##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 (Mark One)
 þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2010
 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
 o o
  Large accelerated filer oAccelerated 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 30, 2010  Table of Contents
 Page No.PART I. FINANCIAL INFORMATIONItem 1 Condensed Consolidated Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of September 30, 2010
and December 31, 2009
    
    
    3Condensed Consolidated Statements of Operations for the three and
nine month periods ended September 30, 2010 and September 26,
2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 2010 and September 26, 2009
    
    
    5Condensed Consolidated Statements of Changes in Shareholders
Equity for the nine month period ended September 30, 2010
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    13Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    23Item 4 Controls and Procedures
    
    
    23PART II. OTHER INFORMATIONItem 1A Risk Factors
    
    
    24Item 6 Exhibits
    
    
    24SIGNATURES
    
    
    25EXHIBIT INDEX
    
    
    26Exhibit 10.1Exhibit 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)
 September 30, 2010
    
    December 31, 2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    69,564
    
    
    $
    66,046Short-term investments
    
    
    3
    
    
    
    3Trade accounts receivable, net of allowance for doubtful
accounts of $1,386 and $1,496 in 2010 and 2009
    
    
    9,611
    
    
    
    6,998Other receivables
    
    
    194
    
    
    
    1,007Inventories, net
    
    
    1,582
    
    
    
    2,119Prepaid expenses and deposits
    
    
    610
    
    
    
    759Deferred and refundable income taxes
    
    
    240
    
    
    
    196Total current assets
    
    
    81,804
    
    
    
    77,128Property and equipment, net
    
    
    2,330
    
    
    
    3,101Intangibles, net
    
    
    5,834
    
    
    
    7,110Deferred tax assets
    
    
    114
    
    
    
    119Other assets
    
    
    143
    
    
    
    229Total assets
    
    $
    90,225
    
    
    $
    87,687LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,583
    
    
    $
    927Accrued warranty
    
    
    272
    
    
    
    504Accrued expenses
    
    
    1,398
    
    
    
    2,456Accrued salaries and wages
    
    
    1,302
    
    
    
    1,190Income taxes payable
    
    
    700
    
    
    
    393Deferred revenue
    
    
    2,322
    
    
    
    2,463Total current liabilities
    
    
    7,577
    
    
    
    7,933Pension obligation
    
    
    1,034
    
    
    
    983Other tax liabilities
    
    
    845
    
    
    
    738Deferred tax liabilities
    
    
    235
    
    
    
    290Total liabilities
    
    
    9,691
    
    
    
    9,944Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Common stock, $0.20 par value; 50,000 authorized shares,
issued shares, 13,882 in 2010 and 13,788 in 2009
    
    
    2,777
    
    
    
    2,746Additional paid-in capital
    
    
    76,022
    
    
    
    75,244Treasury stock, at cost, 1,162 shares in 2010 and 1,151 in 2009
    
    
    (8,632
    )
    
    
    (8,563
    )Retained earnings
    
    
    11,600
    
    
    
    9,543Accumulated other comprehensive loss
    
    
    (1,233
    )
    
    
    (1,227
    )Total shareholders equity
    
    
    80,534
    
    
    
    77,743Total liabilities and shareholders equity
    
    $
    90,225
    
    
    $
    87,687
  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 30,
    
    September 26,
    
    September 30,
    
    September 26,2010
    
    2009
    
    2010
    
    2009Revenue:Products
    
    $
    4,716
    
    
    $
    5,016
    
    
    $
    13,874
    
    
    $
    14,986Services
    
    
    6,340
    
    
    
    6,310
    
    
    
    19,849
    
    
    
    17,300Total Revenue
    
    
    11,056
    
    
    
    11,326
    
    
    
    33,723
    
    
    
    32,286Cost of sales:Products
    
    
    1,645
    
    
    
    2,537
    
    
    
    5,732
    
    
    
    8,090Services
    
    
    2,081
    
    
    
    2,137
    
    
    
    5,937
    
    
    
    5,497Amortization of intangible assets
    
    
    388
    
    
    
    659
    
    
    
    1,177
    
    
    
    1,949Impairment of intangible assets
    
    
    
    
    
    
    191
    
    
    
    
    
    
    
    191Inventory write-down
    
    
    
    
    
    
    3,070
    
    
    
    
    
    
    
    3,070Severance
    
    
    (98
    )
    
    
    502
    
    
    
    319
    
    
    
    778Total cost of sales
    
    
    4,016
    
    
    
    9,096
    
    
    
    13,165
    
    
    
    19,575Gross profit
    
    
    7,040
    
    
    
    2,230
    
    
    
    20,558
    
    
    
    12,711Operating expenses:Selling and marketing
    
    
    1,243
    
    
    
    1,567
    
    
    
    4,579
    
    
    
    4,850General and administrative
    
    
    1,813
    
    
    
    4,111
    
    
    
    5,985
    
    
    
    9,525Research and development
    
    
    1,428
    
    
    
    2,353
    
    
    
    5,468
    
    
    
    6,795Severance
    
    
    (111
    )
    
    
    1,114
    
    
    
    1,774
    
    
    
    1,179Other impairments
    
    
    
    
    
    
    293
    
    
    
    
    
    
    
    293Total operating expenses
    
    
    4,373
    
    
    
    9,438
    
    
    
    17,806
    
    
    
    22,642Income (loss) from operations
    
    
    2,667
    
    
    
    (7,208
    )
    
    
    2,752
    
    
    
    (9,931
    )Other income/(expense)
    
    
    677
    
    
    
    46
    
    
    
    (47
    )
    
    
    555Income (loss) before income taxes
    
    
    3,344
    
    
    
    (7,162
    )
    
    
    2,705
    
    
    
    (9,376
    )Provision (benefit) for income taxes
    
    
    851
    
    
    
    (80
    )
    
    
    648
    
    
    
    215Income (loss) from continuing operations
    
    
    2,493
    
    
    
    (7,082
    )
    
    
    2,057
    
    
    
    (9,591
    )(Loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (223
    )Net Income (loss)
    
    $
    2,493
    
    
    
    ($7,082
    )
    
    $
    2,057
    
    
    
    ($9,814
    )Per share information:Weighted average shares of common stock
and equivalents:Basic
    
    
    12,723
    
    
    
    12,682
    
    
    
    12,697
    
    
    
    12,681Diluted
    
    
    13,167
    
    
    
    12,682
    
    
    
    12,926
    
    
    
    12,681Income (loss) per common and common
equivalent shares:Basic
    
    $
    0.20
    
    
    
    ($0.56
    )
    
    $
    0.16
    
    
    
    ($0.78
    )Diluted
    
    $
    0.19
    
    
    
    ($0.56
    )
    
    $
    0.16
    
    
    
    ($0.78
    )Income (loss) per common and common
equivalent shares from continuing
operations:Basic
    
    $
    0.20
    
    
    
    ($0.56
    )
    
    $
    0.16
    
    
    
    ($0.76
    )Diluted
    
    $
    0.19
    
    
    
    ($0.56
    )
    
    $
    0.16
    
    
    
    ($0.76
    )Net Income (loss) per common and
common equivalent shares from
discontinued operations:Basic
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    
    ($0.02
    )Diluted
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    
    ($0.02
    )
  4




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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
 September 30,
    
    
    September 26,2010
    
    
    2009Cash flows from operating activities:Net Income (loss)
    
    $
    2,057
    
    
    
    ($9,814
    )Adjustments to reconcile net loss to net cash provided by operating
activitiesLoss from discontinued operations
    
    
    
    
    
    
    223Impairment of intangible assets
    
    
    
    
    
    
    191Impairment of other long live assets
    
    
    
    
    
    
    293Amortization expense
    
    
    1,177
    
    
    
    1,949Depreciation expense
    
    
    905
    
    
    
    865Stock-based compensation expense
    
    
    730
    
    
    
    720Deferred income taxes
    
    
    (267
    )
    
    
    247Inventory write-down
    
    
    
    
    
    
    3,070Provision for losses on inventory
    
    
    (279
    )
    
    
    268Provision for allowance for doubtful accounts
    
    
    (92
    )
    
    
    1,178Changes in assets and liabilities:Accounts receivable-trade
    
    
    (3,595
    )
    
    
    1,608Other receivable
    
    
    1,918
    
    
    
    (588
    )Inventories
    
    
    815
    
    
    
    1,384Prepaid expenses, deposits and other assets
    
    
    231
    
    
    
    506Accounts payable
    
    
    674
    
    
    
    (752
    )Accrued warranty
    
    
    (219
    )
    
    
    (307
    )Accrued expenses, deferred revenue and salaries & wages
    
    
    (371
    )
    
    
    1,050Income taxes payable
    
    
    (121
    )
    
    
    (21
    )Net cash provided by operating activities of discontinued operations
    
    
    
    
    
    
    12Net cash provided by operating activities
    
    
    3,563
    
    
    
    2,082Cash flows from investing activities:Proceeds on sale of cable product line
    
    
    
    
    
    
    3,012Proceeds from note receivable
    
    
    124
    
    
    
    53Redemption/maturity of short term investments
    
    
    
    
    
    
    2,220Purchase of acquired assets
    
    
    
    
    
    
    (300
    )Purchase of property and equipment
    
    
    (206
    )
    
    
    (505
    )Net cash used in investing activities of discontinued operations
    
    
    
    
    
    
    (57
    )Net cash (used in)/provided by investing activities
    
    
    (82
    )
    
    
    4,423Cash flows from financing activities:Exercise of common stock options
    
    
    104
    
    
    
    Repurchase of treasury stock
    
    
    (69
    )
    
    
    Net cash provided by financing activities
    
    
    35
    
    
    
    Net increase in cash and cash equivalents
    
    
    3,516
    
    
    
    6,505Effect of exchange rate changes on cash and cash equivalents
    
    
    2
    
    
    
    698Cash and cash equivalents, beginning of period
    
    
    66,046
    
    
    
    57,976Cash and cash equivalents, end of period
    
    $
    69,564
    
    
    $
    65,179Supplemental disclosure of cash flow information:Cash paid during the period for income taxes
    
    
    515
    
    
    
    (8
    )
  5




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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(In thousands) (Unaudited)
 Additional
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated OtherCommon Stock
    
    Paid-In
    
    Treasury Stock
    
    Retained
    
    ComprehensiveShares
    
    Amount
    
    Capital
    
    Shares
    
    Amount
    
    Earnings
    
    Loss
    
    TotalBalance at December
31, 2009
    
    
    13,788
    
    
    $
    2,746
    
    
    $
    75,244
    
    
    
    1,151
    
    
    
    ($8,563
    )
    
    $
    9,543
    
    
    
    ($1,227
    )
    
    $
    77,743Exercise of common
stock options
    
    
    24
    
    
    
    5
    
    
    
    99
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104Purchase of
treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    (69
    )
    
    
    
    
    
    
    
    
    
    
    (69
    )Compensation
expense for options
and restricted
stock, net
    
    
    70
    
    
    
    26
    
    
    
    679
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    705Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    (6
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,057
    
    
    
    
    
    
    
    2,057Balance at
September 30, 2010
    
    
    13,882
    
    
    $
    2,777
    
    
    $
    76,022
    
    
    
    1,162
    
    
    
    ($8,632
    )
    
    $
    11,600
    
    
    
    ($1,233
    )
    
    $
    80,534
  6




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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION
  RECENTLY ISSUED ACCOUNTING GUIDANCE
  2. 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
 7




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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.
  3. STOCK-BASED COMPENSATION
   Stock-Based Compensation Expense
   8




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Range of Option
    
    
    Weighted AverageNumber of Shares
    
    
    Prices
    
    
    Exercise PriceOutstanding, December 31, 2009
    
    
    1,684,795
    
    
    $
    3.27 - $159.19
    
    
    $
    27.29Granted
    
    
    477,500
    
    
    $
    6.43 - $6.48
    
    
    $
    6.48Exercised
    
    
    (24,334
    )
    
    $
    4.26
    
    
    $
    4.26Cancelled/Forfeited/Expired
    
    
    (568,308
    )
    
    $
    6.09 - $59.35
    
    
    $
    35.39Outstanding, September 30,
2010
    
    
    1,569,653
    
    
    $
    3.27 - $103.59
    
    
    $
    9.05
 4. SEVERANCE
   9




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5. INTANGIBLE ASSETS
  September 30, 2010Accumulated
    
    ImpairmentsUseful
    
    
    
    
    
    Amortization
    
    During theLife
    
    
    
    
    
    and
    
    ReportingAmortizing Intangible Assets:
    
    (Years)
    
    Gross
    
    Impairments
    
    Period
    
    NetPost warranty service
agreements
    
    
    6-15
    
    
    $
    37,644
    
    
    $
    32,965
    
    
    $
    
    
    
    $
    4,679Technology
    
    
    2-10
    
    
    
    13,992
    
    
    
    13,131
    
    
    
    
    
    
    
    861Customer relationships
    
    
    5-15
    
    
    
    915
    
    
    
    685
    
    
    
    
    
    
    
    230Tradenames and other
    
    
    1-10
    
    
    
    576
    
    
    
    512
    
    
    
    
    
    
    
    64Total Intangible Assets
    
    
    
    
    
    $
    53,127
    
    
    $
    47,293
    
    
    $
    0
    
    
    $
    5,834
 December 31, 2009Accumulated
    
    ImpairmentsUseful
    
    
    
    
    
    Amortization
    
    During theLife
    
    
    
    
    
    and
    
    ReportingAmortizing Intangible Assets:
    
    (Years)
    
    Gross
    
    Impairments
    
    Period
    
    NetPost warranty service
agreements
    
    
    6-15
    
    
    $
    37,779
    
    
    $
    5,438
    
    
    $
    26,960
    
    
    $
    5,381Technology
    
    
    2-10
    
    
    
    14,000
    
    
    
    12,488
    
    
    
    191
    
    
    
    1,321Customer relationships
    
    
    5-15
    
    
    
    927
    
    
    
    613
    
    
    
    
    
    
    
    314Tradenames and other
    
    
    1-10
    
    
    
    537
    
    
    
    443
    
    
    
    
    
    
    
    94Total Intangible Assets
    
    
    
    
    
    $
    53,243
    
    
    $
    18,982
    
    
    $
    27,151
    
    
    $
    7,110
   Impairments
 Long-Lived Assets
   10




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6. INVENTORIES
  September 30, 2010
    
    
    December 31, 2009Raw materials
    
    $
    3,452
    
    
    $
    3,584Work in process
    
    
    644
    
    
    
    830Finished goods
    
    
    1,946
    
    
    
    2,352Total Gross Inventory
    
    
    6,042
    
    
    
    6,766Reserves for slow
moving and obsolete
inventory
    
    
    (4,460
    )
    
    
    (4,647
    )Net Inventory
    
    $
    1,582
    
    
    $
    2,119
 7. PRODUCT WARRANTY
  September 30, 2010
    
    
    December 31, 2009Balance at the beginning of the period
    
    $
    565
    
    
    $
    926Accruals for warranties issued during
the period
    
    
    6
    
    
    
    894Settlements during the period
    
    
    (299
    )
    
    
    (1,316
    )Balance at the end of the period
    
    $
    272
    
    
    $
    504
 8. PER SHARE INFORMATION
   11




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9. REVENUE CONCENTRATION, MAJOR CUSTOMERS
  Three Months Ended
    
    Nine Months EndedSeptember 30, 2010
    
    September 26, 2009
    
    September 30, 2010
    
    September 26, 2009Test Products
    
    $
    3,354
    
    
    
    30
    %
    
    $
    3,937
    
    
    
    35
    %
    
    $
    9,390
    
    
    
    28
    %
    
    $
    10,851
    
    
    
    34
    %MCU
    
    
    1,362
    
    
    
    12
    %
    
    
    1,079
    
    
    
    10
    %
    
    
    4,484
    
    
    
    13
    %
    
    
    4,135
    
    
    
    13
    %Services
    
    
    6,340
    
    
    
    57
    %
    
    
    6,310
    
    
    
    56
    %
    
    
    19,849
    
    
    
    59
    %
    
    
    17,300
    
    
    
    54
    %Total
    
    $
    11,056
    
    
    
    100
    %
    
    $
    11,326
    
    
    
    100
    %
    
    $
    33,723
    
    
    
    100
    %
    
    $
    32,286
    
    
    
    100
    %
   Three Months Ended
    
    Nine Months EndedSeptember 30, 2010
    
    September 26, 2009
    
    September 30, 2010
    
    September 26, 2009Customer A
    
    $
    2,460
    
    
    
    22
    %
    
    $
    1,448
    
    
    
    13
    %
    
    $
    7,607
    
    
    
    23
    %
    
    $
    4,850
    
    
    
    15
    %Customer B
    
    
    1,779
    
    
    
    16
    %
    
    
    1,913
    
    
    
    17
    %
    
    
    5,337
    
    
    
    16
    %
    
    
    3,501
    
    
    
    11
    %Customer C
    
    
    1,477
    
    
    
    13
    %
    
    
    373
    
    
    
    3
    %
    
    
    3,378
    
    
    
    10
    %
    
    
    2,594
    
    
    
    8
    %``Total
    
    $
    5,716
    
    
    
    52
    %
    
    $
    3,734
    
    
    
    33
    %
    
    $
    16,322
    
    
    
    48
    %
    
    $
    10,945
    
    
    
    34
    %
  Three Months Ended
    
    Nine Months EndedSeptember 30, 2010
    
    September 26, 2009
    
    September 30, 2010
    
    September 26, 2009RegionEurope/Africa
    
    $
    4,131
    
    
    
    37
    %
    
    $
    2,464
    
    
    
    22
    %
    
    $
    10,680
    
    
    
    32
    %
    
    $
    9,537
    
    
    
    30
    %Americas
    
    
    1,048
    
    
    
    9
    %
    
    
    1,117
    
    
    
    10
    %
    
    
    1,695
    
    
    
    5
    %
    
    
    2,821
    
    
    
    9
    %Asia
    
    
    12
    
    
    
    0
    %
    
    
    86
    
    
    
    1
    %
    
    
    1,426
    
    
    
    4
    %
    
    
    585
    
    
    
    2
    %Total International
    
    
    5,191
    
    
    
    47
    %
    
    
    3,667
    
    
    
    32
    %
    
    
    13,801
    
    
    
    41
    %
    
    
    12,943
    
    
    
    40
    %Total Domestic
    
    
    5,865
    
    
    
    53
    %
    
    
    7,659
    
    
    
    68
    %
    
    
    19,922
    
    
    
    59
    %
    
    
    19,343
    
    
    
    60
    %Total Revenue
    
    $
    11,056
    
    
    
    100
    %
    
    $
    11,326
    
    
    
    100
    %
    
    $
    33,723
    
    
    
    100
    %
    
    $
    32,286
    
    
    
    100
    %
 10. COMPREHENSIVE INCOME
 Three Months Ended
    
    Nine Months EndedSeptember 30, 2010
    
    September 26, 2009
    
    September 30, 2010
    
    September 26, 2009Net Income/(Loss)
    
    $
    2,493
    
    
    
    ($7,082
    )
    
    $
    2,057
    
    
    
    ($9,814
    )Foreign currency
translation
    
    
    177
    
    
    
    73
    
    
    
    (6
    )
    
    
    693Comprehensive
Income/(Loss)
    
    $
    2,670
    
    
    
    ($7,009
    )
    
    $
    2,051
    
    
    
    ($9,121
    )
 12




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##### Table of Contents



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
  Our Customers
  13




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##### Table of Contents



Backlog
  RESULTS OF OPERATIONS
 THREE MONTHS ENDED SEPTEMBER 30, 2010 COMPARED TO THREE MONTHS ENDED SEPTEMBER 26, 2009
 Revenue
 September 30, 2010
    
    
    September 26, 2009
    
    
    Change
    
    
    %System Test Products
    
    $
    3,354
    
    
    $
    3,937
    
    
    
    ($583
    )
    
    
    -15
    %MCU
    
    
    1,362
    
    
    
    1,079
    
    
    $
    283
    
    
    
    26
    %Total Products
    
    
    4,716
    
    
    
    5,016
    
    
    
    ($300
    )
    
    
    -6
    %Services
    
    
    6,340
    
    
    
    6,310
    
    
    $
    30
    
    
    
    0
    %Total Revenues
    
    $
    11,056
    
    
    $
    11,326
    
    
    
    ($270
    )
    
    
    -2
    %
   Gross Profit
  14




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##### Table of Contents



Selling and Marketing Expenses
 September 30, 2010
    
    
    September 26, 2009
    
    
    Change
    
    
    %Employee Costs
    
    $
    1,033
    
    
    $
    1,044
    
    
    
    ($11
    )
    
    
    -1
    %Travel Expenses
    
    
    91
    
    
    
    245
    
    
    
    (154
    )
    
    
    -63
    %Consulting Expenses
    
    
    27
    
    
    
    67
    
    
    
    (40
    )
    
    
    -60
    %Other Expenses
    
    
    92
    
    
    
    211
    
    
    
    (119
    )
    
    
    -56
    %Total
    
    $
    1,243
    
    
    $
    1,567
    
    
    
    ($324
    )
    
    
    -21
    %
  General and Administrative Expenses
 September 30, 2010
    
    
    September 26, 2009
    
    
    Change
    
    
    %Employee Costs
    
    $
    870
    
    
    $
    1,159
    
    
    
    ($289
    )
    
    
    -25
    %Legal &
Professional Fees
    
    
    425
    
    
    
    1,322
    
    
    
    (897
    )
    
    
    -68
    %Bad Debt Expense
    
    
    1
    
    
    
    1,116
    
    
    
    (1,115
    )
    
    
    -100
    %General Insurance
Expense
    
    
    79
    
    
    
    172
    
    
    
    (93
    )
    
    
    -54
    %Other Expense
    
    
    438
    
    
    
    342
    
    
    
    96
    
    
    
    28
    %Total
    
    $
    1,813
    
    
    $
    4,111
    
    
    
    ($2,298
    )
    
    
    -56
    %
  15




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Research and Development Expenses
 September 30, 2010
    
    
    September 26, 2009
    
    
    Change
    
    
    %Employee Costs
    
    $
    1,285
    
    
    $
    2,033
    
    
    
    ($748
    )
    
    
    -37
    %Professional Fees
    
    
    12
    
    
    
    212
    
    
    
    (200
    )
    
    
    -94
    %Depreciation
    
    
    141
    
    
    
    159
    
    
    
    (18
    )
    
    
    -11
    %Cost of sales allocation
    
    
    (362
    )
    
    
    (448
    )
    
    
    86
    
    
    
    -19
    %Other
    
    
    352
    
    
    
    397
    
    
    
    (45
    )
    
    
    -11
    %Total
    
    $
    1,428
    
    
    $
    2,353
    
    
    
    ($925
    )
    
    
    -39
    %
  Severance Expenses
   16




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Other Income/(Expense)
  Income Taxes
   NINE MONTHS ENDED SEPTEMBER 30, 2010 COMPARED TO NINE MONTHS ENDED SEPTEMBER 26, 2009
 Revenue
 September 30, 2010
    
    
    September 26, 2009
    
    
    Change
    
    
    %System Test Products
    
    $
    9,390
    
    
    $
    10,851
    
    
    
    ($1,461
    )
    
    
    -13
    %MCU
    
    
    4,484
    
    
    
    4,135
    
    
    $
    349
    
    
    
    8
    %Total Products
    
    
    13,874
    
    
    
    14,986
    
    
    
    ($1,112
    )
    
    
    -7
    %Services
    
    
    19,849
    
    
    
    17,300
    
    
    $
    2,549
    
    
    
    15
    %Total Revenues
    
    $
    33,723
    
    
    $
    32,286
    
    
    $
    1,437
    
    
    
    4
    %
   17




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##### Table of Contents



Gross Profit
  Selling and Marketing Expenses
 September 30, 2010
    
    
    September 26, 2009
    
    
    Change
    
    
    %Employee Costs
    
    $
    3,505
    
    
    $
    3,346
    
    
    $
    159
    
    
    
    5
    %Travel Expenses
    
    
    419
    
    
    
    658
    
    
    
    (239
    )
    
    
    -36
    %Consulting Expenses
    
    
    261
    
    
    
    304
    
    
    
    (43
    )
    
    
    -14
    %Other Expenses
    
    
    394
    
    
    
    542
    
    
    
    (148
    )
    
    
    -27
    %Total
    
    $
    4,579
    
    
    $
    4,850
    
    
    
    ($271
    )
    
    
    -6
    %
  18




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General and Administrative Expenses
 September 30, 2010
    
    
    September 26, 2009
    
    
    Change
    
    
    %Employee Costs
    
    $
    3,025
    
    
    $
    3,458
    
    
    
    ($433
    )
    
    
    -13
    %Legal &
Professional Fees
    
    
    1,482
    
    
    
    3,313
    
    
    
    (1,831
    )
    
    
    -55
    %General Insurance
Expense
    
    
    259
    
    
    
    512
    
    
    
    (253
    )
    
    
    -49
    %Bad Debt Expense
    
    
    (91
    )
    
    
    1,182
    
    
    
    (1,273
    )
    
    
    -108
    %Other Expense
    
    
    1,310
    
    
    
    1,060
    
    
    
    250
    
    
    
    24
    %Total
    
    $
    5,985
    
    
    $
    9,525
    
    
    
    ($3,540
    )
    
    
    -37
    %
   Research and Development Expenses
 September 30, 2010
    
    
    September 26, 2009
    
    
    Change
    
    
    %Employee Costs
    
    $
    4,700
    
    
    $
    6,068
    
    
    
    ($1,368
    )
    
    
    -23
    %Professional Fees
    
    
    474
    
    
    
    492
    
    
    
    (18
    )
    
    
    -4
    %Depreciation
    
    
    430
    
    
    
    507
    
    
    
    (77
    )
    
    
    -15
    %Cost of sales
allocation
    
    
    (1,068
    )
    
    
    (1,311
    )
    
    
    243
    
    
    
    -19
    %Other
    
    
    932
    
    
    
    1,039
    
    
    
    (107
    )
    
    
    -10
    %Total
    
    $
    5,468
    
    
    $
    6,795
    
    
    
    ($1,327
    )
    
    
    -20
    %
  19




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Severance Expenses
   Other Income/(Expense)
  20




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Income Taxes
   LIQUIDITY AND CAPITAL RESOURCES
      21




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COMMITMENTS AND CONTRACTUAL OBLIGATIONS
    MoreLess than 1
    
    
    1-3
    
    
    3-5
    
    
    than 5Total
    
    
    year
    
    
    years
    
    
    years
    
    
    yearsOperating Lease
Obligations
    
    
    4,013
    
    
    $
    194
    
    
    $
    1,469
    
    
    $
    1,038
    
    
    $
    1,312Severance Obligation
    
    
    92
    
    
    
    92
    
    
    
    0
    
    
    
    0
    
    
    
    0Uncertain Tax Obligations
    
    
    845
    
    
    
    0
    
    
    
    845
    
    
    
    0
    
    
    
    0Pension Obligations
    
    
    1,034
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1,034Total
    
    $
    5,984
    
    
    $
    286
    
    
    $
    2,314
    
    
    $
    1,038
    
    
    $
    2,346
   Application of Critical Accounting Policies
  22




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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 Item 4. CONTROLS AND PROCEDURES
   23




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PART II. OTHER INFORMATION
 
 Item 1A. RISK FACTORS
  
 Item 6. EXHIBITS
 (a)
    
    Exhibits:
  ExhibitNumber
    
    Description10.1
    
    Agreement dated September 23, 2010 by and between Tollgrade
Communications, Inc. and Edward H. Kennedy, incorporated by
reference to Exhibit 10.1 of the Companys Current Report on Form
8-K, filed with the SEC on September 29, 2010.31.1
    
    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.
 
 24




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##### Table of Contents



SIGNATURES
  Tollgrade Communications, Inc.
(Registrant)Dated:  October 28, 2010/s/ Edward H. KennedyEdward H. KennedyChief Executive Officer and PresidentDated:  October 28, 2010/s/ Michael D. BornakMichael D. BornakChief Financial Officer and Treasurer 25




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description10.1
    
    Agreement dated September 23, 2010 by and between Tollgrade
Communications, Inc. and Edward H. Kennedy, incorporated by
reference to Exhibit 10.1 of the Companys Current Report on Form
8-K, filed with the SEC on September 29, 2010.31.1
    
    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.
 26