##### 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 27, 2009
 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
  o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o(Do not check if a smaller reporting
company)
    
    Smaller reporting company o
  o þ




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##### 



TOLLGRADE COMMUNICATIONS, INC.
 Quarterly Report on Form 10-Q
For the Quarter Ended June 27, 2009  Table of Contents
 PAGENO.PART I. FINANCIAL INFORMATIONItem 1 Condensed Consolidated Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of June 27, 2009 and
December 31, 2008 (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the three
and six month periods ended June 27, 2009 and June 28, 2008
(Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the six
month periods ended June 27, 2009 and June 28, 2008 (Unaudited)
    
    
    5Condensed Consolidated Statements of Changes in Shareholders
Equity for the six month period ended June 27, 2009 (Unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    7Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    21Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    37Item 4 Controls and Procedures
    
    
    37PART II. OTHER INFORMATIONItem 1A Risk Factors
    
    
    37Item 6 Exhibits
    
    
    53SIGNATURES
    
    
    54EXHIBIT INDEX
    
    
    55EX-10.3EX-31.1EX-31.2EX-32
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except par value) (Unaudited)
 June 27, 2009
    
    December 31, 2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    63,718
    
    
    $
    57,976Short-term investments
    
    
    199
    
    
    
    2,419Accounts receivable:Trade, net of allowance for doubtful accounts of
$284 in 2009 and $222 in 2008
    
    
    10,427
    
    
    
    9,361Other
    
    
    1,097
    
    
    
    632Inventories
    
    
    6,420
    
    
    
    7,843Prepaid expenses and deposits
    
    
    1,034
    
    
    
    1,200Deferred and refundable tax assets
    
    
    337
    
    
    
    453Current assets related to discontinued operations
    
    
    
    
    
    
    4,314Total current assets
    
    
    83,232
    
    
    
    84,198Property and equipment, net
    
    
    3,394
    
    
    
    2,661Intangibles
    
    
    35,548
    
    
    
    36,678Deferred tax assets
    
    
    65
    
    
    
    81Other assets
    
    
    441
    
    
    
    262Noncurrent assets related to discontinued operations
    
    
    
    
    
    
    467Total assets
    
    $
    122,680
    
    
    $
    124,347LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    779
    
    
    $
    1,198Accrued warranty
    
    
    653
    
    
    
    927Accrued expenses
    
    
    2,429
    
    
    
    1,514Accrued salaries and wages
    
    
    547
    
    
    
    363Accrued royalties payable
    
    
    55
    
    
    
    284Income taxes payable
    
    
    253
    
    
    
    267Deferred revenue
    
    
    3,742
    
    
    
    3,024Current liabilities related to discontinued operations
    
    
    
    
    
    
    1,146Total current liabilities
    
    
    8,458
    
    
    
    8,723Pension obligation
    
    
    971
    
    
    
    889Deferred tax liabilities
    
    
    1,758
    
    
    
    1,792Other tax liabilities
    
    
    606
    
    
    
    489Total liabilities
    
    
    11,793
    
    
    
    11,893Commitments and contingenciesShareholders equity:Common stock, $0.20 par value; 50,000 authorized
shares, issued shares, 13,754 in 2009 and 13,733 in
2008
    
    
    2,744
    
    
    
    2,744Additional paid-in capital
    
    
    74,468
    
    
    
    73,923Treasury stock, at cost, 1,072 shares in 2009 and 2008
    
    
    (8,081
    )
    
    
    (8,081
    )Retained earnings
    
    
    43,016
    
    
    
    45,748Accumulated other comprehensive loss
    
    
    (1,260
    )
    
    
    (1,880
    )Total shareholders equity
    
    
    110,887
    
    
    
    112,454Total liabilities and shareholders equity
    
    $
    122,680
    
    
    $
    124,347
  3




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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share data) (Unaudited)
 Three Months Ended
    
    Six Months EndedJune 27,
    
    June 28,
    
    June 27,
    
    June 28,2009
    
    2008
    
    2009
    
    2008Revenues:Products
    
    $
    4,141
    
    
    $
    6,433
    
    
    $
    9,970
    
    
    $
    12,000Services
    
    
    6,502
    
    
    
    5,681
    
    
    
    10,990
    
    
    
    11,303Total revenues
    
    
    10,643
    
    
    
    12,114
    
    
    
    20,960
    
    
    
    23,303Cost of sales:Products
    
    
    2,769
    
    
    
    3,203
    
    
    
    5,554
    
    
    
    5,943Services
    
    
    1,935
    
    
    
    1,806
    
    
    
    3,359
    
    
    
    3,646Amortization
    
    
    649
    
    
    
    782
    
    
    
    1,290
    
    
    
    1,581Impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    202Inventory write-down
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    738Restructuring / severance
    
    
    93
    
    
    
    
    
    
    
    276
    
    
    
    16Total cost of sales
    
    
    5,446
    
    
    
    5,791
    
    
    
    10,479
    
    
    
    12,126Gross profit
    
    
    5,197
    
    
    
    6,323
    
    
    
    10,481
    
    
    
    11,177Operating expenses:Selling and marketing
    
    
    1,628
    
    
    
    1,728
    
    
    
    3,283
    
    
    
    3,690General and administrative
    
    
    2,839
    
    
    
    2,237
    
    
    
    5,414
    
    
    
    4,798Research and development
    
    
    2,405
    
    
    
    2,593
    
    
    
    4,441
    
    
    
    5,564Restructuring / severance
    
    
    3
    
    
    
    47
    
    
    
    66
    
    
    
    453Total operating expenses
    
    
    6,875
    
    
    
    6,605
    
    
    
    13,204
    
    
    
    14,505Loss from operations
    
    
    (1,678
    )
    
    
    (282
    )
    
    
    (2,723
    )
    
    
    (3,328
    )Other income
    
    
    391
    
    
    
    310
    
    
    
    509
    
    
    
    799(Loss) income before income taxes
    
    
    (1,287
    )
    
    
    28
    
    
    
    (2,214
    )
    
    
    (2,529
    )Provision for income taxes
    
    
    198
    
    
    
    200
    
    
    
    295
    
    
    
    649Loss from continuing operations
    
    
    (1,485
    )
    
    
    (172
    )
    
    
    (2,509
    )
    
    
    (3,178
    )Loss from discontinued operations, net of income
taxes
    
    
    (24
    )
    
    
    (83
    )
    
    
    (223
    )
    
    
    (3,581
    )Net loss
    
    $
    (1,509
    )
    
    $
    (255
    )
    
    $
    (2,732
    )
    
    $
    (6,759
    )Earnings per share information:Weighted average shares of common stock and
equivalents:Basic
    
    
    12,681
    
    
    
    13,158
    
    
    
    12,680
    
    
    
    13,158Diluted
    
    
    12,681
    
    
    
    13,158
    
    
    
    12,680
    
    
    
    13,158Loss per common and common equivalent shares
from continuing operations:Basic
    
    $
    (0.12
    )
    
    $
    (0.01
    )
    
    $
    (0.20
    )
    
    $
    (0.24
    )Diluted
    
    $
    (0.12
    )
    
    $
    (0.01
    )
    
    $
    (0.20
    )
    
    $
    (0.24
    )Loss per common and common equivalent shares
from discontinued operations:Basic
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.27
    )Diluted
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.27
    )Net loss per common and common equivalent shares:Basic
    
    $
    (0.12
    )
    
    $
    (0.02
    )
    
    $
    (0.22
    )
    
    $
    (0.51
    )Diluted
    
    $
    (0.12
    )
    
    $
    (0.02
    )
    
    $
    (0.22
    )
    
    $
    (0.51
    )
  4




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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands) (Unaudited)
 Six Months EndedJune 27, 2009
    
    June 28, 2008Cash flows from operating activities:Net loss
    
    $
    (2,732
    )
    
    $
    (6,759
    )Loss from discontinued operations
    
    
    223
    
    
    
    3,581Adjustments to reconcile net loss to net cash
provided by operating activitiesImpairment of goodwill & intangible assets
    
    
    
    
    
    
    202Depreciation and amortization
    
    
    1,850
    
    
    
    2,328Stock-based compensation expense
    
    
    545
    
    
    
    157Valuation allowance
    
    
    
    
    
    
    129Deferred income taxes
    
    
    180
    
    
    
    19Restructuring and inventory write-down
    
    
    
    
    
    
    770Provision for losses on inventory
    
    
    226
    
    
    
    175Provision for allowance for doubtful accounts
    
    
    66
    
    
    
    31Changes in assets and liabilities:Accounts receivable-trade
    
    
    (1,049
    )
    
    
    767Accounts receivable-other
    
    
    307
    
    
    
    492Inventories
    
    
    1,197
    
    
    
    (165
    )Prepaid expenses and other assets
    
    
    388
    
    
    
    199Accounts payable
    
    
    561
    
    
    
    (3,057
    )Accrued warranty
    
    
    (274
    )
    
    
    (109
    )Accrued expenses and deferred income
    
    
    (496
    )
    
    
    1,619Accrued royalties payable
    
    
    (230
    )
    
    
    (600
    )Income taxes payable
    
    
    (19
    )
    
    
    517Net cash provided by operating activities of
discontinued operations
    
    
    12
    
    
    
    3Net cash provided by operating activities
    
    
    755
    
    
    
    299Cash flows from investing activities:Proceeds on sale of cable product line
    
    
    3,012
    
    
    
    Proceeds from note receivable
    
    
    17
    
    
    
    Purchase of short-term investments
    
    
    
    
    
    
    (2,274
    )Redemption/maturity of short-term investments
    
    
    2,220
    
    
    
    464Purchase of assets
    
    
    (300
    )
    
    
    Capital expenditure
    
    
    (399
    )
    
    
    (399
    )Sale of assets held for sale
    
    
    
    
    
    
    262Net cash used in investing activities of
discontinued operations
    
    
    (57
    )
    
    
    (3
    )Net cash provided by (used in) investing activities
    
    
    4,493
    
    
    
    (1,950
    )Net increase (decrease) in cash and cash equivalents
    
    
    5,248
    
    
    
    (1,651
    )Effect of exchange rate changes on cash and cash
equivalents
    
    
    494
    
    
    
    309Cash and cash equivalents, beginning of period
    
    
    57,976
    
    
    
    58,222Cash and cash equivalents, end of period
    
    $
    63,718
    
    
    $
    56,880
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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
 (In thousands) (Unaudited)
 AccumulatedOtherCommon Stock
    
    
    Additional
    
    
    Treasury
    
    
    Retained
    
    
    Comprehensive
    
    
    
    
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Paid-In
    
    
    Stock
    
    
    Earnings
    
    
    Loss
    
    
    Total
    
    
    LossBalance at December 31, 2008
    
    
    13,733
    
    
    $
    2,744
    
    
    $
    73,923
    
    
    $
    (8,081
    )
    
    $
    45,748
    
    
    $
    (1,880
    )
    
    $
    112,454Compensation expense for options and restricted stock, net
    
    2
    
    
    
    
    
    
    
    545
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    545Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    620
    
    
    
    620
    
    
    $
    620Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,732
    )
    
    
    
    
    
    
    (2,732
    )
    
    
    (2,732
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (2,112
    )Balance at June 27, 2009
    
    
    13,735
    
    
    $
    2,744
    
    
    $
    74,468
    
    
    $
    (8,081
    )
    
    $
    43,016
    
    
    $
    (1,260
    )
    
    $
    110,887
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION
  RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
   7




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9




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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
    2. ACQUISITIONS AND DISCONTINUED OPERATIONS
    10




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Three Months Ended
    
    Six Months EndedJune 27,
    
    June 28,
    
    June 27,
    
    June 28,2009
    
    2008
    
    2009
    
    2008Revenues:Products
    
    $
    1,111
    
    
    $
    2,057
    
    
    $
    2,376
    
    
    $
    3,631Services
    
    
    259
    
    
    
    425
    
    
    
    723
    
    
    
    8471,370
    
    
    
    2,482
    
    
    
    3,099
    
    
    
    4,478Loss from discontinued operationsLoss from discontinued operations, before tax
    
    
    (24
    )
    
    
    (83
    )
    
    
    (223
    )
    
    
    (3,581
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from discontinued operations, net of tax
    
    
    (24
    )
    
    
    (83
    )
    
    
    (223
    )
    
    
    (3,581
    )
  December 31, 2008ASSETSAccounts receivable trade, net of allowance for doubtful accounts
    
    $
    1,166Accounts receivable other
    
    
    36Inventories
    
    
    2,830Prepaid expenses
    
    
    249Property and equipment, net
    
    
    292Intangibles and capitalized software, net
    
    
    175Assets related to discontinued operations
    
    
    4,748LIABILITIESAccounts payable
    
    $
    66Accrued warranty
    
    
    664Accrued expenses
    
    
    142Accrued royalties
    
    
    15Deferred revenue
    
    
    259Liabilities related to discontinued operations
    
    
    1,146
 3. FAIR VALUE MEASUREMENTS
  11




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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; and
 
    
    Level 3  Inputs that are both significant to the fair value measurement and
unobservable.
  4. STOCK COMPENSATION PLANS AND ACCOUNTING FOR STOCK-BASED COMPENSATION EXPENSE
 The Plans
   Stock-Based Compensation Expense
 12




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Shares Authorized But Not GrantedJune 27, 2009
    
    December 31, 20082006 Long-Term Incentive Compensation Plan
    
    
    1,259,603
    
    
    
    1,220,106
  Number of
    
    Range of
    
    Weighted AverageShares
    
    Option Prices
    
    Exercise PriceOutstanding, December 31,
2008
    
    
    1,605,490
    
    
    $
    3.27 - 159.19
    
    
    $
    23.08Granted
    
    
    419,000
    
    
    
    5.32-5.38
    
    
    
    5.38Exercised
    
    
    
    
    
    
    
    
    
    
    Cancelled/Forfeited/Expired
    
    
    (164,155
    )
    
    
    5.38-117.34
    
    
    
    18.09Outstanding, June 27, 2009
    
    
    1,860,335
    
    
    $
    3.27-159.19
    
    
    $
    19.54
 13




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5. SEVERANCE
    6. INTANGIBLE ASSETS
  June 27, 2009Useful
    
    
    (Unaudited)Life
    
    
    
    
    
    
    AccumulatedAmortizing Intangible Assets:
    
    (Years)
    
    
    Gross
    
    
    Amortization
    
    
    Impairments
    
    
    NetPost warranty service agreements
    
    
    6-50
    
    
    $
    37,789
    
    
    $
    4,628
    
    
    $
    
    
    
    $
    33,161Technology
    
    
    3-10
    
    
    
    14,001
    
    
    
    12,132
    
    
    
    
    
    
    
    1,869Customer relationships
    
    
    5-10
    
    
    
    930
    
    
    
    535
    
    
    
    
    
    
    
    395Tradenames and other
    
    
    3-10
    
    
    
    538
    
    
    
    415
    
    
    
    
    
    
    
    123Total Intangible Assets
    
    
    
    
    
    $
    53,258
    
    
    $
    17,710
    
    
    $
    
    
    
    $
    35,548
 December 31, 2008(unaudited)Useful
    
    
    
    
    
    AccumulatedAmortizing Intangible Assets:
    
    Life (Years)
    
    
    Gross
    
    
    Amortization
    
    
    Impairments
    
    
    NetPost warranty service
agreements
    
    
    6-50
    
    
    $
    37,563
    
    
    $
    3,752
    
    
    $
    
    
    
    $
    33,811Technology
    
    
    2-10
    
    
    
    13,987
    
    
    
    11,700
    
    
    
    30
    
    
    
    2,257Customer relationships
    
    
    5-15
    
    
    
    904
    
    
    
    334
    
    
    
    112
    
    
    
    458Tradenames and other
    
    
    0.5-10
    
    
    
    534
    
    
    
    323
    
    
    
    59
    
    
    
    152Total Intangible Assets
    
    
    
    
    
    $
    52,988
    
    
    $
    16,109
    
    
    $
    201
    
    
    $
    36,678
 Impairments
 Long-Lived Assets
  14




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7. INVENTORIES
  Year EndedJune 27,2009
    
    December 31, 2008(Unaudited)
    
    (Unaudited)Raw materials
    
    $
    4,063
    
    
    $
    4,621Work in process
    
    
    1,926
    
    
    
    3,142Finished goods
    
    
    2,357
    
    
    
    1,7828,346
    
    
    
    9,545Reserves for slow moving and obsolete inventory
    
    
    (1,926
    )
    
    
    (1,702
    )$
    6,420
    
    
    $
    7,843
 8. PRODUCT WARRANTY
  Six Months Ended
    
    
    Year EndedJune 27, 2009
    
    
    December 31, 2008(Unaudited)
    
    
    (Unaudited)Balance at the beginning of the period
    
    $
    927
    
    
    $
    1,147Accruals for warranties issued during the period
    
    
    248
    
    
    
    1,683Settlements during the period
    
    
    (522
    )
    
    
    (1,903
    )Balance at the end of the period
    
    $
    653
    
    
    $
    927
 9. PER SHARE INFORMATION
   16




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Three Months Ended
    
    
    Six Months EndedJune 27, 2009
    
    
    June 27, 2009(Unaudited)
    
    
    (Unaudited)Loss from continuing operations
    
    $
    (1,485
    )
    
    $
    (2,509
    )Loss from discontinued operations, net of income taxes
    
    
    (24
    )
    
    
    (223
    )Net loss from operations
    
    
    (1,509
    )
    
    
    (2,732
    )Common and common equivalent shares:Weighted average common shares outstanding
    
    
    12,681
    
    
    
    12,680Effect of dilutive securities  stock options
    
    
    
    
    
    
    Loss per share from continuing operations:Basic
    
    $
    (0.12
    )
    
    $
    (0.20
    )Diluted
    
    $
    (0.12
    )
    
    $
    (0.20
    )Loss per share from discontinued operations:Basic
    
    $
    (0.00
    )
    
    $
    (0.02
    )Diluted
    
    $
    (0.00
    )
    
    $
    (0.02
    )
 Three Months Ended
    
    
    Six Months EndedJune 28, 2008
    
    
    June 28, 2008(Unaudited)
    
    
    (Unaudited)Loss from continuing operations
    
    $
    (172
    )
    
    $
    (3,178
    )Loss from discontinued operations, net of income taxes
    
    
    (83
    )
    
    
    (3,581
    )Net loss from operations
    
    
    (255
    )
    
    
    (6,759
    )Common and common equivalent shares:Weighted average common shares outstanding
    
    
    13,158
    
    
    
    13,158Effect of dilutive securities  stock options
    
    
    
    
    
    
    Loss per share from continuing operations:Basic
    
    $
    (0.01
    )
    
    $
    (0.24
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.24
    )Loss per share from discontinued operationsBasic
    
    $
    (0.01
    )
    
    $
    (0.27
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.27
    )
  10. CONTINGENCIES AND COMMITMENTS
  17




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At June 27, 20092009 (remaining period)
    
    $
    4942010
    
    
    6332011
    
    
    4922012
    
    
    3252013
    
    
    Thereafter
    
    
    $
    1,944
   11. INCOME TAXES
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United States  Federal
    
    2005 and forwardUnited States  State
    
    2005 and forwardEurope
    
    2007 and forward
  12. MAJOR CUSTOMERS AND INTERNATIONAL SALES
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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussion should be read in conjunction with the Unaudited Condensed Consolidated
Financial Statements and Notes thereto appearing elsewhere in this report.
 CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995.
   Cable Product Line
  Overview
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1.
    
    Developing a comprehensive strategic plan to focus on our core expertise in service
assurance and adjacent markets;
 2.
    
    Selling off non-core assets that do not support our refocused strategy;
 3.
    
    Bolstering cash reserves to more than $63 million;
 4.
    
    Authorizing a $15 million stock buyback program;
 5.
    
    Reducing corporate overhead by streamlining operations; and
 6.
    
    Making key management changes to strengthen our functional expertise.
  22




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Products
 Services
    Telecommunications Test and Measurement Products
 ®
  23




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®
   Electric Utility Monitoring Products
  24




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Our Customers
    25




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Backlog
   RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
   26




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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
    Application of Critical Accounting Policies
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RESULTS OF OPERATIONS FROM CONTINUING OPERATIONS
 THREE MONTHS ENDED JUNE 27, 2009 COMPARED TO THREE MONTHS ENDED JUNE 28, 2008
 Revenues
      Gross Profit
  30




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Selling and Marketing Expense
  General and Administrative Expense
 .
 Research and Development Expense
  Other Income
  Income Taxes
  31




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Loss from Continuing Operations and Loss Per Share from Continuing Operations
  SIX MONTHS ENDED JUNE 27, 2009 COMPARED TO SIX MONTHS ENDED JUNE 28, 2008
 Revenues
     32




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Gross Profit
  Selling and Marketing Expense
  General and Administrative Expense
 .
 Research and Development Expense
  33




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Severance Expense
   Other Income
  Income Taxes
  Loss from Continuing Operations and Loss Per Share from Continuing Operations
  LIQUIDITY AND CAPITAL RESOURCES
   34




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KEY RATIOS
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COMMITMENTS AND CONTRACTUAL OBLIGATIONS
   Minimum annual future commitments as of June 27, 2009 are (in thousands):
 Payments due by periodTotal
    
    2009
    
    2010
    
    2011
    
    2012
    
    2013
    
    ThereafterOperating Lease
Obligations
    
    $
    1,757
    
    
    $
    467
    
    
    $
    580
    
    
    $
    439
    
    
    $
    271
    
    
    $
    
    
    
    $
    Purchase Obligations
    
    
    8
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    FIN 48 Obligations
    
    
    604
    
    
    
    
    
    
    
    604
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pension Obligations
    
    
    971
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    971Total
    
    $
    3,340
    
    
    $
    475
    
    
    $
    1,184
    
    
    $
    439
    
    
    $
    271
    
    
    $
    
    
    
    $
    971
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Item 4. CONTROLS AND PROCEDURES
   
 PART II. OTHER INFORMATION
 
 Item 1A. RISK FACTORS
  Our Services business is subject to a trend of reduced capital spending for our products by our
major customers and possible delays in, or the inability to complete, negotiation and execution of
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purchase and service agreements with new or existing customers could significantly impact business
results and possibly result in impairment charges in the future.
  Our future growth depends to a large extent upon our ability to reposition the Company with a
greater focus on our service assurance testing offerings to the telecom market.
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Our cost reduction plans may be ineffective or may limit our ability to compete.
  Potential continuing uncertainty resulting from the contested election of directors at our 2009
Annual Meeting of Shareholders, and from any resulting changes to the composition of our Board of
Directors and its committees, may adversely affect our business.
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Failure to achieve the maximum revenues under our new managed services contract could have an
adverse effect on our revenues and results of operations.
  A continuing downturn in the global economy may adversely affect our revenues, results of
operations and financial condition.
  
    
    poor availability of credit,
    
    continued recession in the United States economy and other countries that we serve,
    
    fluctuation in the value of the U.S. dollar relative to foreign currencies in
jurisdictions where we transact business,
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
    
    significant act of terrorism which disrupts global trade or consumer confidence,
    
    geopolitical tensions including war and civil unrest, and
    
    reduced levels of economic activity or disruption of domestic or international
transportation.
   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 or services 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 weakening 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 large domestic carriers, 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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We have completed, and may pursue additional acquisitions, which could result in the disruption of
our current business, 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
impairment charges.
  The sale of our products is dependent upon our ability to satisfy the proprietary requirements of
our customers.
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The sale of our products is dependent on our ability to respond to rapid technological change 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.
   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.
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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.
  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.
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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.
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The continued adoption of industry-wide standards in the telecommunications market could have a
material adverse effect on our profitability.
  The presence of available open source software could adversely affect our ability to maximize
revenue from software products.
  If our development efforts with respect to our LightHouse system 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.
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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.
   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.
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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.
  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.
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Consolidations in, or a continued slowdown in, the telecommunications industry could harm our
business.
  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 license from third-party developers to perform key functions in our
products.
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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;
    
    The fact that we no longer receive research coverage by sell-side market analysts;
    
    Announcements by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures, capital commitments or other strategic announcements;
    
    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.
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We may have difficulty securing new financing upon the same or substantially similar terms.
  Our business may be interrupted and adversely affected if we are unable to secure and prepare new
office space for our corporate headquarters prior to the expiration of our Cheswick lease.
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Item 6. EXHIBITS
   ExhibitNumber
    
    Description10.1
    
    Purchase and Sale Agreement, by and among, Tollgrade
Communications, Inc., a Pennsylvania corporation, Tollgrade
Communications, Inc., a Delaware corporation, and Cheetah
Technologies, L.P., a Pennsylvania limited partnership, dated as
of May 1, 2009 (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed with the SEC on May 5,
2009).10.2
    
    Tollgrade Communications, Inc. 2006 Long-Term Incentive
Compensation Plan, as amended and restated on June 4, 2009
(incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the SEC on June 10, 2009).10.3
    
    Amendment of Lease, dated May 22, 2009, between the Regional
Industrial Development Corporation of Southwestern Pennsylvania
and Tollgrade Communications, Inc., filed herewith.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.
     ®
 ®
 ®
 ®
 ®
  53




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SIGNATURES
  Tollgrade Communications, Inc.
(Registrant)Dated: August 6, 2009/s/ Joseph A. FerraraJoseph A.  FerraraChairman, Chief Executive Officer and PresidentDated: August 6, 2009/s/ Gary W. Bogatay, Jr.Gary W. Bogatay, Jr.Chief Financial Officer and Treasurer 54




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EXHIBIT INDEX
  ExhibitNumber
    
    Description10.1
    
    Purchase and Sale Agreement, by and among, Tollgrade
Communications, Inc., a Pennsylvania corporation, Tollgrade
Communications, Inc., a Delaware corporation, and Cheetah
Technologies, L.P., a Pennsylvania limited partnership, dated as
of May 1, 2009 (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed with the SEC on May 5,
2009).10.2
    
    Tollgrade Communications, Inc. 2006 Long-Term Incentive
Compensation Plan, as amended and restated on June 4, 2009
(incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the SEC on June 10, 2009).10.3
    
    Amendment of Lease, dated May 22, 2009, between the Regional
Industrial Development Corporation of Southwestern Pennsylvania
and Tollgrade Communications, Inc., filed herewith.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.
 55