##### 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 25, 2005
 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
  þ o
    1




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TOLLGRADE COMMUNICATIONS, INC.
 Quarterly Report on Form 10-Q
For the Quarter Ended June 25, 2005
 Table of Contents
 PAGE NO.PART I. FINANCIAL INFORMATIONItem 1
    
    Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of June 25, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the three month and six month periods ended June 25, 2005 and June 26, 2004
    
    
    4Condensed Consolidated Statement of Changes in Shareholders Equity for the six month period ended June 25, 2005
    
    
    5Condensed Consolidated Statements of Cash Flows for the six month periods ended June 25, 2005 and June 26, 2004
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Report of Independent Registered Public Accounting Firm
    
    
    15Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    40Item 4
    
    Controls and Procedures
    
    
    41PART II. OTHER INFORMATIONItem 2
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    41Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    41Item 6
    
    Exhibits
    
    
    42SIGNATURES
    
    
    43EXHIBIT INDEX
    
    
    44EX-10.2EX-15EX-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
 (Unaudited)
 June 25, 2005
    
    December 31, 2004 *ASSETSCurrent assets:Cash and cash equivalents
    
    $
    21,712,874
    
    
    $
    32,622,135Short-term investments
    
    
    29,419,536
    
    
    
    18,537,310Accounts receivable:Trade, net of allowance for doubtful
accounts of $761,361 in 2005 and $754,598
in 2004
    
    
    12,739,756
    
    
    
    10,690,695Other
    
    
    1,195,252
    
    
    
    106,484Inventory
    
    
    12,483,325
    
    
    
    12,940,878Prepaid expenses and other current assets
    
    
    1,390,530
    
    
    
    2,542,565Refundable income taxes
    
    
    752,274
    
    
    
    964,171Deferred tax assets
    
    
    1,584,521
    
    
    
    1,143,410Total current assets
    
    
    81,278,068
    
    
    
    79,547,648Property and equipment, net
    
    
    7,281,605
    
    
    
    7,859,709Deferred tax assets
    
    
    208,620
    
    
    
    176,464Intangibles, net
    
    
    45,036,250
    
    
    
    45,107,750Goodwill
    
    
    19,339,682
    
    
    
    19,339,682Capitalized software costs, net
    
    
    5,478,944
    
    
    
    6,452,749Receivable from officer
    
    
    155,797
    
    
    
    156,392Other assets
    
    
    169,978
    
    
    
    194,081Total assets
    
    $
    158,948,944
    
    
    $
    158,834,475LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,259,348
    
    
    $
    1,086,818Accrued warranty
    
    
    1,907,147
    
    
    
    2,081,238Accrued expenses
    
    
    2,331,063
    
    
    
    1,771,930Accrued salaries and wages
    
    
    246,171
    
    
    
    717,540Accrued royalties payable
    
    
    117,671
    
    
    
    414,408Income taxes payable
    
    
    338,343
    
    
    
    168,501Deferred income
    
    
    1,638,025
    
    
    
    2,461,728Total current liabilities
    
    
    7,837,768
    
    
    
    8,702,163Deferred tax liabilities
    
    
    3,165,391
    
    
    
    2,623,377Total liabilities
    
    
    11,003,159
    
    
    
    11,325,540Commitments and contingent liabilities
    
    
    
    
    
    
    Shareholders equity:Preferred stock, $1.00 par value;
Authorized shares, 10,000,000; issued shares, -0-
In 2005 and 2004
    
    
    
    
    
    
    Common stock, $.20 par value; authorized shares,
50,000,000; issued shares, 13,622,940 in 2005 and 2004
    
    
    2,724,588
    
    
    
    2,724,588Additional paid-in capital
    
    
    71,134,745
    
    
    
    71,134,745Treasury stock, at cost, 461,800 shares in 2005 and 2004
    
    
    (4,790,783
    )
    
    
    (4,790,783
    )Retained Earnings
    
    
    78,877,235
    
    
    
    78,440,385Total shareholders equity
    
    
    147,945,785
    
    
    
    147,508,935Total liabilities and shareholders equity
    
    $
    158,948,944
    
    
    $
    158,834,475
 *
    
    Amounts derived from audited financial statements  3




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##### Table of Contents



TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  For the
    
    For theThree Months Ended
    
    Six Months EndedJune 25, 2005
    
    June 26, 2004
    
    June 25, 2005
    June 26, 2004Revenues:Products
    
    $
    12,858,437
    
    
    $
    12,267,500
    
    
    $
    24,838,424
    
    
    $
    26,722,130Services
    
    
    4,233,349
    
    
    
    3,198,311
    
    
    
    6,527,986
    
    
    
    6,350,830Total revenues:
    
    
    17,091,786
    
    
    
    15,465,811
    
    
    
    31,366,410
    
    
    
    33,072,960Cost of product sales:Products
    
    
    6,170,500
    
    
    
    6,266,456
    
    
    
    12,223,079
    
    
    
    12,280,924Services
    
    
    935,783
    
    
    
    997,479
    
    
    
    1,731,372
    
    
    
    1,857,304Amortization of intangibles
    
    
    541,499
    
    
    
    510,194
    
    
    
    1,081,202
    
    
    
    983,5277,647,782
    
    
    
    7,774,129
    
    
    
    15,035,653
    
    
    
    15,121,755Gross Profit:
    
    
    9,444,004
    
    
    
    7,691,682
    
    
    
    16,330,757
    
    
    
    17,951,205Selling and marketing
    
    
    2,437,768
    
    
    
    2,383,142
    
    
    
    4,675,389
    
    
    
    4,854,730General and administrative
    
    
    1,895,471
    
    
    
    1,661,246
    
    
    
    3,730,107
    
    
    
    3,595,420
    



Research and development
    
    
    3,693,057
    
    
    
    4,114,965
    
    
    
    7,089,585
    
    
    
    8,306,753Retirement Expense
    
    
    
    
    
    
    
    
    
    
    775,213
    
    
    
    
    

Total operating expenses
    
    
    8,026,296
    
    
    
    8,159,353
    
    
    
    16,270,294
    
    
    
    16,756,903Income (loss) from operations
    
    
    1,417,708
    
    
    
    (467,671
    )
    
    
    60,463
    
    
    
    1,194,302Interest and other income, net
    
    
    252,198
    
    
    
    68,195
    
    
    
    514,936
    
    
    
    158,377Income (loss) before income taxes
    
    
    1,669,906
    
    
    
    (399,476
    )
    
    
    575,399
    
    
    
    1,352,679Provision (benefit) for income taxes
    
    
    501,890
    
    
    
    (264,929
    )
    
    
    138,549
    
    
    
    407,200Net income (loss)
    
    $
    1,168,016
    
    
    $
    (134,547
    )
    
    $
    436,850
    
    
    $
    945,479Earnings (loss) per share information:Weighted average shares of common stock and equivalents:Basic
    
    
    13,161,140
    
    
    
    13,131,835
    
    
    
    13,161,140
    
    
    
    13,126,231Diluted
    
    
    13,167,863
    
    
    
    13,131,835
    
    
    
    13,189,533
    
    
    
    13,309,961Net income (loss) per common and common equivalent shares:Basic
    
    $
    0.09
    
    
    $
    (0.01
    )
    
    $
    0.03
    
    
    $
    0.07Diluted
    
    $
    0.09
    
    
    $
    (0.01
    )
    
    $
    0.03
    
    
    $
    0.07
  4




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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
For the Six Months Ended June 25, 2005
  AdditionalPreferred Stock
    
    Common Stock
    
    Paid-In
    
    Treasury
    
    RetainedShares
    
    Amount
    
    Shares
    
    Amount
    
    Earnings
    
    Stock
    
    Earnings
    
    TotalBalance at
December 31, 2004
    
    
    
    
    
    $
    
    
    
    
    13,622,940
    
    
    $
    2,724,588
    
    
    $
    71,134,745
    
    
    $
    (4,790,783
    )
    
    $
    78,440,385
    
    
    $
    147,508,935Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    436,850
    
    
    
    436,850Balance at
June 25, 2005
    
    
    
    
    
    $
    
    
    
    
    13,622,940
    
    
    $
    2,724,588
    
    
    $
    71,134,745
    
    
    $
    (4,790,783
    )
    
    $
    78,877,235
    
    
    $
    147,945,785
  5




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##### Table of Contents



TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedJune 25, 2005
    
    June 26, 2004Cash flows from operating activities:Net income
    
    $
    436,850
    
    
    $
    945,479Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    2,315,596
    
    
    
    2,266,035Tax benefit from exercise of stock options
    
    
    
    
    
    
    48,884Deferred income taxes
    
    
    68,747
    
    
    
    (47,629
    )Provision for losses on inventory
    
    
    274,041
    
    
    
    (86,888
    )Provision for allowance for doubtful accounts
    
    
    6,763
    
    
    
    38,698Changes in assets and liabilities:Increase in accounts receivable-trade
    
    
    (2,055,824
    )
    
    
    (694,227
    )(Increase) decrease in accounts receivable-other
    
    
    (1,088,768
    )
    
    
    38,395Decrease (increase) in inventory
    
    
    183,512
    
    
    
    (877,132
    )Decrease (increase) in prepaid expenses and other assets
    
    
    1,176,733
    
    
    
    (528,380
    )Decrease in refundable taxes
    
    
    211,897
    
    
    
    273,278Increase in accounts payable
    
    
    172,530
    
    
    
    686,441Decrease in accrued warranty
    
    
    (174,091
    )
    
    
    (33,180
    )(Decrease) increase in accrued expenses and deferred income
    
    
    (264,570
    )
    
    
    587,176Decrease in accrued royalties payable
    
    
    (296,737
    )
    
    
    (118,310
    )Decrease in accrued salaries and wages
    
    
    (471,369
    )
    
    
    (689,111
    )Increase in income taxes payable
    
    
    169,842
    
    
    
    55,925Net cash provided by operating activities
    
    
    665,152
    
    
    
    1,865,454Cash flows from investing activities:Purchase of short-term investments
    
    
    (15,327,226
    )
    
    
    (7,733,938
    )Redemption/maturity of short-term investments
    
    
    4,445,000
    
    
    
    5,394,901Capital expenditures, including capitalized software
    
    
    (692,187
    )
    
    
    (1,474,553
    )Investments in other assets
    
    
    
    
    
    
    (715,000
    )Net cash used in investing activities
    
    
    (11,574,413
    )
    
    
    (4,528,590
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    
    
    
    
    152,633Net cash provided by financing activities
    
    
    
    
    
    
    152,633Net decrease in cash and cash equivalents
    
    
    (10,909,261
    )
    
    
    (2,510,503
    )Cash and cash equivalents at beginning of period
    
    
    32,622,135
    
    
    
    31,059,972Cash and cash equivalents at end of period
    
    $
    21,712,874
    
    
    $
    28,549,469
  6




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION
   2. ACCOUNTING FOR STOCK-BASED COMPENSATION
  7




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Three Months Ended
    
    Six Months EndedJune 25, 2005
    
    June 26, 2004
    
    June 25, 2005
    
    June 26, 2004Net income (loss), as reported
    
    $
    1,168,016
    
    
    $
    (134,547
    )
    
    $
    436,850
    
    
    $
    945,479Deduct / Add: Total stock-based
compensation expense based on the
fair value method for all awards,
net of related tax effects
    
    
    6,797
    
    
    
    43,627
    
    
    
    9,256
    
    
    
    176,715Pro forma net income (loss)
    
    $
    1,161,219
    
    
    $
    (178,174
    )
    
    $
    427,594
    
    
    $
    768,764Earnings (loss) per share:Basic  as reported
    
    $
    0.09
    
    
    $
    (0.01
    )
    
    $
    0.03
    
    
    $
    0.07Basic  pro forma
    
    $
    0.09
    
    
    $
    (0.01
    )
    
    $
    0.03
    
    
    $
    0.06Diluted  as reported
    
    $
    0.09
    
    
    $
    (0.01
    )
    
    $
    0.03
    
    
    $
    0.07Diluted  pro forma
    
    $
    0.09
    
    
    $
    (0.01
    )
    
    $
    0.03
    
    
    $
    0.06
 3. ACQUISITION
  8




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4. INTANGIBLE ASSETS
  As of June 25, 2005
    
    As of December 31, 2004Gross
    
    
    
    
    
    GrossCarrying
    
    Accumulated
    
    Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    AmortizationAmortized intangible assets:Cheetah sales order backlog,
included in inventory
    
    $
    543,273
    
    
    $
    543,273
    
    
    $
    543,273
    
    
    $
    543,273Exclusivity agreement
    
    
    715,000
    
    
    
    178,750
    
    
    
    715,000
    
    
    
    107,250Total Amortized Intangibles
    
    $
    1,258,273
    
    
    $
    722,023
    
    
    $
    1,258,273
    
    
    $
    650,523Non-amortized intangible assets:LoopCare trade name
    
    $
    1,300,000
    
    
    $
    
    
    
    $
    1,300,000
    
    
    $
    Base software  LoopCare
    
    
    5,200,000
    
    
    
    
    
    
    
    5,200,000
    
    
    
    Post warranty maintenance
service agreements
    
    
    32,000,000
    
    
    
    
    
    
    
    32,000,000
    
    
    
    Customer Base
 Cheetah
    
    
    5,000,000
    
    
    
    
    
    
    
    5,000,000
    
    
    
    Cheetah Trademark
    
    
    1,000,000
    
    
    
    
    
    
    
    1,000,000
    
    
    
    Total Non-Amortized
Intangibles
    
    $
    44,500,000
    
    
    $
    
    
    
    $
    44,500,000
    
    
    $
    Total Intangibles
    
    $
    45,758,273
    
    
    $
    722,023
    
    
    $
    45,758,273
    
    
    $
    650,523Capitalized software:Developed product software
    
    $
    7,627,070
    
    
    $
    5,578,146
    
    
    $
    7,591,173
    
    
    $
    4,817,234Base software  Cheetah
    
    
    2,900,000
    
    
    
    700,833
    
    
    
    2,900,000
    
    
    
    555,833Proprietary technology
    
    
    1,000,000
    
    
    
    241,667
    
    
    
    1,000,000
    
    
    
    191,667Cheswick product software
    
    
    537,900
    
    
    
    65,380
    
    
    
    537,900
    
    
    
    11,590Total capitalized software
(long term)
    
    $
    12,064,970
    
    
    $
    6,586,026
    
    
    $
    12,029,073
    
    
    $
    5,576,324Goodwill
    
    $
    19,339,682
    
    
    $
    
    
    
    $
    19,339,682
    
    
    $
    
  2005 (Remaining 6 months)
    
    $
    1,084,7922006
    
    $
    1,800,9932007
    
    $
    701,8962008
    
    $
    681,7312009
    
    $
    543,282Thereafter
    
    $
    1,202,500
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5. INVENTORY
  June 25, 2005
    
    December 31, 2004Raw materials
    
    $
    6,616,684
    
    
    $
    7,631,246Work in process
    
    
    4,231,865
    
    
    
    4,441,737Finished goods
    
    
    3,328,528
    
    
    
    2,287,60614,177,077
    
    
    
    14,360,589Reserve for slow moving and obsolete inventory
    
    
    (1,693,752
    )
    
    
    (1,419,711
    )$
    12,483,325
    
    
    $
    12,940,878
 6. SHORT-TERM INVESTMENTS
    June 25, 2005
    
    December 31, 2004Carrying
    
    
    
    
    
    CarryingAmount
    
    Fair Value
    
    Amount
    
    Fair ValueFinancial assets:Cash and cash equivalents
    
    $
    21,712,874
    
    
    $
    21,712,874
    
    
    $
    32,622,135
    
    
    $
    32,622,135Short-term investments
    
    
    29,419,536
    
    
    
    29,419,218
    
    
    
    18,537,310
    
    
    
    18,538,275$
    51,132,410
    
    
    $
    51,132,092
    
    
    $
    51,159,445
    
    
    $
    51,160,410
 7. RETIREMENT EXPENSE
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8. COST ALIGNMENT
  9. PER SHARE INFORMATION
   Three Months
    
    Three Months
    
    Six Months
    
    Six MonthsEnded
    
    Ended
    
    Ended
    
    EndedJune 25, 2005
    
    June 26, 2004
    
    June 25, 2005
    
    June 26, 2004Net income (loss)
    
    $
    1,168,016
    
    
    $
    (134,547
    )
    
    $
    436,850
    
    
    $
    945,479Common and common equivalent shares:Weighted average common shares outstanding
    
    
    13,161,140
    
    
    
    13,131,835
    
    
    
    13,161,140
    
    
    
    13,126,231Effect of
dilutive securities  stock options
    
    
    6,723
    
    
    
    
    
    
    
    28,393
    
    
    
    183,73013,167,863
    
    
    
    13,131,835
    
    
    
    13,189,533
    
    
    
    13,309,961Earnings (loss) per share:Basic
    
    $
    0.09
    
    
    $
    (0.01
    )
    
    $
    0.03
    
    
    $
    0.07Diluted
    
    $
    0.09
    
    
    $
    (0.01
    )
    
    $
    0.03
    
    
    $
    0.07
  11




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10. RECEIVABLE FROM OFFICER
  11. PRODUCT WARRANTY
   Six Months Ended
    
    Year EndedJune 25, 2005
    
    December 31, 2004Balance at the beginning of the period
    
    $
    2,081,000
    
    
    $
    2,150,000Accruals for warranties issued during
the period
    
    
    652,000
    
    
    
    1,435,000Settlements during the period
    
    
    (826,000
    )
    
    
    (1,504,000
    )Balance at the end of the period
    
    $
    1,907,000
    
    
    $
    2,081,000
 12. CONTINGENCIES AND COMMITMENTS
  13. MAJOR CUSTOMERS
  12




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14. INTERNATIONAL SALES
  15. GOODWILL
  16. INCOME TAXES
  17. ACCOUNTING PRONOUNCEMENTS
 123(R).
 13




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14




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Report of Independent Registered Public Accounting Firm
 
     
 15




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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 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.
 will, believes, intends, expects, plans, could or may,
  16




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OVERVIEW
 About the Company
     About its customers
  17




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PRODUCTS
 TELECOMMUNICATION TEST SYSTEMS
  DigiTest and LoopCare
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
    
    the Common Object Request Broker Architecture (CORBA)-based Application Programming
Interface;
    
    Benchmark Data Base;
    
    DSL Testing;
    
    the Advanced Testhead Feature Package;
    
    Batch Testing;
    
    Fax Unalert;
    
    Loop Length Reporting;
    
    Enabling Flow Through by Re-Classification of VER 55-58 Codes;
    
    LoopCare TCP/IP Communications Network; and
    
    Testing Voice Services in a Broadband Passive Optical Network (bPON).
 MCU
  CABLE TESTING PRODUCTS
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SERVICES
  BACKLOG
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REPORTING SEGMENT
  INTERNATIONAL SALES
  APPLICATION OF CRITICAL ACCOUNTING POLICIES
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GOODWILL
  INCOME TAXES
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RESULTS OF OPERATIONS
 THE FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF THE COMPANY
SHOULD BE READ IN CONJUNCTION WITH PART I, ITEM 1 OF THIS REPORT
 SECOND QUARTER OF 2005 COMPARED TO SECOND QUARTER OF 2004
 Revenues
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Gross Profit
  Selling and Marketing Expense
  General and Administrative Expense
 .
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Research and Development Expense
  Interest and Other Income
  Provision (Benefit) for Income Taxes
  Net Income (Loss) and Earnings (Loss) Per Share
  SIX MONTHS ENDED JUNE 25, 2005 COMPARED TO SIX MONTH ENDED JUNE 26, 2004
 Revenues
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Gross Profit
  Selling and Marketing Expense
  General and Administrative Expense
 .
 Research and Development Expense
  Retirement Expense
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Interest and Other Income
  Provision for Income Taxes
  Net Income and Earnings Per Share
  CHEETAH ACQUISITION
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LIQUIDITY AND CAPITAL RESOURCES
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RELATED PARTY TRANSACTION
  KEY RATIOS
  ACCOUNTING PRONOUNCEMENTS
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RISK FACTORS THAT MIGHT AFFECT FUTURE OPERATING RESULTS AND FINANCIAL CONDITION
  We depend upon a few major customers for a majority of our revenues, and the loss of any of these
customers, or the substantial reduction in the products that they purchase from us, would
significantly reduce our revenues and net income.
  -
    
    the conditions of the telecommunications market and the economy in general;-
    
    subscriber line loss and related reduced demand for telecommunications services;-
    
    changes or shifts in the technology utilized in the networks;-
    
    labor disputes between our customers and their collective bargaining units;-
    
    the failure 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.
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The sales cycle for our software products is long, and the delay or failure to complete one or more
large license 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.
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Our Services business is subject to a trend of reduced capital spending by our major customers.
  We recently emphasized our network assurance and testing software solutions and cable status
monitoring products.
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The sale of our products is dependent upon our ability to satisfy the proprietary requirements of
our customers and to respond to rapid technological change, including evolving industry-wide
standards.
   Our customers are subject to governmental regulations 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.
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Our products could infringe the intellectual property rights of others, and resulting claims
against us could be costly and require us to enter into disadvantageous license or royalty
arrangements.
   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.
  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.
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We have completed, and may pursue additional acquisitions, which will complicate our management
tasks and could result in substantial expenditures, and the failure of acquired assets to meet
expectations could result in impairment of intangible assets.
   Our future sales in international markets are subject to numerous risks and uncertainties.
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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.
  Our future results are dependent on our ability to establish, maintain and expand our distribution
channels and our existing third-party distributors.
  We face intense competition, which could result in our losing market share or experiencing a
decline in our gross margins.
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We are dependent upon our ability to attract, retain and motivate our key personnel.
  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.
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Our restructuring plan may be ineffective or may limit our ability to compete.
  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.
  Our common stock price may be extremely volatile.
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
    
    General market and economic conditions;
    
    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 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 our customers regarding end market conditions and the
status of existing and future infrastructure network deployments;
    
    Additions or departures of key personnel; and
    
    Future equity or debt offerings or our announcements of these offerings.
  We may be subject from time to time to legal proceedings, and any adverse determinations in these
proceedings could materially harm our business.
  
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Item 4. CONTROLS AND PROCEDURES
   
 PART II. OTHER INFORMATION
 
 Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Nominee for Director
    
    Total Votes Cast
    
    For
    
    WithheldDaniel P. Barry
    
    
    12,803,856
    
    
    
    12,393,782
    
    
    
    410,074David S. Egan
    
    
    12,803,856
    
    
    
    12,405,089
    
    
    
    398,767Mark B. Peterson
    
    
    12,803,856
    
    
    
    12,438,669
    
    
    
    365,187
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Item 6. EXHIBITS
 (a)
    
    Exhibits:The following exhibits are being filed with this report:
 ExhibitNumber
    
    Description10.1
    
    Agreement made as of May 31, 2005 between Tollgrade
Communications, Inc. and Mark B. Peterson, filed as Exhibit 10.1
to the Report on Form 8-K (File No. 000-27312) filed with the SEC
on June 2, 200510.2
    
    Sixth Extension Agreement, dated June 24, 2005, between Tollgrade
Communications, Inc. and Dictaphone Corporation, filed herewith15
    
    Letter re audited interim financial information31.1
    
    Certification of 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
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SIGNATURES
  Tollgrade Communications, Inc.(Registrant)Dated: August 3, 2005
    
    
    
    /s/ Mark B. PetersonMark B. PetersonChief Executive Officer and
PresidentDated: August 3, 2005
    
    
    
    /s/ Samuel C. KnochSamuel C. KnochChief Financial Officer and TreasurerDated: August 3, 2005
    
    
    
    /s/ Sean M. ReillySean M. ReillyController
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EXHIBIT INDEX
  ExhibitNumber
    
    Description10.1
    
    Agreement made as of May 31, 2005 between Tollgrade
Communications, Inc. and Mark B. Peterson, filed as Exhibit 10.1
to the Report on Form 8-K (File No. 000-27312) filed with the SEC
on June 2, 200510.2
    
    Sixth Extension Agreement, dated June 24, 2005, between Tollgrade
Communications, Inc. and Dictaphone Corporation, filed herewith15
    
    Letter re audited interim financial information31.1
    
    Certification of 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
 44