##### 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 March 29, 2008
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from to
 Commission File Number: 000-27312
 TOLLGRADE COMMUNICATIONS, INC.
  Pennsylvania
    
    25-1537134(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 493 Nixon Rd.
Cheswick, PA 15024
 412-820-1400
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



TOLLGRADE COMMUNICATIONS, INC.
 Quarterly Report on Form 10-Q
For the Quarter Ended March 29, 2008  Table of Contents
 PAGENO.PART I. FINANCIAL INFORMATIONItem 1 Condensed Consolidated Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of March 29, 2008 and
December 31, 2007
    
    
    3Condensed Consolidated Statements of Operations for the three month
periods ended March 29, 2008 and March 31, 2007 (Unaudited)
    
    
    4Condensed Consolidated Statements of Changes in Shareholders Equity
for the three month period ended March 29, 2008 (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the three month
periods ended March 29, 2008 and March 31, 2007 (Unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2 Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    18Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    39Item 4 Controls and Procedures
    
    
    40PART II. OTHER INFORMATIONItem 1A Risk Factors
    
    
    40Item 6 Exhibits
    
    
    53SIGNATURES
    
    
    55EXHIBIT INDEX
    
    
    56Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 31.1Exhibit 31.2Exhibit 32EX-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)
 March 29, 2008
    
    December 31, 2007*ASSETSCurrent assets:Cash and cash equivalents
    
    $
    53,525
    
    
    $
    58,222Short-term investments
    
    
    2,354
    
    
    
    632Accounts receivable:Trade, net of allowance for doubtful accounts of
$479 in 2008 and $478 in 2007
    
    
    15,580
    
    
    
    14,625Other
    
    
    1,083
    
    
    
    1,601Inventories
    
    
    13,363
    
    
    
    13,687Prepaid expenses and deposits
    
    
    1,202
    
    
    
    1,120Deferred and refundable income taxes
    
    
    337
    
    
    
    503Assets held for sale
    
    
    52
    
    
    
    272Total current assets
    
    
    87,496
    
    
    
    90,662Property and equipment, net
    
    
    4,103
    
    
    
    4,279Intangibles
    
    
    40,148
    
    
    
    44,215Other assets
    
    
    279
    
    
    
    333Total assets
    
    $
    132,026
    
    
    $
    139,489LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,985
    
    
    $
    4,214Accrued warranty
    
    
    1,641
    
    
    
    1,937Accrued expenses
    
    
    2,723
    
    
    
    3,148Accrued salaries and wages
    
    
    273
    
    
    
    891Accrued royalties payable
    
    
    111
    
    
    
    707Income taxes payable
    
    
    859
    
    
    
    572Deferred income
    
    
    3,357
    
    
    
    2,113Total current liabilities
    
    
    11,949
    
    
    
    13,582Pension obligation
    
    
    1,021
    
    
    
    908Deferred tax liabilities
    
    
    2,060
    
    
    
    1,999Total liabilities
    
    
    15,030
    
    
    
    16,489Contingencies and commitmentsShareholders equity:Common stock, $0.20 par value; authorized shares,
50,000; issued shares, 13,733 in 2008 and 13,731 in
2007
    
    
    2,744
    
    
    
    2,744Additional paid-in capital
    
    
    73,366
    
    
    
    73,389Treasury stock, at cost, 575 shares in 2008 and 2007
    
    
    (5,900
    )
    
    
    (5,900
    )Retained earnings
    
    
    46,359
    
    
    
    52,863Accumulated other comprehensive income (loss)
    
    
    427
    
    
    
    (96
    )Total shareholders equity
    
    
    116,996
    
    
    
    123,000Total liabilities and shareholders equity
    
    $
    132,026
    
    
    $
    139,489
 
 *
    
    Amounts derived from audited financial statements presented in the Companys Annual Report on
Form 10-K for the year ended December 31, 2007  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 EndedMarch 29, 2008
    
    
    March 31, 2007Revenues:Products
    
    $
    7,139
    
    
    $
    9,997Services
    
    
    6,045
    
    
    
    3,045Total revenues:
    
    
    13,184
    
    
    
    13,042Cost of sales:Products
    
    
    3,616
    
    
    
    4,527Services
    
    
    1,986
    
    
    
    929Amortization
    
    
    1,014
    
    
    
    568Intangible impairment
    
    
    3,291
    
    
    
    Inventory impairment/restructuring
    
    
    759
    
    
    
    Total cost of sales
    
    
    10,666
    
    
    
    6,024Gross profit
    
    
    2,518
    
    
    
    7,018Operating expenses:Selling and marketing
    
    
    2,435
    
    
    
    2,185General and administrative
    
    
    2,579
    
    
    
    2,108Research and development
    
    
    3,616
    
    
    
    2,953Restructuring expense
    
    
    435
    
    
    
    382Total operating expense
    
    
    9,065
    
    
    
    7,628Loss from operations
    
    
    (6,547
    )
    
    
    (610
    )Interest income
    
    
    492
    
    
    
    776(Loss) income before taxes
    
    
    (6,055
    )
    
    
    166Provision for income taxes
    
    
    449
    
    
    
    55Net (loss) income
    
    $
    (6,504
    )
    
    $
    111(Loss) income per share information:Weighted average shares of common stock
and equivalents:Basic
    
    
    13,158
    
    
    
    13,254Diluted
    
    
    13,158
    
    
    
    13,442Net (loss) income per common share:Basic
    
    $
    (0.49
    )
    
    $
    0.01Diluted
    
    $
    (0.49
    )
    
    $
    0.01
  4




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##### Table of Contents



Tollgrade Communications, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Changes in Shareholders Equity
(In thousands) (Unaudited)
 Accumulated
    
    
    
    
    
    
    OtherAdditional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    ComprehensiveCommon Stock
    
    
    Paid-In
    
    
    Treasury
    
    
    Retained
    
    
    Comprehensive
    
    
    
    
    
    
    IncomeShares
    
    
    Amount
    
    
    Earnings
    
    
    Stock
    
    
    Income
    
    
    Income
    
    
    Total
    
    
    (loss)Balance at December
31, 2007
    
    
    13,731
    
    
    $
    2,744
    
    
    $
    73,389
    
    
    $
    (5,900
    )
    
    $
    52,863
    
    
    $
    (96
    )
    
    $
    123,000FAS 123R options
and restricted
stock, net
    
    
    2
    
    
    
    
    
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23
    )Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    523
    
    
    
    523
    
    
    $
    523Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,504
    )
    
    
    
    
    
    
    (6,504
    )
    
    
    (6,504
    )Other comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (5,981
    )Balance at March
29, 2008
    
    
    13,733
    
    
    $
    2,744
    
    
    $
    73,366
    
    
    $
    (5,900
    )
    
    $
    46,359
    
    
    $
    427
    
    
    $
    116,996
  5




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##### Table of Contents



TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
 Three Months EndedMarch 29, 2008
    
    March 31, 2007Cash flows from operating activities:Net (loss) income
    
    $
    (6,504
    )
    
    $
    111Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:Impairment loss
    
    
    3,291
    
    
    
    Depreciation and amortization
    
    
    1,480
    
    
    
    982Compensation expense related to stock plans
    
    
    (23
    )
    
    
    354Valuation allowance
    
    
    187
    
    
    
    109Deferred income taxes
    
    
    28
    
    
    
    (52
    )Restructuring and inventory write down
    
    
    761
    
    
    
    174Excess tax benefits from stock-based compensation
    
    
    
    
    
    
    (1
    )Provision for losses on inventory
    
    
    61
    
    
    
    214Provision (benefit) for allowance for doubtful accounts
    
    
    37
    
    
    
    (23
    )Changes in assets and liabilities:Accounts receivable-trade
    
    
    (602
    )
    
    
    3,513Accounts receivable-other
    
    
    401
    
    
    
    1,072Inventories
    
    
    (475
    )
    
    
    (3,186
    )Prepaid expenses and other assets
    
    
    (25
    )
    
    
    (348
    )Accounts payable
    
    
    (1,542
    )
    
    
    836Accrued warranty
    
    
    (295
    )
    
    
    9Accrued expenses and deferred income
    
    
    426
    
    
    
    (1,396
    )Accrued royalties payable
    
    
    (596
    )
    
    
    102Income taxes payable
    
    
    228
    
    
    
    Net cash (used in) provided by operating activities
    
    
    (3,162
    )
    
    
    2,470Cash flows from investing activities:Purchase of short-term investments
    
    
    (2,186
    )
    
    
    (1,956
    )Redemption/maturity of short-term investments
    
    
    464
    
    
    
    3,184Capital expenditures, including capitalized software
    
    
    (275
    )
    
    
    (281
    )Sale of assets held for sale
    
    
    198
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (1,799
    )
    
    
    947Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    
    
    
    
    5Excess tax benefit from stock-based compensation
    
    
    
    
    
    
    1Net cash provided by financing activities
    
    
    
    
    
    
    6Net (decrease) increase in cash and cash equivalents
    
    
    (4,961
    )
    
    
    3,423Effect of exchange rate changes on cash and cash equivalents
    
    
    264
    
    
    
    Cash and cash equivalents at beginning of period
    
    
    58,222
    
    
    
    57,378Cash and cash equivalents at end of period
    
    $
    53,525
    
    
    $
    60,801
  6




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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION
  RECLASSIFICATIONS
  NEW ACCOUNTING STANDARDS
  7




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##### Table of Contents




    
    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.
    
    Level 3Inputs that are both significant to the fair value measurement and unobservable.
   8




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2. STOCK COMPENSATION PLANS AND ACCOUNTING FOR STOCK-BASED COMPENSATION EXPENSE
 The Plans
   Grants Under the Plans
  9




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Stock-Based Compensation Expense
  10




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Shares Authorized But Not GrantedMarch 29, 2008
    
    December 31, 20071998 Employee Incentive Compensation Plan
    
    
    
    
    
    
    164,1412006 Long Term Incentive Compensation Plan
    
    
    439,683
    
    
    
    1,169,452
  Range of
    
    Weighted AverageNumber of Shares
    
    Option Prices
    
    Exercise PriceOutstanding, December 31, 2007
    
    
    1,440,562
    
    
    $
    7.28 - 159.19
    
    
    $
    27.28Granted
    
    
    556,400
    
    
    $
    6.57
    
    
    $
    6.57Exercised
    
    
    
    
    
    
    
    
    
    
    Cancelled/Forfeited/Expired
    
    
    (40,800
    )
    
    $
    6.57 - 31.44
    
    
    $
    11.70Outstanding, March 29, 2008
    
    
    1,956,162
    
    
    $
    6.57 - 159.19
    
    
    $
    21.71
 3. RESTRUCTURING
    Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atDecember
    
    Restructuring
    
    Cash
    
    Asset write-
    
    March 29,31, 2007
    
    charge/expense
    


    payments
    
    downs
    
    2008Severance
    
    $
    
    
    
    $
    434
    
    
    $
    (423
    )
    
    $
    
    
    
    $
    11Inventory writedown
    
    
    
    
    
    
    738
    
    
    
    
    
    
    
    (738
    )
    
    
    Total
    
    $
    
    
    
    $
    1,172
    
    
    $
    (423
    )
    
    $
    (738
    )
    
    $
    11
  11




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##### Table of Contents



Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atDecember
    
    
    
    
    
    Cash
    
    Asset write-
    
    March 29,31, 2007
    
    Expense
    
    payments
    
    downs
    
    2008Facility
rationalization
including employee
costs
    
    $
    103
    
    
    $
    2
    
    
    $
    (105
    )
    
    $
    
    
    
    $
    Real estate impairment
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    (20
    )
    
    
    Total
    
    $
    103
    
    
    $
    22
    
    
    $
    (105
    )
    
    $
    (20
    )
    
    $
    
    4. ACQUISITION
  12




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##### Table of Contents



Accounts receivable
    
    $
    4,579Inventories
    
    
    1,428Property and equipment
    
    
    454Intangible assets
    
    
    7,937Goodwill
    
    
    1,122Other
    
    
    26Total assets acquired
    
    
    15,546Deferred income
    
    
    1,588Accounts payable
    
    
    709Pension obligations
    
    
    870Relocation and lease termination accrual
    
    
    524Total liabilities
    
    
    3,691Net assets acquired
    
    $
    11,855
  (In Thousands, Except Per Share Data)Unaudited Pro FormaThree Months EndedMarch 31, 2007Revenues
    
    $
    17,408Loss from operations
    
    
    (841
    )Net loss
    
    
    (43
    )Basic and diluted earnings (loss) per share
    
    $
    0.00
  5. INTANGIBLE ASSETS
  13




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March 29, 2008Useful
    
    (Unaudited)Life
    
    
    
    
    
    Accumulated(Years)
    
    Gross
    
    Amortization
    
    Impairments
    
    NetAmortizing Intangible Assets:Post warranty service agreements
    
    
    6-50
    
    
    $
    38,441
    
    
    $
    2,529
    
    
    $
    
    
    
    $
    35,912Technology
    
    
    2-10
    
    
    
    18,813
    
    
    
    14,199
    
    
    
    1,396
    
    
    
    3,218Customer relationships
    
    
    5-15
    
    
    
    3,647
    
    
    
    1,318
    
    
    
    1,676
    
    
    
    653Tradenames and other
    
    
    0.5-10
    
    
    
    823
    
    
    
    239
    
    
    
    219
    
    
    
    365Total Intangible Assets
    
    
    
    
    
    $
    61,724
    
    
    $
    18,285
    
    
    $
    3,291
    
    
    $
    40,148
 Useful
    
December
31, 2007Life
    
    
    
    
    
    Accumulated(Years)
    
    Gross
    
    Amortization
    
    Impairments
    
    NetAmortizing Intangible Assets:Post warranty service agreements
    
    
    6-50
    
    
    $
    38,204
    
    
    $
    2,019
    
    
    $
    
    
    
    $
    36,185Technology
    
    
    3-10
    
    
    
    19,249
    
    
    
    13,858
    
    
    
    448
    
    
    
    4,943Customer relationships
    
    
    5-15
    
    
    
    3,626
    
    
    
    1,190
    
    
    
    
    
    
    
    2,436Tradenames and other
    
    
    0.5-10
    
    
    
    2,635
    
    
    
    169
    
    
    
    1,815
    
    
    
    651Total Intangible Assets
    
    
    
    
    
    $
    63,714
    
    
    $
    17,236
    
    
    $
    2,263
    
    
    $
    44,215
  Impairments
 Long-Lived Assets
   6. PENSION
  14




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7. INVENTORY
  March 29, 2008(Unaudited)
    
    December 31, 2007Raw materials
    
    $
    8,621
    
    
    $
    8,393Work in process
    
    
    3,041
    
    
    
    3,582Finished goods
    
    
    4,583
    
    
    
    4,32116,245
    
    
    
    16,296Reserves for slow moving and obsolete inventory
    
    
    (2,882
    )
    
    
    (2,609
    )$
    13,363
    
    
    $
    13,687
 8. PER SHARE INFORMATION
   Three Months EndedMarch 28, 2008
    
    
    Three Months Ended(Unaudited)
    
    
    March 31, 2007Net (loss) income
    
    $
    (6,504
    )
    
    $
    111Common and common equivalent shares:Weighted average common shares outstanding
    
    
    13,158
    
    
    
    13,254Effect of dilutive securities  stock
options and restricted stock
    
    
    
    
    
    
    18813,158
    
    
    
    13,442Earnings per share:Basic
    
    $
    (0.49
    )
    
    $
    0.01Diluted
    
    $
    (0.49
    )
    
    $
    0.01
 15




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9. PRODUCT WARRANTY
   Three Months EndedMarch 29, 2008
    
    
    Year Ended(Unaudited)
    
    
    December 31, 2007Balance at the beginning of the period
    
    $
    1,937
    
    
    $
    2,135Accruals for warranties issued during the period
    
    
    358
    
    
    
    1,680Settlements during the period
    
    
    (654
    )
    
    
    (1,878
    )Balance at the end of the period
    
    $
    1,641
    
    
    $
    1,937
 10. CONTINGENCIES AND COMMITMENTS
   At March 29, 20082008 (remaining period)
    
    $
    6382009
    
    
    8402010
    
    
    6912011
    
    
    6612012
    
    
    488Thereafter
    
    
    $
    3,318
 16




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11. INCOME TAXES
      17




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12. MAJOR CUSTOMERS AND INTERNATIONAL SALES
    13. SHARE REPURCHASE PROGRAM
  
 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.
 CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
 18




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PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
  Overview
  
    
    Providing innovative products, services, solutions and new technologies to current,
adjacent and new markets;
    
    Realigning our investments to support our core business;
    
    Improving existing channel partnerships and pursuing new ones;
    
    Capitalizing on our worldwide customer footprint and relationships;
    
    Achieving higher levels of execution and performance in all business areas; and
    
    Enhancing shareholder value through investment, organic growth and potential
acquisitions that promote our strategic objectives.
  General Business Trends
  19




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Our Customers
  Our Product Solutions
 Telecommunications Solutions
 20




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® ® ®
 ®
    ®
 21




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Cable Solutions
  ®
  22




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Services
   BACKLOG
   23




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OPERATING SEGMENT
  INTERNATIONAL SALES
    24




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RECENT ACCOUNTING PRONOUNCEMENTS
    
    
    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
 25




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
    
    Level 3Inputs that are both significant to the fair
value measurement and unobservable.
    APPLICATION OF CRITICAL ACCOUNTING POLICIES
  Revenue Recognition
  26




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27




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Goodwill and Intangible Assets
   28




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Sensitivity Analysis
  29




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YearsTwelve-monthRemaining
    
    Carrying
    
    RollingAsset Description
    
    Original
    
    Life at
    
    Value at
    
    ProjectedLife
    
    3/29/08
    
    3/29/08
    
    Amortization(in millions)LoopCareBase Software
    
    
    10
    
    
    
    3.5
    
    
    
    1.6
    
    
    
    0.5Post-WarrantyMaintenance Service
Agreements
    
    
    50
    
    
    
    47.50
    
    
    
    30.4
    
    
    
    0.6CheetahProprietary Technology
    
    
    10
    
    
    
    1.75
    
    
    
    0.1
    
    
    
    EmersonProprietary Technology
    
    
    5
    
    
    
    3.00
    
    
    
    0.4
    
    
    
    0.1Broadband Test DivisionPost WarrantyMaintenance Service
Agreements
    
    
    48
    
    
    
    47.35
    
    
    
    1.3
    
    
    
    0.4Post WarrantyMaintenance Service
Agreements
    
    
    20
    
    
    
    19.35
    
    
    
    3.4
    
    
    
    0.7Post WarrantyMaintenance Service
Agreements
    
    
    10
    
    
    
    9.35
    
    
    
    0.7
    
    
    
    0.2Post WarrantyMaintenance Service
Agreements
    
    
    6
    
    
    
    5.35
    
    
    
    0.2
    
    
    
    Technology
    
    
    3-10
    
    
    
    2.35-9.35
    
    
    
    0.7
    
    
    
    0.1Customer Relationship
    
    
    10
    
    
    
    9.35
    
    
    
    0.7
    
    
    
    0.2Other
    
    
    0.5-10
    
    
    
    0.75-9.75
    
    
    
    0.6
    
    
    
    0.540.1
    
    
    
    3.3
  Goodwill and Indefinite Lived Assets:
  30




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Inventory Valuation
    Allowance for Doubtful Accounts
  31




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Income Taxes
  Warranty
  Long-Lived Assets Held for Sale
   Restructuring Accrual
  32




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Pension Benefits
    33




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Stock-Based Compensation
  Foreign Currency Translation
   RESULTS OF OPERATIONS
 FIRST QUARTER OF 2008 COMPARED TO FIRST QUARTER OF 2007
 Revenues
    34




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Gross Profit
  Selling and Marketing Expense
  35




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General and Administrative Expense
 .
 Research and Development Expense
  Restructuring Expense
   Interest Income
  Income Taxes
  36




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Net (Loss) Income and (Loss) Income Per Share
  LIQUIDITY AND CAPITAL RESOURCES
      37




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KEY RATIOS
  COMMITMENTS AND CONTRACTUAL OBLIGATIONS
   38




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Minimum annual future commitments as of March 29, 2008 are (in thousands):
 Payments due by periodTotal
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012
    
    ThereafterOperating Lease
Obligations
    
    $
    3,026
    
    
    $
    704
    
    
    $
    751
    
    
    $
    602
    
    
    $
    571
    
    
    $
    398
    
    
    $
    Purchase Obligations
    
    
    104
    
    
    
    58
    
    
    
    38
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    FIN 48 Obligations
    
    
    319
    
    
    
    
    
    
    
    
    
    
    
    319
    
    
    
    
    
    
    
    
    
    
    
    Pension Obligations
    
    
    1,021
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,021Total
    
    $
    4,470
    
    
    $
    762
    
    
    $
    789
    
    
    $
    929
    
    
    $
    571
    
    
    $
    398
    
    
    $
    1,021
   
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  39




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Item 4. CONTROLS AND PROCEDURES
   
 PART II. OTHER INFORMATION
 
 Item 1.A. RISK FACTORS
  Our strategic focus on our core test and measurement competencies and cost reduction plans may be
ineffective or may limit our ability to compete.
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We have commenced a review of strategic business alternatives, which may or may not result in
changes to our business and our profitability.
  We are dependent upon our ability to attract, retain and motivate our key personnel.
  We depend upon a few major customers for a majority of our revenues, and the loss of any of these
customers, or the substantial reduction in the products that they purchase from us, would
significantly reduce our revenues and net income.
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
    
    the conditions of the communications market and the economy in general;
    
    subscriber line loss and related reduced demand for wireline telecommunications services;
    
    changes or shifts in the technology utilized in the networks;
    
    labor disputes between our customers and their collective bargaining units;
    
    the failure of our customers to meet established purchase forecasts and growth projections;
    
    competition among the RBOCs, competitive exchange carriers and wireless telecommunications
and cable providers; and
    
    reorganizations, including management changes, at one or more of our customers or
potential customers.
  Our operating results may vary from quarter to quarter, causing our stock price to fluctuate.
  We may experience reduced product sales caused by customers transitioning their access network
service assurance solutions.
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Our Services business is subject to a trend of reduced capital spending for our products by our
major customers.
  We have completed, and may pursue additional acquisitions, which could result in the disruption of
our current business, increased near-term expenses, difficulties related to the integration of
acquired businesses, and substantial expenditures.
   The failure of acquired assets to meet expectations, or a decline in our fair value determined by
market prices of our stock, could indicate impairment of our intangible assets and result in
additional impairment charges.
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The sale of our products is dependent upon our ability to satisfy the proprietary requirements of
our customers.
  The sale of our products is dependent on our ability to respond to rapid technological change,
including evolving industry-wide standards, and may be adversely affected by the development, and
acceptance by our customers, of new technologies which may compete with or reduce the demand for
our products.
  44




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Our reliance on third parties to manufacture certain aspects of our products involves risks,
including delays in product shipments and reduced control over product quality.
  Our future sales in international markets are subject to numerous risks and uncertainties.
  45




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We face intense competition, which could result in our losing market share or experiencing a
decline in our gross margins.
   Our future results are dependent on our ability to establish, maintain and expand our distribution
channels and our existing third-party distributors.
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The sales cycle for our system products is long, and the delay or failure to complete one or more
large transactions in a quarter could cause our operating results to fall below our expectations.
   We depend on sales of our MCU products for a meaningful portion of our revenues, but this product
is mature and its sales will continue to decline.
  47




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Our continued emphasis on our network assurance and testing solutions and cable status monitoring
products, and on software products in particular, could have a material adverse effect on our
profitability.
    48




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If our new development efforts fail to result in products which meet our customers needs, or if
our customers fail to accept our new products, our revenues will be adversely affected.
  Our customers are subject to an evolving governmental regulatory environment that could
significantly reduce the demand for our products or increase our costs of doing business.
   Our limited ability to protect our proprietary information and technology may adversely affect our
ability to compete, and our products could infringe upon the intellectual property rights of
others, resulting in claims against us the results of which could be costly.
  49




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The success of some of our products is dependent on our ability to maintain licenses to technology
from the manufacturers of systems with which our products must be compatible.
  If we are unable to satisfy our customers specific product quality, certification or network
requirements, our business could be disrupted and our financial condition could be harmed.
  If our accounting controls and procedures are circumvented or otherwise fail to achieve their
intended purposes, our business could be seriously harmed.
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If we ship products that contain defects, the market acceptance of our products and our reputation
will be harmed and our customers could seek to recover their damages from us.
  We may incur significant liabilities if we fail to comply with environmental regulations.
  Consolidations in, or a continued slowdown in, the telecommunications industry could harm our
business.
  51




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Our expenses are relatively fixed in the short term, and we may be unable to adjust spending to
compensate for unexpected revenue shortfalls.
  We rely on software that we have licensed from third-party developers to perform key functions in
our products.
  We are affected by a pattern of product price decline in certain markets, which can harm our
business.
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Our common stock price may be extremely volatile.
  
    
    General market and economic conditions;
    
    Changes in the telecommunications industry;
    
    Actual or anticipated variations in operating results;
    
    Announcements of technological innovations, new products or new services by us or by
our competitors or customers;
    
    Changes in financial estimates or recommendations or failure to continue research
coverage by stock market analysts regarding us or our competitors;
    
    Announcements by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
    
    Announcements by us related to our consideration of strategic business opportunities;
    
    Announcements by our customers regarding end market conditions and the status of
existing and future infrastructure network deployments;
    
    Additions or departures of key personnel; and
    
    Future equity or debt offerings or our announcements of these offerings.
  We may be subject from time to time to legal proceedings, and any adverse determinations in these
proceedings could materially harm our business.
  
 Item 6. EXHIBITS
 (a)
    
    Exhibits:
  53




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ExhibitNumber
    
    Description10.1
    
    Separation and Mutual Release dated January 7, 2009 by and between
Tollgrade Communications, Inc. and Carol M. Franklin, filed as
Exhibit 10.1 to the Companys Current Report on Form 8-K/A filed
with the SEC on January 10, 2008.10.2
    
    Severance Policy, filed as Exhibit 10.1 to the Companys Current
Report on Form 8-K filed with the SEC on January 31, 2008.10.3
    
    Employment Agreement dated April 10, 2008 between the Company and
Joseph A. Ferrara, filed as Exhibit 10.1 to the Companys Current
Report on Form 8-K/A filed with the SEC on April 16, 2008.31.1
    
    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: May 8, 2008
    /s/ Joseph A. FerraraJoseph A.  FerraraChief Executive Officer and President Dated: May 8, 2008
    /s/ Samuel C. KnochSamuel C. KnochChief Financial Officer and Treasurer Dated: May 8, 2008
    /s/ R. Joseph FinkR. Joseph FinkController 55




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EXHIBIT INDEX
  ExhibitNumber
    
    Description10.1
    
    Separation and Mutual Release dated January 7, 2009 by and between
Tollgrade Communications, Inc. and Carol M. Franklin, filed as
Exhibit 10.1 to the Companys Current Report on Form 8-K/A filed
with the SEC on January 10, 2008.10.2
    
    Severance Policy, filed as Exhibit 10.1 to the Companys Current
Report on Form 8-K filed with the SEC on January 31, 2008.10.3
    
    Employment Agreement dated April 10, 2008 between the Company and
Joseph A. Ferrara, filed as Exhibit 10.1 to the Companys Current
Report on Form 8-K/A filed with the SEC on April 16, 2008.31.1
    
    Certification of the Chief Executive Officer, filed herewith31.2
    
    Certification of Chief Financial Officer, filed herewith32
    
    Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18.U.S.C. Section 350, filed herewith
 56