##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 10-Q
  þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 26, 2009
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from
to&nbs
p;
 Commission File Number: 000-27312
 TOLLGRADE COMMUNICATIONS, INC.
  Pennsylvania
(State or other jurisdiction 
of incorporation or organization)
    
    25-1537134
(I.R.S. Employer
Identification No.)
 493 Nixon Rd.
Cheswick, PA 15024
 412-820-1400
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
  o þ




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##### 



TOLLGRADE COMMUNICATIONS, INC.
 Quarterly Report on Form 10-Q
For the Quarter Ended September 26, 2009  Table of Contents
 PAGENO.PART I. FINANCIAL INFORMATIONItem 1 Condensed Consolidated Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of September 26, 2009 and
December 31, 2008 (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the three and nine
month periods ended September 26, 2009 and September 27, 2008
(Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine month
periods ended September 26, 2009 and September 27, 2008 (Unaudited)
    
    
    5Condensed Consolidated Statements of Changes in Shareholders Equity
for the nine month period ended September 26, 2009 (Unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    7Item 2 Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    22Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    36Item 4 Controls and Procedures
    
    
    36PART II. OTHER INFORMATIONItem 1A Risk Factors
    
    
    36Item 4 Submission of Matters to a Vote of Security Holders
    
    
    37Item 6 Exhibits
    
    
    38SIGNATURES
    
    
    39EXHIBIT INDEX
    
    
    40Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 31.1Exhibit 31.2Exhibit 32EX-10.3EX-31.1EX-31.2EX-32
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 TOLLGRADE
COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value) (Unaudited)
 September 26, 2009
    
    December 31, 2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    65,179
    
    
    $
    57,976Short-term investments
    
    
    198
    
    
    
    2,419Trade accounts receivable, net of allowance for
doubtful accounts of $1,564 in 2009 and $222 in 2008
    
    
    6,782
    
    
    
    9,361Other receivables
    
    
    1,239
    
    
    
    632Inventories, net
    
    
    3,124
    
    
    
    7,843Prepaid expenses and deposits
    
    
    715
    
    
    
    1,200Deferred and refundable tax assets
    
    
    717
    
    
    
    453Current assets related to discontinued operations
    
    
    
    
    
    
    4,314Total current assets
    
    
    77,954
    
    
    
    84,198Property and equipment, net
    
    
    3,185
    
    
    
    2,661Intangibles, net
    
    
    34,740
    
    
    
    36,678Deferred tax assets
    
    
    107
    
    
    
    81Other assets
    
    
    314
    
    
    
    262Noncurrent assets related to discontinued operations
    
    
    
    
    
    
    467Total assets
    
    $
    116,300
    
    
    $
    124,347LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    555
    
    
    $
    1,198Accrued warranty
    
    
    620
    
    
    
    927Accrued expenses
    
    
    2,002
    
    
    
    1,702Accrued salaries and wages
    
    
    2,504
    
    
    
    459Income taxes payable
    
    
    264
    
    
    
    267Deferred revenue
    
    
    2,391
    
    
    
    3,024Current liabilities related to discontinued operations
    
    
    
    
    
    
    1,146Total current liabilities
    
    
    8,336
    
    
    
    8,723Pension obligation
    
    
    1,046
    
    
    
    889Deferred tax liabilities
    
    
    2,144
    
    
    
    1,792Other tax liabilities
    
    
    689
    
    
    
    489Total liabilities
    
    
    12,215
    
    
    
    11,893Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock, $0.20 par value; 50,000 authorized
shares, issued shares, 13,735 in 2009 and 13,733 in
2008
    
    
    2,744
    
    
    
    2,744Additional paid-in capital
    
    
    74,675
    
    
    
    73,923Treasury stock, at cost, 1,072 shares in 2009 and 2008
    
    
    (8,081
    )
    
    
    (8,081
    )Retained earnings
    
    
    35,934
    
    
    
    45,748Accumulated other comprehensive loss
    
    
    (1,187
    )
    
    
    (1,880
    )Total shareholders equity
    
    
    104,085
    
    
    
    112,454Total liabilities and shareholders equity
    
    $
    116,300
    
    
    $
    124,347
  3




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##### Table of Contents



TOLLGRADE
COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 26,
    
    
    September 27,
    
    
    September 26,
    
    
    September 27,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Products
    
    $
    5,016
    
    
    $
    7,417
    
    
    $
    14,986
    
    
    $
    19,419Services
    
    
    6,310
    
    
    
    5,481
    
    
    
    17,300
    
    
    
    16,782Total revenues
    
    
    11,326
    
    
    
    12,898
    
    
    
    32,286
    
    
    
    36,201Cost of sales:Products
    
    
    2,537
    
    
    
    2,823
    
    
    
    8,090
    
    
    
    8,601Services
    
    
    2,137
    
    
    
    2,207
    
    
    
    5,497
    
    
    
    6,018Amortization of intangible assets
    
    
    659
    
    
    
    772
    
    
    
    1,949
    
    
    
    2,353Impairment of intangible assets
    
    
    191
    
    
    
    
    
    
    
    191
    
    
    
    202Inventory write-down
    
    
    3,070
    
    
    
    
    
    
    
    3,070
    
    
    
    754Severance
    
    
    502
    
    
    
    
    
    
    
    778
    
    
    
    Total cost of sales
    
    
    9,096
    
    
    
    5,802
    
    
    
    19,575
    
    
    
    17,928Gross profit
    
    
    2,230
    
    
    
    7,096
    
    
    
    12,711
    
    
    
    18,273Operating expenses:Selling and marketing
    
    
    1,567
    
    
    
    1,594
    
    
    
    4,850
    
    
    
    5,284General and administrative
    
    
    4,111
    
    
    
    2,205
    
    
    
    9,525
    
    
    
    7,003Research and development
    
    
    2,353
    
    
    
    2,513
    
    
    
    6,795
    
    
    
    8,077Severance
    
    
    1,114
    
    
    
    
    
    
    
    1,179
    
    
    
    453Other impairments
    
    
    293
    
    
    
    
    
    
    
    293
    
    
    
    Total operating expenses
    
    
    9,438
    
    
    
    6,312
    
    
    
    22,642
    
    
    
    20,817(Loss) income from operations
    
    
    (7,208
    )
    
    
    784
    
    
    
    (9,931
    )
    
    
    (2,544
    )Other income
    
    
    46
    
    
    
    264
    
    
    
    555
    
    
    
    1,063(Loss) income before income taxes
    
    
    (7,162
    )
    
    
    1,048
    
    
    
    (9,376
    )
    
    
    (1,481
    )(Benefit) provision for income taxes
    
    
    (80
    )
    
    
    277
    
    
    
    215
    
    
    
    926(Loss) income from continuing operations
    
    
    (7,082
    )
    
    
    771
    
    
    
    (9,591
    )
    
    
    (2,407
    )Income
(loss) from discontinued operations, net of income taxes
    
    
    
    
    
    
    147
    
    
    
    (223
    )
    
    
    (3,434
    )Net (loss) income
    
    $
    (7,082
    )
    
    $
    918
    
    
    $
    (9,814
    )
    
    $
    (5,841
    )Earnings per share information:Weighted average shares of common stock
and equivalents:Basic
    
    
    12,682
    
    
    
    13,173
    
    
    
    12,681
    
    
    
    13,170Diluted
    
    
    12,682
    
    
    
    13,173
    
    
    
    12,681
    
    
    
    13,170(Loss) income per common and common
equivalent shares from continuing
operations:Basic
    
    $
    (0.56
    )
    
    $
    0.06
    
    
    $
    (0.76
    )
    
    $
    (0.18
    )Diluted
    
    $
    (0.56
    )
    
    $
    0.06
    
    
    $
    (0.76
    )
    
    $
    (0.18
    )(Loss) income per common and common
equivalent shares from discontinued
operations:Basic
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    (0.02
    )
    
    $
    (0.26
    )Diluted
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    (0.02
    )
    
    $
    (0.26
    )Net (loss) income per common and common
equivalent shares:Basic
    
    $
    (0.56
    )
    
    $
    0.07
    
    
    $
    (0.78
    )
    
    $
    (0.44
    )Diluted
    
    $
    (0.56
    )
    
    $
    0.07
    
    
    $
    (0.78
    )
    
    $
    (0.44
    )
  4




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TOLLGRADE
COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
 Nine Months EndedSeptember 26,
    
    September 27,2009
    
    2008Cash flows from operating activities:Net loss
    
    $
    (9,814
    )
    
    $
    (5,841
    )Loss from discontinued operations
    
    
    223
    
    
    
    3,434Adjustments to reconcile net loss to net cash
provided by operating activitiesImpairment of intangible assets
    
    
    191
    
    
    
    202Impairment of other long live assets
    
    
    293
    
    
    
    Amortization expense
    
    
    1,949
    
    
    
    2,353Depreciation expense
    
    
    865
    
    
    
    1,100Stock-based compensation expense
    
    
    720
    
    
    
    341Valuation allowance
    
    
    
    
    
    
    129Deferred income taxes
    
    
    247
    
    
    
    190Inventory write-down
    
    
    3,070
    
    
    
    754Provision for losses on inventory
    
    
    268
    
    
    
    567Provision for allowance for doubtful accounts
    
    
    1,178
    
    
    
    178Changes in assets and liabilities:Accounts receivable-trade
    
    
    1,608
    
    
    
    6,604Other receivable
    
    
    (588
    )
    
    
    (522
    )Inventories
    
    
    1,384
    
    
    
    455Prepaid expenses, deposits and other assets
    
    
    506
    
    
    
    285Accounts payable
    
    
    (752
    )
    
    
    (5,989
    )Accrued warranty
    
    
    (307
    )
    
    
    (369
    )Accrued expenses, deferred revenue,  and salaries & wages
    
    
    1,050
    
    
    
    (632
    )Income taxes payable
    
    
    (21
    )
    
    
    612Net cash
provided by operating activities of discontinued operations
    
    
    12
    
    
    
    37Net cash provided by operating activities
    
    
    2,082
    
    
    
    3,888Cash flows from investing activities:Proceeds on sale of cable product line
    
    
    3,012
    
    
    
    Proceeds from note receivable
    
    
    53
    
    
    
    Purchase of short-term investments
    
    
    
    
    
    
    (2,279
    )Redemption/maturity of short-term investments
    
    
    2,220
    
    
    
    1,922Purchase of acquired assets
    
    
    (300
    )
    
    
    Purchase of property and equipment
    
    
    (505
    )
    
    
    (528
    )Sale of assets held for sale
    
    
    
    
    
    
    263Net cash used in investing activities of
discontinued operations
    
    
    (57
    )
    
    
    (37
    )Net cash provided by (used in) investing activities
    
    
    4,423
    
    
    
    (659
    )Net increase in cash and cash equivalents
    
    
    6,505
    
    
    
    3,229Effect of exchange rate changes on cash and cash
equivalents
    
    
    698
    
    
    
    (210
    )Cash and cash equivalents, beginning of period
    
    
    57,976
    
    
    
    58,222Cash and cash equivalents, end of period
    
    $
    65,179
    
    
    $
    61,241
  5




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TOLLGRADE
COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(In thousands) (Unaudited)
 Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated OtherShares
    
    
    Amount
    
    
    Additional Paid-In
    
    
    Treasury Stock
    
    
    Retained Earnings
    
    
    Comprehensive Loss
    
    
    Total
    
    
    Comprehensive LossBalance at December 31, 2008
    
    
    13,733
    
    
    $
    2,744
    
    
    $
    73,923
    
    
    $
    (8,081
    )
    
    $
    45,748
    
    
    $
    (1,880
    )
    
    $
    112,454Compensation expense for
options and restricted
stock, net
    
    
    2
    
    
    
    
    
    
    
    752
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    752Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    693
    
    
    
    693
    
    
    $
    693Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,814
    )
    
    
    
    
    
    
    (9,814
    )
    
    
    (9,814
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (9,119
    )Balance at September 26, 2009
    
    
    13,735
    
    
    $
    2,744
    
    
    $
    74,675
    
    
    $
    (8,081
    )
    
    $
    35,934
    
    
    $
    (1,187
    )
    
    $
    104,085
  6




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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION
  RECENTLY ADOPTED ACCOUNTING GUIDANCE
 TM
 Fair Value Accounting
  7




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Business Combinations and Consolidation Accounting
   8




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Other
    RECENTLY ISSUED ACCOUNTING GUIDANCE
  9




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10




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2. ACQUISITIONS AND DISCONTINUED OPERATIONS
      Three Months Ended
    
    
    Nine Months EndedSeptember 26,
    
    

September 27,
    
    
    September 26,
    
    

September 27,2009
    
    

2008

    
    
    2009
    
    

2008Revenues:Products
    
    $
    
    
    
    $
    1,877
    
    
    $
    2,376
    
    
    $
    5,508Services
    
    
    
    
    
    
    431
    
    
    
    723
    
    
    
    1,278$
    
    
    
    $
    2,308
    
    
    $
    3,099
    
    
    $
    6,786Loss from discontinued operationsLoss from discontinued operations, before tax
    
    $
    
    
    
    $
    147
    
    
    $
    (223
    )
    
    $
    (3,434
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from discontinued operations, net of tax
    
    $
    
    
    
    $
    147
    
    
    $
    (223
    )
    
    $
    (3,434
    )
 11




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December 31, 2008ASSETSAccounts
receivable trade, net of allowance for doubtful accounts
    
    $
    1,199Accounts receivable other
    
    
    36Inventories
    
    
    2,830Prepaid expenses
    
    
    249Property and equipment, net
    
    
    292Intangibles and capitalized software, net
    
    
    175Assets related to discontinued operations
    
    $
    4,781LIABILITIESAccounts payable
    
    $
    66Accrued warranty
    
    
    664Accrued expenses
    
    
    142Accrued royalties
    
    
    15Deferred revenue
    
    
    259Liabilities related to discontinued operations
    
    $
    1,146
 3. FAIR VALUE MEASUREMENTS
  
    
    Level 1  Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities;
    
    Level 2  Inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly or indirectly, including quoted prices for
similar assets or liabilities in active markets; quoted prices for identical or similar
assets or liabilities in markets that are not active; inputs other than quoted prices that
are observable for the asset or liability (e.g., interest rates); and inputs that are
derived principally from or corroborated by observable market data by correlation or other
means; and
    
    Level 3  Inputs that are both significant to the fair value measurement and
unobservable.
  12




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4. STOCK COMPENSATION PLANS AND ACCOUNTING FOR STOCK-BASED COMPENSATION EXPENSE
 The Plans
   Stock-Based Compensation Expense
   13




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Number of
    
    
    Range of
    
    
    Weighted AverageShares
    
    
    Option Prices
    
    
    Exercise PriceOutstanding, December 31, 2008
    
    
    1,605,490
    
    
    $
    3.27  159.19
    
    
    $
    23.08Granted
    
    
    467,500
    
    
    
    5.17  5.38
    
    
    
    5.36Exercised
    
    
    
    
    
    
    
    
    
    
    Cancelled/Forfeited/Expired
    
    
    (252,921
    )
    
    
    3.27  159.19
    
    
    
    19.16Outstanding, September 26, 2009
    
    
    1,820,069
    
    
    
    $3.27  159.19
    
    
    $
    19.08
 5. SEVERANCE
   14




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6. INTANGIBLE ASSETS
  September 26, 2009(Unaudited)Useful
    
    
    
    
    
    
    AccumulatedAmortizing Intangible Assets:
    
    Life (Years)
    
    
    Gross
    
    
    Amortization
    
    
    Impairments
    
    
    NetPost warranty service agreements
    
    
    6-50
    
    
    $
    37,856
    
    
    $
    5,064
    
    
    $
    
    
    
    $
    32,792Technology
    
    
    3-10
    
    
    
    14,003
    
    
    
    12,329
    
    
    
    191
    
    
    
    1,483Customer relationships
    
    
    5-10
    
    
    
    933
    
    
    
    577
    
    
    
    
    
    
    
    356Tradenames and other
    
    
    3-10
    
    
    
    538
    
    
    
    429
    
    
    
    
    
    
    
    109Total Intangible Assets
    
    
    
    
    
    $
    53,330
    
    
    $
    18,399
    
    
    $
    191
    
    
    $
    34,740
 December 31, 2008(Unaudited)Useful
    
    
    
    
    
    
    AccumulatedAmortizing Intangible Assets:
    
    Life (Years)
    
    
    Gross
    
    
    Amortization
    
    
    Impairments
    
    
    NetPost warranty service agreements
    
    
    6-50
    
    
    $
    37,563
    
    
    $
    3,752
    
    
    $
    
    
    
    $
    33,811Technology
    
    
    3-10
    
    
    
    13,987
    
    
    
    11,700
    
    
    
    30
    
    
    
    2,257Customer relationships
    
    
    5-10
    
    
    
    904
    
    
    
    334
    
    
    
    112
    
    
    
    458Tradenames and other
    
    
    0.5-10
    
    
    
    534
    
    
    
    322
    
    
    
    60
    
    
    
    152Total Intangible Assets
    
    
    
    
    
    $
    52,988
    
    
    $
    16,108
    
    
    $
    202
    
    
    $
    36,678
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Impairments
 Long-Lived Assets
    7. INVENTORIES
  Year EndedSeptember 26, 2009
    
    
    December 31, 2008(Unaudited)
    
    
    (Unaudited)Raw materials
    
    $
    3,741
    
    
    $
    4,621Work in process
    
    
    2,037
    
    
    
    3,142Finished goods
    
    
    1,999
    
    
    
    1,7827,777
    
    
    
    9,545Reserves for slow moving and obsolete inventory
    
    
    (4,653
    )
    
    
    (1,702
    )Net Inventory
    
    $
    3,124
    
    
    $
    7,843
  16




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8. PRODUCT WARRANTY
  Nine Months Ended
    
    
    Year EndedSeptember 26, 2009
    
    
    December 31, 2008(Unaudited)
    
    
    (Unaudited)Balance at the beginning of the period
    
    $
    927
    
    
    $
    1,147Accruals for warranties issued during the period
    
    
    411
    
    
    
    1,683Settlements during the period
    
    
    (718
    )
    
    
    (1,903
    )Balance at the end of the period
    
    $
    620
    
    
    $
    927
 9. PER SHARE INFORMATION
   Three Months Ended
    
    
    Nine Months EndedSeptember 26, 2009
    
    
    September 26, 2009(Unaudited)
    
    
    (Unaudited)Loss from continuing operations
    
    $
    (7,082
    )
    
    $
    (9,591
    )Loss from discontinued operations, net of income taxes
    
    
    
    
    
    
    (223
    )Net loss from operations
    
    
    (7,082
    )
    
    
    (9,814
    )Common and common equivalent shares:Weighted average common shares outstanding
    
    
    12,682
    
    
    
    12,681Effect of dilutive securities  stock options
    
    
    12,682
    
    
    
    12,681Loss per share from continuing operations:Basic
    
    $
    (0.56
    )
    
    $
    (0.76
    )Diluted
    
    $
    (0.56
    )
    
    $
    (0.76
    )Loss per share from discontinued operations:Basic
    
    $
    
    
    
    $
    (0.02
    )Diluted
    
    $
    
    
    
    $
    (0.02
    )
 17




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Three Months Ended
    
    
    Nine Months EndedSeptember 27, 2008
    
    
    September 27, 2008(Unaudited)
    
    
    (Unaudited)Income (loss) from continuing operations
    
    $
    771
    
    
    $
    (2,407
    )Income
(loss) from discontinued operations, net of income taxes
    
    
    147
    
    
    
    (3,434
    )Net income (loss) from operations
    
    
    918
    
    
    
    (5,841
    )Common and common equivalent shares:Weighted average common shares outstanding
    
    
    13,173
    
    
    
    13,170Effect of dilutive securities  stock options
    
    
    13,173
    
    
    
    13,170Loss per share from continuing operations:Basic
    
    $
    0.06
    
    
    $
    (0.18
    )Diluted
    
    $
    0.06
    
    
    $
    (0.18
    )Loss per share from discontinued operationsBasic
    
    $
    0.01
    
    
    $
    (0.26
    )Diluted
    
    $
    0.01
    
    
    $
    (0.26
    )
  10. CONTINGENCIES AND COMMITMENTS
   At September 26, 20092009 (remaining period)
    
    $
    2522010
    
    
    9732011
    
    
    6182012
    
    
    3412013
    
    
    Thereafter
    
    
    $
    2,184
 18




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##### Table of Contents



11. INCOME TAXES
     United States  Federal
    
    2006 and forwardUnited States  State
    
    2005 and forwardEurope
    
    2007 and forward
  19




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12. MAJOR CUSTOMERS AND INTERNATIONAL SALES
        20




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13. SUBSEQUENT EVENT
   21




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 The following discussion should be read in conjunction with the Unaudited Condensed Consolidated
Financial Statements and Notes thereto appearing elsewhere in this report. Additionally, when used
in this form 10-Q unless the context requires otherwise, the terms we, our, and us refer to
Tollgrade Communications, Inc.
 CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995.
   Cable Product Line
  Overview
   22




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23




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Products
 Services
    Telecommunications Test and Measurement Products
 ®
  24




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25




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##### Table of Contents



Electric Utility Monitoring Products
   Our Customers
    26




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##### Table of Contents



Backlog
  RESULTS OF OPERATIONS FROM CONTINUING OPERATIONS
 THREE MONTHS ENDED SEPTEMBER 26, 2009 COMPARED TO THREE MONTHS ENDED SEPTEMBER 27, 2008
 Revenues
   27




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Gross Profit
   Selling and Marketing Expense
  28




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##### Table of Contents



General and Administrative Expense
 .
 Research and Development Expense
  Severance Expense
  Other Impairments
  29




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##### Table of Contents



Other Income
  Income Taxes
   Loss from Continuing Operations and Loss Per Share from Continuing Operations
  NINE MONTHS ENDED SEPTEMBER 26, 2009 COMPARED TO NINE MONTHS ENDED SEPTEMBER 27, 2008
 Revenues
   30




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Gross Profit
   Selling and Marketing Expense
  31




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##### Table of Contents



General and Administrative Expense
 ,
 Research and Development Expense
  Severance Expense
    32




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##### Table of Contents



Other Impairments
  Other Income
  Income Taxes
  Loss from Continuing Operations and Loss Per Share from Continuing Operations
  LIQUIDITY AND CAPITAL RESOURCES
   33




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COMMITMENTS AND CONTRACTUAL OBLIGATIONS
  34




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##### Table of Contents



Minimum annual future commitments as of September 26, 2009 are (in thousands):
 Payments due by periodTotal
    
    2009
    
    2010
    
    2011
    
    2012
    
    2013
    
    ThereafterOperating Lease
Obligations
    
    $
    1,999
    
    
    $
    238
    
    
    $
    916
    
    
    $
    561
    
    
    $
    284
    
    
    $
    
    
    
    $
    Purchase Obligations
    
    
    380
    
    
    
    368
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    FIN 48 Obligations
    
    
    692
    
    
    
    
    
    
    
    692
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    3,071
    
    
    $
    606
    
    
    $
    1,620
    
    
    $
    561
    
    
    $
    284
    
    
    $
    
    
    
    $
    
   Application of Critical Accounting Policies
  35




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##### Table of Contents



Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Item 4. CONTROLS AND PROCEDURES
   
 PART II. OTHER INFORMATION
 
 Item 1A. RISK FACTORS
  36




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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Election of Directors
 Nominee for Director
    
    For
    
    WithheldJoseph A. Ferrara
    
    
    11,262,566
    
    
    
    71,987Charles E. Hoffman
    
    
    11,260,797
    
    
    
    73,956Jeffrey M. Solomon
    
    
    8,014,525
    
    
    
    49,900Edward B. Meyercord III
    
    
    8,013,492
    
    
    
    50,933Scott C. Chandler
    
    
    5,195,952
    
    
    
    2,867,073Brian C. Mullins
    
    
    3,214,325
    
    
    
    56,203James J. Barnes
    
    
    2,612,270
    
    
    
    658,058David S. Egan
    
    
    2,608,110
    
    
    
    663,618
  Ratification of the appointment of PricewaterhouseCoopers LLP as the Companys independent
registered public accounting firm for the fiscal year ending December 31, 2009
 For
    
    Against
    
    Abstain11,205,194
    
    
    116,366
    
    
    
    13,193
  Approval of an Amendment to the Companys 2006 Long-Term Incentive Compensation Plan, as amended
and restated, to increase the number of authorized shares issuable thereunder by 1,500,000 shares
 For
    
    Against
    
    Abstain8,342,499
    
    
    1,423,472
    
    
    
    1,568,782
  37




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##### Table of Contents



Item 6. EXHIBITS
 (a)
    
    Exhibits:
  ExhibitNumber
    
    Description10.1
    
    Agreement dated September 17, 2009 by and between Tollgrade
Communications, Inc. and Gary W. Bogatay, Jr. (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed with the SEC on September 22, 2009)10.2
    
    Tollgrade Communications, Inc. 2006 Long-Term Incentive
Compensation Plan, as amended and restated on August 5, 2009
(incorporated by reference to Exhibit 99 to the Companys
Registration Statement on Form S-8 filed with the SEC on November
2, 2009)10.3
    
    Summary of Compensation Program for Non-Employee Directors,
adopted October 19, 2009, filed herewith31.1
    
    Certification of Chief Executive Officer, filed herewith.31.2
    
    Certification of Chief Financial Officer, filed herewith.32
    
    Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18.U.S.C. Section 350, filed herewith.
 
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SIGNATURES
  Tollgrade Communications, Inc.
(Registrant)Dated: November 3, 2009/s/ Joseph A. FerraraJoseph A.  FerraraChairman, Chief Executive Officer and
President  /s/ Michael D. BornakInterim Chief Financial Officer andTreasurer 39




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EXHIBIT INDEX
 ExhibitNumber
    
    Description10.1
    
    Agreement dated September 17, 2009 by and between Tollgrade
Communications, Inc. and Gary W. Bogatay, Jr. (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed with the SEC on September 22, 2009)10.2
    
    Tollgrade Communications, Inc. 2006 Long-Term Incentive
Compensation Plan, as amended and restated on August 5, 2009
(incorporated by reference to Exhibit 99 to the Companys
Registration Statement on Form S-8 filed with the SEC on
November 2, 2009)10.3
    
    Summary of Compensation Program for Non-Employee Directors,
adopted October 19, 2009, filed herewith31.1
    
    Certification of Chief Executive Officer, filed herewith.31.2
    
    Certification of Chief Financial Officer, filed herewith.32
    
    Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18.U.S.C. Section 350, filed herewith.
 40