##### 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 June 28, 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
(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
  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 June 28, 2008  Table of Contents
  
 PAGENO.PART I. FINANCIAL INFORMATIONItem 1 Condensed Consolidated Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of June 28, 2008 and December 31, 2007 (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the three and six month periods ended June 28, 2008 and June 30, 2007 (Unaudited)
    
    
    4Condensed Consolidated Statements of Changes in Shareholders Equity for the six month period ended June 28, 2008 (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the six month periods ended June 28, 2008 and June 30, 2007 (Unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    44Item 4 Controls and Procedures
    
    
    45PART II. OTHER INFORMATIONItem 1A Risk Factors
    
    
    45Item 4 Submission of Matters to a Vote of Security Holders
    
    
    59Item 6 Exhibits
    
    
    59SIGNATURES
    
    
    61EXHIBIT INDEX
    
    
    62EX-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)
 June 28, 2008
    
    
    December 31, 2007*ASSETSCurrent assets:Cash and cash equivalents
    
    $
    56,880
    
    
    $
    58,222Short-term investments
    
    
    2,442
    
    
    
    632Accounts receivable:Trade, net
of allowance for doubtful accounts of $471 in 2008 and $478 in 2007
    
    
    13,279
    
    
    
    14,625Other
    
    
    1,518
    
    
    
    2,255Inventories
    
    
    12,613
    
    
    
    13,687Prepaid expenses and deposits
    
    
    925
    
    
    
    1,120Deferred and refundable income taxes
    
    
    385
    
    
    
    503Assets held for sale
    
    
    
    
    
    
    272Total current assets
    
    
    88,042
    
    
    
    91,316Property and equipment, net
    
    
    3,795
    
    
    
    4,279Intangibles
    
    
    39,274
    
    
    
    44,215Other assets
    
    
    343
    
    
    
    333Total assets
    
    $
    131,454
    
    
    $
    140,143LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    598
    
    
    $
    4,214Accrued warranty
    
    
    1,537
    
    
    
    1,937Accrued expenses
    
    
    2,526
    
    
    
    3,148Accrued salaries and wages
    
    
    687
    
    
    
    891Accrued royalties payable
    
    
    89
    
    
    
    707Income taxes payable
    
    
    1,145
    
    
    
    572Deferred revenue
    
    
    4,917
    
    
    
    2,767Total current liabilities
    
    
    11,499
    
    
    
    14,236Pension obligation
    
    
    1,052
    
    
    
    908Deferred tax liabilities
    
    
    2,082
    
    
    
    1,999Total liabilities
    
    
    14,633
    
    
    
    17,143Commitments and contingenciesShareholders 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
    
    
    73,546
    
    
    
    73,389Treasury stock, at cost, 575 shares in 2008 and 2007
    
    
    (5,900
    )
    
    
    (5,900
    )Retained earnings
    
    
    46,104
    
    
    
    52,863Accumulated other comprehensive income (loss)
    
    
    327
    
    
    
    (96
    )Total shareholders equity
    
    
    116,821
    
    
    
    123,000Total liabilities and shareholders equity
    
    $
    131,454
    
    
    $
    140,143
 *
    
    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 Ended
    
    Six Months EndedJune 28, 2008
    
    June 30, 2007
    
    June 28, 2008
    
    June 30, 2007Revenues:Products
    
    $
    8,491
    
    
    $
    10,863
    
    
    $
    15,631
    
    
    $
    20,860Services
    
    
    6,106
    
    
    
    3,318
    
    
    
    12,150
    
    
    
    6,363Total revenues:
    
    
    14,597
    
    
    
    14,181
    
    
    
    27,781
    
    
    
    27,223Cost of sales:Products
    
    
    4,478
    
    
    
    4,976
    
    
    
    8,094
    
    
    
    9,503Services
    
    
    1,924
    
    
    
    831
    
    
    
    3,910
    
    
    
    1,760Amortization
    
    
    853
    
    
    
    570
    
    
    
    1,867
    
    
    
    1,138Intangible impairment
    
    
    
    
    
    
    
    
    
    
    3,291
    
    
    
    Restructuring
    
    
    
    
    
    
    
    
    
    
    759
    
    
    
    Total cost of sales
    
    
    7,255
    
    
    
    6,377
    
    
    
    17,921
    
    
    
    12,401Gross profit
    
    
    7,342
    
    
    
    7,804
    
    
    
    9,860
    
    
    
    14,822Operating expenses:Selling and marketing
    
    
    2,162
    
    
    
    2,325
    
    
    
    4,597
    
    
    
    4,510General and administrative
    
    
    2,248
    
    
    
    2,340
    
    
    
    4,827
    
    
    
    4,448Research and development
    
    
    3,230
    
    
    
    2,992
    
    
    
    6,846
    
    
    
    5,945Restructuring expense
    
    
    70
    
    
    
    212
    
    
    
    505
    
    
    
    594Total operating expense
    
    
    7,710
    
    
    
    7,869
    
    
    
    16,775
    
    
    
    15,497Loss from operations
    
    
    (368
    )
    
    
    (65
    )
    
    
    (6,915
    )
    
    
    (675
    )Interest income
    
    
    313
    
    
    
    740
    
    
    
    805
    
    
    
    1,516(Loss) income before taxes
    
    
    (55
    )
    
    
    675
    
    
    
    (6,110
    )
    
    
    841Provision for income taxes
    
    
    200
    
    
    
    225
    
    
    
    649
    
    
    
    280Net (loss) income
    
    $
    (255
    )
    
    $
    450
    
    
    $
    (6,759
    )
    
    $
    561(Loss) income per share information:Weighted average shares of common
stock and equivalents:Basic
    
    
    13,158
    
    
    
    13,260
    
    
    
    13,158
    
    
    
    13,257Diluted
    
    
    13,158
    
    
    
    13,516
    
    
    
    13,158
    
    
    
    13,480Net (loss) income per common share:Basic
    
    $
    (0.02
    )
    
    $
    0.03
    
    
    $
    (0.51
    )
    
    $
    0.04Diluted
    
    $
    (0.02
    )
    
    $
    0.03
    
    
    $
    (0.51
    )
    
    $
    0.04
  4




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##### Table of Contents



Tollgrade Communications, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Changes in Shareholders Equity
 (In thousands) (Unaudited)
 AccumulatedOther
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Additional
    
    
    Treasury
    
    
    Retained
    
    
    Comprehensive
    
    
    
    
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Paid-In
    
    
    Income
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Total
    
    
    Income (Loss)Balance at December
31, 2007
    
    
    13,731
    
    
    $
    2,744
    
    
    $
    73,389
    
    
    $
    (5,900
    )
    
    $
    52,863
    
    
    $
    (96
    )
    
    $
    123,000Compensation
expense for options
and restricted
stock, net
    
    
    2
    
    
    
    
    
    
    
    157
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    157Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    423
    
    
    
    423
    
    
    $
    423Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,759
    )
    
    
    
    
    
    
    (6,759
    )
    
    
    (6,759
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (6,336
    )Balance at June 28,
2008
    
    
    13,733
    
    
    $
    2,744
    
    
    $
    73,546
    
    
    $
    (5,900
    )
    
    $
    46,104
    
    
    $
    327
    
    
    $
    116,821
  5




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##### Table of Contents



TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
 Six Months EndedJune 28, 2008
    
    June 30, 2007Cash flows from operating activities:Net (loss) income
    
    $
    (6,759
    )
    
    $
    561Adjustments to reconcile net (loss) income to net cash
provided by operating activities:Impairment loss
    
    
    3,291
    
    
    
    Depreciation and amortization
    
    
    2,770
    
    
    
    1,947Compensation expense related to stock plans
    
    
    157
    
    
    
    628Valuation allowance
    
    
    129
    
    
    
    164Deferred income taxes
    
    
    19
    
    
    
    937Restructuring
    
    
    770
    
    
    
    246Provision for losses on inventory
    
    
    175
    
    
    
    268Provision for allowance for doubtful accounts
    
    
    40
    
    
    
    39Changes in assets and liabilities:Accounts receivable-trade
    
    
    1,055
    
    
    
    5,116Accounts receivable-other
    
    
    477
    
    
    
    238Inventories
    
    
    160
    
    
    
    (3,600
    )Prepaid expenses and other assets
    
    
    254
    
    
    
    (492
    )Accounts payable
    
    
    (3,349
    )
    
    
    (365
    )Accrued warranty
    
    
    (400
    )
    
    
    (95
    )Accrued expenses and deferred income
    
    
    1,611
    
    
    
    (1,311
    )Accrued royalties payable
    
    
    (618
    )
    
    
    105Income taxes payable
    
    
    517
    
    
    
    Net cash provided by operating activities
    
    
    299
    
    
    
    4,386Cash flows from investing activities:Purchase of short-term investments
    
    
    (2,274
    )
    
    
    (11,608
    )Redemption/maturity of short-term investments
    
    
    464
    
    
    
    4,170Capital expenditures, including capitalized software
    
    
    (402
    )
    
    
    (761
    )Sale of assets held for sale
    
    
    262
    
    
    
    568Net cash used in investing activities
    
    
    (1,950
    )
    
    
    (7,631
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    
    
    
    
    36Excess tax benefit from stock-based compensation
    
    
    
    
    
    
    2Net cash provided by financing activities
    
    
    
    
    
    
    38Net decrease in cash and cash equivalents
    
    
    (1,651
    )
    
    
    (3,207
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    309
    
    
    
    Cash and cash equivalents at beginning of period
    
    
    58,222
    
    
    
    57,378Cash and cash equivalents at end of period
    
    $
    56,880
    
    
    $
    54,171
  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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
    
    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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##### Table of Contents



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




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##### Table of Contents



Grants Under the Plans
  Stock-Based Compensation Expense
  Shares Authorized But Not GrantedJune 28, 2008
    
    December 31, 20071998 Employee Incentive Compensation Plan
    
    
    
    
    
    
    164,1412006 Long Term Incentive Compensation Plan
    
    
    448,183
    
    
    
    1,169,452
  Number of
    
    Range of
    
    Weighted AverageShares
    
    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
    
    
    (53,750
    )
    
    
    6.57-31.44
    
    
    
    10.84Outstanding, June 28, 2008
    
    
    1,943,212
    
    
    $
    6.57-159.19
    
    
    $
    21.80
 10




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##### Table of Contents



3. RESTRUCTURING
    Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atDecember
    
    Restructuring
    
    Cash
    
    Asset write-
    
    June 28,31, 2007
    
    charge/expense
    
    payments
    
    downs
    
    2008Severance
    
    $
    
    
    
    $
    494
    
    
    $
    (439
    )
    
    $
    
    
    
    $
    55Inventory write-down
    
    
    
    
    
    
    738
    
    
    
    
    
    
    
    (738
    )
    
    
    Total
    
    $
    
    
    
    $
    1,232
    
    
    $
    (439
    )
    
    $
    (738
    )
    
    $
    55
   Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance atDecember
    
    
    
    
    
    Cash
    
    Asset write-
    
    June 28,31, 2007
    
    Expense
    
    payments
    
    downs
    
    2008Facility
rationalization
including employee
costs
    
    $
    103
    
    
    $
    24
    
    
    $
    (111
    )
    
    $
    (16
    )
    
    $
    Real estate impairment
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    (8
    )
    
    
    Total
    
    $
    103
    
    
    $
    32
    
    
    $
    (111
    )
    
    $
    (24
    )
    
    $
    
  11




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##### Table of Contents



4. ACQUISITION
   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
 12




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##### Table of Contents



(In Thousands, Except Per Share Data)Unaudited Pro Forma
    
    Unaudited Pro FormaThree Months Ended
    
    Six Months EndedJune 30, 2007
    
    June 30, 2007Revenues
    
    $
    20,040
    
    
    $
    37,448Income from operations
    
    
    899
    
    
    
    361Net income
    
    
    1,093
    
    
    
    1,252Basic and diluted earnings per share
    
    $
    0.08
    
    
    $
    0.09
  5. INTANGIBLE ASSETS
  June 28, 2008Useful
    
    
    (Unaudited)Life
    
    
    
    
    
    
    AccumulatedAmortizing Intangible Assets:
    
    (Years)
    
    
    Gross
    
    Amortization
    
    Impairments
    
    NetPost warranty service agreements
    
    
    6-50
    
    
    $
    38,422
    
    
    $
    3,015
    
    
    $
    
    
    
    $
    35,407Technology
    
    
    2-10
    
    
    
    18,812
    
    
    
    14,466
    
    
    
    1,396
    
    
    
    2,950Customer relationships
    
    
    5-15
    
    
    
    3,645
    
    
    
    1,364
    
    
    
    1,676
    
    
    
    605Tradenames and other
    
    
    0.5-10
    
    
    
    823
    
    
    
    292
    
    
    
    219
    
    
    
    312Total Intangible Assets
    
    
    
    
    
    $
    61,702
    
    
    $
    19,137
    
    
    $
    3,291
    
    
    $
    39,274
 Useful
    
    
    December 31, 2007Life
    
    
    
    
    
    
    AccumulatedAmortizing Intangible Assets:
    
    (Years)
    
    
    Gross
    
    Amortization
    
    Impairments
    
    NetPost 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
 13




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##### Table of Contents



Impairments
 Long-Lived Assets
   6. PENSION
  14




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7. INVENTORY
  June 28, 2008(Unaudited)
    
    December 31, 2007Raw materials
    
    $
    8,115
    
    
    $
    8,393Work in process
    
    
    2,952
    
    
    
    3,582Finished goods
    
    
    4,666
    
    
    
    4,32115,733
    
    
    
    16,296Reserves for slow moving and obsolete inventory
    
    
    (3,120
    )
    
    
    (2,609
    )$
    12,613
    
    
    $
    13,687
 8. PER SHARE INFORMATION
   Three Months Ended
    
    
    Six Months EndedJune 28, 2008
    
    
    June 28, 2008(Unaudited)
    
    
    (Unaudited)Net loss
    
    $
    (255
    )
    
    $
    (6,759
    )Common and common equivalent shares:Weighted average common shares outstanding
    
    
    13,158
    
    
    
    13,158Effect of dilutive securities  stock
options and restricted stock
    
    
    
    
    
    
    13,158
    
    
    
    13,158Loss per share:Basic
    
    $
    (0.02
    )
    
    $
    (0.51
    )Diluted
    
    $
    (0.02
    )
    
    $
    (0.51
    )
 15




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30, 2007
    
    
    June 30, 2007(Unaudited)
    
    
    (Unaudited)Net income
    
    $
    450
    
    
    $
    561Common and common equivalent shares:Weighted average common shares outstanding
    
    
    13,260
    
    
    
    13,257Effect of dilutive securities  stock options
    
    
    256
    
    
    
    22313,516
    
    
    
    13,480Income per share:Basic
    
    $
    0.03
    
    
    $
    0.04Diluted
    
    $
    0.03
    
    
    $
    0.04
 9. PRODUCT WARRANTY
   Six Months EndedJune 28, 2008
    
    
    Year Ended(Unaudited)
    
    
    December 31, 2007Balance at the beginning of the period
    
    $
    1,937
    
    
    $
    2,135Accruals for warranties issued during the period
    
    
    834
    
    
    
    1,680Settlements during the period
    
    
    (1,234
    )
    
    
    (1,878
    )Balance at the end of the period
    
    $
    1,537
    
    
    $
    1,937
 10. CONTINGENCIES AND COMMITMENTS
  16




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At June 28, 20082008 (remaining period)
    
    $
    4222009
    
    
    8442010
    
    
    6962011
    
    
    6612012
    
    
    488Thereafter
    
    
    $
    3,111
    11. INCOME TAXES
    17




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12. MAJOR CUSTOMERS AND INTERNATIONAL SALES
    18




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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 PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995.
  Overview
  19




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
    
    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
    20




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Our Customers
   21




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Our Product Solutions
 Telecommunications Solutions
      22




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Cable Solutions
   23




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Services
   BACKLOG
   24




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OPERATING SEGMENT
  INTERNATIONAL SALES
     25




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RECENT ACCOUNTING PRONOUNCEMENTS
    26




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
    
    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.
     27




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APPLICATION OF CRITICAL ACCOUNTING POLICIES
  Revenue Recognition
   28




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Goodwill and Intangible Assets
  29




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30




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Sensitivity Analysis
  31




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YearsTwelve-monthRemaining
    
    Carrying
    
    RollingLife at
    
    Value at
    
    ProjectedAsset Description
    
    Life
    
    6/28/08
    
    6/28/08
    
    Amortization(in millions)LoopCareBase Software
    
    
    10
    
    
    
    3.25
    
    
    $
    1.4
    
    
    $
    0.5Post-WarrantyMaintenance Service
Agreements
    
    
    50
    
    
    
    47.25
    
    
    
    30.2
    
    
    
    0.6CheetahProprietary Technology
    
    
    2
    
    
    
    1.50
    
    
    
    
    
    
    
    EmersonProprietary Technology
    
    
    5
    
    
    
    2.75
    
    
    
    0.4
    
    
    
    0.1Broadband Test DivisionPost-WarrantyMaintenance Service
Agreements
    
    
    48
    
    
    
    47.10
    
    
    
    1.2
    
    
    
    0.3Post-WarrantyMaintenance Service
Agreements
    
    
    20
    
    
    
    19.10
    
    
    
    3.2
    
    
    
    0.7Post-WarrantyMaintenance Service
Agreements
    
    
    10
    
    
    
    9.10
    
    
    
    0.6
    
    
    
    0.2Post-WarrantyMaintenance Service
Agreements
    
    
    6
    
    
    
    5.10
    
    
    
    0.1
    
    
    
    Technology
    
    
    3-10
    
    
    
    2.10-9.10
    
    
    
    0.7
    
    
    
    0.1Customer Relationships
    
    
    10
    
    
    
    9.10
    
    
    
    0.6
    
    
    
    0.2Other
    
    
    0.5-10
    
    
    
    0.50-9.50
    
    
    
    0.9
    
    
    
    0.4$
    39.3
    
    
    $
    3.1
  Goodwill and Indefinite Lived Assets:
  32




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Inventory Valuation
   33




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Allowance for Doubtful Accounts
   Income Taxes
  Warranty
  Long-Lived Assets Held for Sale
  34




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Restructuring Accrual
   Pension Benefits
   35




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Stock-Based Compensation
  Foreign Currency Translation
   RESULTS OF OPERATIONS
 SECOND QUARTER OF 2008 COMPARED TO SECOND QUARTER OF 2007
 Revenues
    36




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Gross Profit
  37




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Selling and Marketing Expense
  General and Administrative Expense
 .
 Research and Development Expense
  Restructuring Expense
  Interest Income
  Income Taxes
  38




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Net (Loss) Income and (Loss) Income Per Share
  SIX MONTHS ENDED JUNE 28, 2008 COMPARED TO SIX MONTHS ENDED JUNE 30, 2007
 Revenues
   39




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Gross Profit
  Selling and Marketing Expense
  40




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General and Administrative Expense
  Research and Development Expense
  Restructuring Expense
   Interest Income
  Provision for Income Taxes
  41




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Net (Loss) Income and (Loss) Earnings Per Share
  LIQUIDITY AND CAPITAL RESOURCES
      42




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KEY RATIOS
  COMMITMENTS AND CONTRACTUAL OBLIGATIONS
    43




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Payments due by periodTotal
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012
    
    ThereafterOperating Lease
Obligations
    
    $
    2,738
    
    
    $
    406
    
    
    $
    755
    
    
    $
    606
    
    
    $
    572
    
    
    $
    399
    
    
    $
    Purchase Obligations
    
    
    137
    
    
    
    41
    
    
    
    69
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    FIN 48 Obligations
    
    
    346
    
    
    
    
    
    
    
    
    
    
    
    346
    
    
    
    
    
    
    
    
    
    
    
    Pension Obligations
    
    
    1,052
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,052Total
    
    $
    4,273
    
    
    $
    447
    
    
    $
    824
    
    
    $
    979
    
    
    $
    572
    
    
    $
    399
    
    
    $
    1,052
   
 Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  44




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Item 4. CONTROLS AND PROCEDURES
   
 PART II. OTHER INFORMATION
 
 Item 1A. 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.
  45




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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 and services that they purchase from us, would
significantly reduce our revenues and net income.
  46




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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.
  Our Services business is subject to a trend of reduced capital spending for our products by our
major customers.
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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.
  48




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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.
  49




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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.
  50




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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.
  51




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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.
  52




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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.
    53




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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.
  54




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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.
 55




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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.
 56




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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.
  57




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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.
  58




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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Election of Directors
 Nominee forDirector
    
    
    Total Votes Cast
    

        
    For
    
    
    
    WithheldDaniel P. Barry
    
    
    12,232,940
    
    
    
    11,590,624
    
    
    
    642,316David S. Egan
    
    
    12,232,940
    
    
    
    11,678,849
    
    
    
    554,091Joseph A. Ferrara
    
    
    12,232,940
    
    
    
    11,684,737
    
    
    
    548,203
  Ratification of the appointment of PricewaterhouseCoopers LLP as the Companys independent
registered public accounting firm for the fiscal year ending December 31, 2008
 For
    
    
    Against
    
    
    
    Abstain
    
    
    
    Non-Votes12,101,528
    
    
    123,161
    
    
    
    8,251
    
    
    
    0
  
 Item 6. EXHIBITS
 (a)
    
    Exhibits:
  ExhibitNumber
    
    Description10.1
    
    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.
 59




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SIGNATURES
  Tollgrade Communications, Inc.
(Registrant)Dated: July 31, 2008
    /s/ Joseph A. FerraraJoseph A.  FerraraChief Executive Officer and PresidentDated: July 31, 2008
    /s/ Samuel C. KnochSamuel C. KnochChief Financial Officer and TreasurerDated: July 31, 2008
    /s/ R. Joseph FinkR. Joseph FinkController 61




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EXHIBIT INDEX
 ExhibitNumber
    
    Description10.1
    
    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
 62