##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q/A
 (Amendment No. 1)
  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
  o þ o
  o þ




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2




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TOLLGRADE COMMUNICATIONS, INC.
 Quarterly Report on Form 10-Q/A
For the Quarter Ended June 25, 2005
 Table of Contents
 PAGENO.PART I. FINANCIAL INFORMATION RESTATEDItem 1
    
    Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of June 25, 2005 and December 31, 2004
    
    
    4Condensed Consolidated Statements of Operations for the three month and six month periods ended June 25, 2005 and June 26, 2004
    
    
    5Condensed
Consolidated Statement of Changes in Shareholders Equity for the six month period ended June 25, 2005
    
    
    6Condensed Consolidated Statements of Cash Flows for the six month periods ended June 25, 2005 and June 26, 2004
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    8Report of Independent Registered Public Accounting Firm
    
    
    18Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    49Item 4
    
    Controls and Procedures
    
    
    49PART II. OTHER INFORMATIONItem 2
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    51Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    52Item 6
    
    Exhibits
    
    
    53SIGNATURES
    
    
    54EXHIBIT INDEXEX-15EX-31.1EX-31.2EX-32EXHIBIT 15EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
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PART I. FINANCIAL INFORMATION
 
 Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except per share amounts) (Unaudited)
 June 25, 2005
    
    
    December 31, 2004 *Restated  See Note 2ASSETSCurrent assets:Cash and cash equivalents
    
    $
    21,713
    
    
    $
    32,622Short-term investments
    
    
    29,420
    
    
    
    18,537Accounts receivable:Trade, net of allowance for doubtful accounts of $761
in 2005 and $754 in 2004
    
    
    12,740
    
    
    
    10,691Other
    
    
    1,195
    
    
    
    106Inventory
    
    
    12,483
    
    
    
    12,941Prepaid expenses and other current assets
    
    
    1,391
    
    
    
    2,543Refundable income taxes
    
    
    752
    
    
    
    964Deferred tax assets
    
    
    1,584
    
    
    
    1,143Total current assets
    
    
    81,278
    
    
    
    79,547Property and equipment, net
    
    
    7,281
    
    
    
    7,860Deferred tax assets
    
    
    232
    
    
    
    197Intangibles, net
    
    
    40,098
    
    
    
    40,518Goodwill
    
    
    22,220
    
    
    
    22,220Capitalized software costs, net
    
    
    5,479
    
    
    
    6,453Receivable from officer
    
    
    156
    
    
    
    156Other assets
    
    
    170
    
    
    
    194Total assets
    
    $
    156,914
    
    
    $
    157,145LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,260
    
    
    $
    1,087Accrued warranty
    
    
    1,907
    
    
    
    2,081Accrued expenses
    
    
    2,331
    
    
    
    1,735Accrued salaries and wages
    
    
    246
    
    
    
    718Accrued royalties payable
    
    
    118
    
    
    
    451Income taxes payable
    
    
    338
    
    
    
    169Deferred income
    
    
    1,638
    
    
    
    2,461Total current liabilities
    
    
    7,838
    
    
    
    8,702Deferred tax liabilities
    
    
    2,465
    
    
    
    2,042Total liabilities
    
    
    10,303
    
    
    
    10,744Commitments 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
    
    
    2,725
    
    
    
    2,725Additional paid-in capital
    
    
    71,135
    
    
    
    71,135Treasury stock, at cost, 461,800 shares in 2005 and 2004
    
    
    (4,791
    )
    
    
    (4,791
    )Retained Earnings
    
    
    77,542
    
    
    
    77,332Total shareholders equity
    
    
    146,611
    
    
    
    146,401Total liabilities and shareholders equity
    
    $
    156,914
    
    
    $
    157,145
 
 * Amounts derived from audited financial statements presented in the Companys Annual Report on Form
10-K for the year ended December 31, 2005.  4




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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts) (Unaudited)
 For the
    
    
    For theThree Months Ended
    
    
    Six Months EndedJune 25, 2005
    
    
    June 26, 2004
    
    
    June 25, 2005
    
    
    June 26, 2004Restated  See Note 2
    
    

Restated  See Note 2Revenues:Products
    
    $
    12,859
    
    
    $
    12,268
    
    
    $
    24,839
    
    
    $
    26,723Services
    
    
    4,233
    
    
    
    3,198
    
    
    
    6,528
    
    
    
    6,350Total revenues:
    
    
    17,092
    
    
    
    15,466
    
    
    
    31,367
    
    
    
    33,073Cost of product sales:Products
    
    
    6,170
    
    
    
    6,266
    
    
    
    12,222
    
    
    
    12,280Services
    
    
    936
    
    
    
    998
    
    
    
    1,732
    
    
    
    1,858Amortization of intangibles
    
    
    716
    
    
    
    662
    
    
    
    1,430
    
    
    
    1,2877,822
    
    
    
    7,926
    
    
    
    15,384
    
    
    
    15,425Gross Profit:
    
    
    9,270
    
    
    
    7,540
    
    
    
    15,983
    
    
    
    17,648Selling and marketing
    
    
    2,438
    
    
    
    2,383
    
    
    
    4,676
    
    
    
    4,855General and administrative
    
    
    1,895
    
    
    
    1,661
    
    
    
    3,730
    
    
    
    3,595Research and development
    
    
    3,693
    
    
    
    4,115
    
    
    
    7,089
    
    
    
    8,307Retirement Expense
    
    
    
    
    
    
    
    
    
    
    775
    
    
    
    Total operating expenses
    
    
    8,026
    
    
    
    8,159
    
    
    
    16,270
    
    
    
    16,757Income (loss) from operations
    
    
    1,244
    
    
    
    (619
    )
    
    
    (287
    )
    
    
    891Interest and other income, net
    
    
    252
    
    
    
    68
    
    
    
    514
    
    
    
    158Income (loss) before income taxes
    
    
    1,496
    
    
    
    (551
    )
    
    
    227
    
    
    
    1,049Provision (benefit) for income taxes
    
    
    441
    
    
    
    (271
    )
    
    
    17
    
    
    
    337Net income (loss)
    
    $
    1,055
    
    
    $
    (280
    )
    
    $
    210
    
    
    $
    712Earnings (loss) per share information:Weighted average shares of common
stock and equivalents:Basic
    
    
    13,161
    
    
    
    13,132
    
    
    
    13,161
    
    
    
    13,126Diluted
    
    
    13,168
    
    
    
    13,132
    
    
    
    13,190
    
    
    
    13,310Net income (loss) per common and
common equivalent shares:Basic
    
    $
    0.08
    
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    0.05Diluted
    
    $
    0.08
    
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    0.05
  5




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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
 (In thousands, except per share amounts) (Unaudited)
 AdditionalPreferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Treasury
    
    
    RetainedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Earnings
    
    
    Stock
    
    
    Earnings
    
    
    TotalBalance at December
31, 2004  as
originally reported
    
    
    
    
    
    $
    
    
    
    
    13,623
    
    
    $
    2,725
    
    
    $
    71,135
    
    
    $
    (4,791
    )
    
    $
    78,440
    
    
    $
    147,509Restatement 
adjustments (Note
2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,108
    )
    
    
    (1,108
    )Balance at December
31, 2004  restated
    
    
    
    
    
    $
    
    
    
    
    13,623
    
    
    $
    2,725
    
    
    $
    71,135
    
    
    $
    (4,791
    )
    
    $
    77,332
    
    
    $
    146,401Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    210
    
    
    
    210Balance at
June 25,
2005  restated
    
    
    
    
    
    $
    
    
    
    
    13,623
    
    
    $
    2,725
    
    
    $
    71,135
    
    
    $
    (4,791
    )
    
    $
    77,542
    
    
    $
    146,611
  6




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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands, except per share amounts) (Unaudited)
 Six Months EndedJune 25, 2005
    
    
    June 26, 2004Restated  See Note 2Cash flows from operating activities:Net income
    
    $
    210
    
    
    $
    712Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    2,665
    
    
    
    2,570Tax benefit from exercise of stock options
    
    
    
    
    
    
    49Deferred income taxes
    
    
    (53
    )
    
    
    (118
    )Provision for losses on inventory
    
    
    274
    
    
    
    (87
    )Provision for allowance for doubtful accounts
    
    
    7
    
    
    
    39Changes in assets and liabilities:Increase in accounts receivable-trade
    
    
    (2,056
    )
    
    
    (694
    )(Increase) decrease in accounts receivable-other
    
    
    (1,089
    )
    
    
    38Decrease (increase) in inventory
    
    
    184
    
    
    
    (877
    )Decrease (increase) in prepaid expenses and other assets
    
    
    1,176
    
    
    
    (528
    )Decrease in refundable taxes
    
    
    212
    
    
    
    273Increase in accounts payable
    
    
    173
    
    
    
    686Decrease in accrued warranty
    
    
    (174
    )
    
    
    (33
    )(Decrease) increase in accrued expenses and deferred income
    
    
    (227
    )
    
    
    587Decrease in accrued royalties payable
    
    
    (333
    )
    
    
    (118
    )Decrease in accrued salaries and wages
    
    
    (472
    )
    
    
    (689
    )Increase in income taxes payable
    
    
    169
    
    
    
    56Net cash provided by operating activities
    
    
    666
    
    
    
    1,866Cash flows from investing activities:Purchase of short-term investments
    
    
    (15,328
    )
    
    
    (7,734
    )Redemption/maturity of short-term investments
    
    
    4,445
    
    
    
    5,395Capital expenditures, including capitalized software
    
    
    (692
    )
    
    
    (1,475
    )Investments in other assets
    
    
    
    
    
    
    (715
    )Net cash used in investing activities
    
    
    (11,575
    )
    
    
    (4,529
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    
    
    
    
    153Net cash provided by financing activities
    
    
    
    
    
    
    153Net decrease in cash and cash equivalents
    
    
    (10,909
    )
    
    
    (2,510
    )Cash and cash equivalents at beginning of period
    
    
    32,622
    
    
    
    31,060Cash and cash equivalents at end of period
    
    $
    21,713
    
    
    $
    28,550
  7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION
   RECLASSIFICATIONS
  2. RESTATEMENT
   8




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BALANCE SHEET
 June 25, 2005
    
    June 25, 2005
    
    December 31, 2004
    
    December 31, 2004As Reported
    
    As Restated
    
    As Reported
    
    As RestatedASSETSCurrent assets
    
    $
    81,278
    
    
    $
    81,278
    
    
    $
    79,547
    
    
    $
    79,547Intangibles
    
    
    45,036
    
    
    
    40,098
    
    
    
    45,108
    
    
    
    40,518Goodwill
    
    
    19,340
    
    
    
    22,220
    
    
    
    19,340
    
    
    
    22,220Other long-term assets
    
    
    13,295
    
    
    
    13,318
    
    
    
    14,839
    
    
    
    14,860Total assets
    
    $
    158,949
    
    
    $
    156,914
    
    
    $
    158,834
    
    
    $
    157,145LIABILITIES AND SHAREHOLDERS EQUITYTotal current liabilities
    
    $
    7,838
    
    
    $
    7,838
    
    
    $
    8,702
    
    
    $
    8,702Deferred tax liabilities
    
    
    3,165
    
    
    
    2,465
    
    
    
    2,623
    
    
    
    2,042Total liabilities
    
    
    11,003
    
    
    
    10,303
    
    
    
    11,325
    
    
    
    10,744Total shareholders equity
    
    
    147,946
    
    
    
    146,611
    
    
    
    147,509
    
    
    
    146,401Total liabilities and shareholders equity
    
    $
    158,949
    
    
    $
    156,914
    
    
    $
    158,834
    
    
    $
    157,145
 Three Months Ended
    
    Six Months EndedJune 25, 2005
    
    June 25, 2005As Reported
    
    As Restated
    
    As Reported
    
    As RestatedTotal revenues
    
    $
    17,092
    
    
    $
    17,092
    
    
    $
    31,367
    
    
    $
    31,367Cost of salesProducts and Services
    
    
    7,106
    
    
    
    7,106
    
    
    
    13,954
    
    
    
    13,954Amortization
    
    
    542
    
    
    
    716
    
    
    
    1,081
    
    
    
    1,4307,648
    
    
    
    7,822
    
    
    
    15,035
    
    
    
    15,384Gross profit
    
    
    9,444
    
    
    
    9,270
    
    
    
    16,332
    
    
    
    15,983Total operating expenses
    
    
    8,026
    
    
    
    8,026
    
    
    
    16,270
    
    
    
    16,270Income (loss) from operations
    
    
    1,418
    
    
    
    1,244
    
    
    
    62
    
    
    
    (287
    )Total Other income
    
    
    252
    
    
    
    252
    
    
    
    514
    
    
    
    514Income before taxes
    
    
    1,670
    
    
    
    1,496
    
    
    
    576
    
    
    
    227Provision for income taxes
    
    
    502
    
    
    
    441
    
    
    
    139
    
    
    
    17Net income
    
    $
    1,168
    
    
    $
    1,055
    
    
    $
    437
    
    
    $
    210Weighted average shares of
common stock and
equivalents:Basic
    
    
    13,161
    
    
    
    13,161
    
    
    
    13,161
    
    
    
    13,161Diluted
    
    
    13,168
    
    
    
    13,168
    
    
    
    13,190
    
    
    
    13,190Net income per common share:Basic
    
    $
    0.09
    
    
    $
    0.08
    
    
    $
    0.03
    
    
    $
    0.02Diluted
    
    $
    0.09
    
    
    $
    0.08
    
    
    $
    0.03
    
    
    $
    0.02
 9




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Three Months Ended
    
    Six Months EndedJune 26, 2004
    
    June 26, 2004As Reported
    
    As Restated
    
    As Reported
    
    As RestatedTotal revenues
    
    $
    15,466
    
    
    $
    15,466
    
    
    $
    33,073
    
    
    $
    33,073Cost of salesProducts and Services
    
    
    7,264
    
    
    
    7,264
    
    
    
    14,138
    
    
    
    14,138Amortization
    
    
    510
    
    
    
    662
    
    
    
    984
    
    
    
    1,2877,774
    
    
    
    7,926
    
    
    
    15,122
    
    
    
    15,425Gross profit
    
    
    7,692
    
    
    
    7,540
    
    
    
    17,951
    
    
    
    17,648Total operating expenses
    
    
    8,159
    
    
    
    8,159
    
    
    
    16,757
    
    
    
    16,757(Loss) income from operations
    
    
    (467
    )
    
    
    (619
    )
    
    
    1,194
    
    
    
    891Total Other income
    
    
    68
    
    
    
    68
    
    
    
    158
    
    
    
    158(Loss) income before taxes
    
    
    (399
    )
    
    
    (551
    )
    
    
    1,352
    
    
    
    1,049(Benefit) provision for income taxes
    
    
    (265
    )
    
    
    (271
    )
    
    
    407
    
    
    
    337Net (loss) income
    
    $
    (134
    )
    
    $
    (280
    )
    
    $
    945
    
    
    $
    712Weighted average shares of common
stock and equivalents:Basic
    
    
    13,132
    
    
    
    13,132
    
    
    
    13,126
    
    
    
    13,126Diluted
    
    
    13,132
    
    
    
    13,132
    
    
    
    13,310
    
    
    
    13,310Net (loss) income per common share:Basic
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    0.07
    
    
    $
    0.05Diluted
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    0.07
    
    
    $
    0.05
  3. ACCOUNTING FOR STOCK-BASED COMPENSATION
  10




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Three Months Ended
    
    
    Six Months EndedJune 25, 2005
    
    
    June 26, 2004
    
    
    June 25, 2005
    
    
    June 26, 2004Restated  See Note 2
    
    
    Restated  See Note 2Net income (loss), as restated
    
    $
    1,055
    
    
    $
    (280
    )
    
    $
    210
    
    
    $
    712Deduct / Add: Total stock-based
compensation expense based on the
fair value method for all awards,
net of related tax effects
    
    
    7
    
    
    
    44
    
    
    
    9
    
    
    
    177Pro forma net income (loss)
    
    $
    1,048
    
    
    $
    (324
    )
    
    $
    201
    
    
    $
    535Earnings (loss) per share:Basic  as restated
    
    $
    0.08
    
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    0.05Basic  pro forma
    
    $
    0.08
    
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    0.04Diluted  as restated
    
    $
    0.08
    
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    0.05Diluted  pro forma
    
    $
    0.08
    
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    0.04
 4. ACQUISITION
  11




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5. INTANGIBLE ASSETS
  Estimated
    
    June 25, 2005 (Restated)
    
    December 31, 2004 (Restated)Useful Life
    
    
    
    
    
    Accumulated
    
    
    
    
    
    
    
    
    
    Accumulated(In Years)
    
    Gross
    
    Amortization
    
    Net
    
    Gross
    
    Amortization
    
    NetNon-amortized intangible
assets:Cheetah trademark
    
    
    
    
    
    $
    1,000
    
    
    $
    
    
    
    $
    1,000
    
    
    $
    1,000
    
    
    $
    
    
    
    $
    1,000LoopCare trade name
    
    
    
    
    
    
    1,300
    
    
    
    
    
    
    
    1,300
    
    
    
    1,300
    
    
    
    
    
    
    
    1,300LoopCare post warranty
maintenance
service agreements
    
    
    
    
    
    
    32,000
    
    
    
    
    
    
    
    32,000
    
    
    
    32,000
    
    
    
    
    
    
    
    32,000Total Non-amortized
Intangible assets
    
    
    
    
    
    $
    34,300
    
    
    $
    
    
    
    $
    34,300
    
    
    $
    34,300
    
    
    $
    
    
    
    $
    34,300Amortized intangible
assets:Cheetah Maintenance
    
    
    10
    
    
    $
    160
    
    
    $
    31
    
    
    $
    129
    
    
    $
    160
    
    
    $
    21
    
    
    $
    139Exclusivity agreement
    
    
    5
    
    
    
    715
    
    
    
    179
    
    
    
    536
    
    
    
    715
    
    
    
    107
    
    
    
    608Customer Base  Cheetah
    
    
    15
    
    
    
    2,650
    
    
    
    336
    
    
    
    2,314
    
    
    
    2,650
    
    
    
    223
    
    
    
    2,427Base software  LoopCare
    
    
    10
    
    
    
    4,510
    
    
    
    1,691
    
    
    
    2,819
    
    
    
    4,510
    
    
    
    1,466
    
    
    
    3,044Total Amortized
Intangible assets
    
    
    
    
    
    $
    8,035
    
    
    $
    2,237
    
    
    $
    5,798
    
    
    $
    8,035
    
    
    $
    1,817
    
    
    $
    6,218Total Intangible assets
    
    
    
    
    
    $
    42,335
    
    
    $
    2,237
    
    
    $
    40,098
    
    
    $
    42,335
    
    
    $
    1,817
    
    
    $
    40,518Capitalized software:Clear Software Purchase
    
    
    1
    
    
    $
    538
    
    
    $
    65
    
    
    $
    473
    
    
    $
    538
    
    
    $
    11
    
    
    $
    527Proprietary technology
    
    
    10
    
    
    
    1,000
    
    
    
    242
    
    
    
    758
    
    
    
    1,000
    
    
    
    192
    
    
    
    808Base software  Cheetah
    
    
    10
    
    
    
    2,900
    
    
    
    701
    
    
    
    2,199
    
    
    
    2,900
    
    
    
    556
    
    
    
    2,344Developed product software
    
    
    5
    
    
    
    7,627
    
    
    
    5,578
    
    
    
    2,049
    
    
    
    7,591
    
    
    
    4,817
    
    
    
    2,774Total capitalized software
    
    
    
    
    
    $
    12,065
    
    
    $
    6,586
    
    
    $
    5,479
    
    
    $
    12,029
    
    
    $
    5,576
    
    
    $
    6,453Goodwill
    
    
    
    
    
    $
    22,220
    
    
    $
    
    
    
    $
    22,220
    
    
    $
    22,220
    
    
    $
    
    
    
    $
    22,220
  2005 (Remaining 6 months)
    
    $
    1,4342006
    
    $
    2,5592007
    
    $
    1,4792008
    
    $
    1,4312009
    
    $
    1,263Thereafter
    
    $
    3,111
  12




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6. INVENTORY
  June 25, 2005
    
    
    December 31, 2004Raw materials
    
    $
    6,617
    
    
    $
    7,631Work in process
    
    
    4,232
    
    
    
    4,442Finished goods
    
    
    3,328
    
    
    
    2,28814,177
    
    
    
    14,361Reserve for slow moving and obsolete inventory
    
    
    (1,694
    )
    
    
    (1,420
    )$
    12,483
    
    
    $
    12,941
 7. SHORT-TERM INVESTMENTS
   June 25, 2005
    
    December 31, 2004Carrying
    
    
    
    
    
    CarryingAmount
    
    Fair Value
    
    Amount
    
    Fair ValueFinancial assets:Cash and cash equivalents
    
    $
    21,713
    
    
    $
    21,713
    
    
    $
    32,622
    
    
    $
    32,622Short-term investments
    
    $
    29,420
    
    
    $
    29,419
    
    
    $
    18,537
    
    
    $
    18,538
 8. RETIREMENT EXPENSE
  13




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9. COST ALIGNMENT
  10. PER SHARE INFORMATION
   14




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Three Months
    
    
    Three Months
    
    
    Six Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJune 25, 2005
    
    
    June 26, 2004
    
    
    June 25, 2005
    
    
    June 26, 2004Restated  See Note 2
    
    
    Restated  See Note 2Net income (loss)
    
    $
    1,055
    
    
    $
    (280
    )
    
    $
    210
    
    
    $
    712Common and common
equivalent shares:Weighted average
common shares
outstanding
    
    
    13,161
    
    
    
    13,132
    
    
    
    13,161
    
    
    
    13,126Effect of dilutive
securities  stock
options
    
    
    7
    
    
    
    
    
    
    
    29
    
    
    
    18413,168
    
    
    
    13,132
    
    
    
    13,190
    
    
    
    13,310Earnings (loss) per
share:Basic
    
    $
    0.08
    
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    0.05Diluted
    
    $
    0.08
    
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    0.05
  11. RECEIVABLE FROM OFFICER
  12. PRODUCT WARRANTY
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Six Months Ended
    
    
    Year EndedJune 25, 2005
    
    
    December 31, 2004Balance at the beginning of the period
    
    $
    2,081
    
    
    $
    2,150Accruals for warranties issued during the period
    
    
    652
    
    
    
    1,435Settlements during the period
    
    
    (826
    )
    
    
    (1,504
    )Balance at the end of the period
    
    $
    1,907
    
    
    $
    2,081
 13. CONTINGENCIES AND COMMITMENTS
  14. MAJOR CUSTOMERS
   15. INTERNATIONAL SALES
  16. INCOME TAXES
 16




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17. ACCOUNTING PRONOUNCEMENTS
   17




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Report of Independent Registered Public Accounting Firm
 
      PricewaterhouseCoopers LLP
 18




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Restatement
  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, ® ®
  19




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OVERVIEW
 About the Company
    ®
 About its customers
  20




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® ®
  PRODUCTS
 TELECOMMUNICATION TEST SYSTEMS
  DigiTest and LoopCare
  21




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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
  22




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CABLE TESTING PRODUCTS
  ® ®
  SERVICES
  BACKLOG
  23




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OPERATING SEGMENT
  INTERNATIONAL SALES
  24




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APPLICATION OF CRITICAL ACCOUNTING POLICIES
  Revenue Recognition
   25




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Cost of sales
  Goodwill and Intangible Assets
  26




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Reviews for Impairment:
   27




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Inventory Valuation
   Allowance for Doubtful Accounts
   Income Taxes
  28




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Warranty
   INCOME TAXES
  29




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RESULTS OF OPERATIONS
 SECOND QUARTER OF 2005 COMPARED TO SECOND QUARTER OF 2004
 Revenues
      30




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Gross Profit
  Selling and Marketing Expense
  General and Administrative Expense
  31




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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
  32




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SIX MONTHS ENDED JUNE 25, 2005 COMPARED TO SIX MONTH ENDED JUNE 26, 2004
 Revenues
      33




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Gross Profit
  Selling and Marketing Expense
  General and Administrative Expense
  Research and Development Expense
  34




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Retirement Expense
    Interest and Other Income
  35




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Provision for Income Taxes
  Net Income and Earnings Per Share
  CHEETAH ACQUISITION
  LIQUIDITY AND CAPITAL RESOURCES
  36




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RELATED PARTY TRANSACTION
  KEY RATIOS
  37




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ACCOUNTING PRONOUNCEMENTS
   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.
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
    
    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.
  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.
  39




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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.
   40




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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.
   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.
  41




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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.
  Our products could infringe the intellectual property rights of others, and resulting claims
 42




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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.
  44




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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.
 45




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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.
  46




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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.
  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.
  47




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Our common stock price may be extremely volatile.
  
    
    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.
  48




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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Item 4. CONTROLS AND PROCEDURES
 (a) Restatement of financial statements and impact on internal control over financial reporting and
disclosure controls and procedures
 Restatement of Financial Statements
    Impact on Internal Control over Financial Reporting and Disclosure Controls and Procedures
  49




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(b) Evaluation of Disclosure Controls and Procedures
   (c) Evaluation of Changes in Internal Control over Financial Reporting
  50




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(d) Remediation of Material Weakness
  1.
    
    Documentation related to the Companys application of
accounting policies for intangible assets is considered in properly
determining and reviewing the estimates and judgments made relating to
useful or indefinite lives assigned to intangible assets acquired in a
business combination. These estimates and judgments include: (a) the
determination of useful lives of software-related intangible assets under
SFAS #86, (b) the critical review of indefinite life assertions and the
evaluation of the pertinent factors in support of such assertions and (c)
the critical evaluation of the views of experts, and underlying assumptions,
used in reaching complex judgments and estimates by management.2.
    
    The Companys existing periodic reviews consider current
events and circumstances to ensure that all available information continues
to support the indefinite life assertions.3.
    
    Management reviews of appropriate accounting literature
encompass current guidance regarding the factors pertinent to determining
and reviewing useful or indefinite lives of intangible assets.
  
 PART II. OTHER INFORMATION
 
 Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
  51




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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 as Exhibit
10.2 to the Report on 10-Q filed with the SEC on August 4, 200515
    
    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: March 2, 2006
    
    /s/ Mark B. PetersonMark B. PetersonChief Executive Officer and PresidentDated: March 2, 2006
    
    /s/ Samuel C. KnochSamuel C. KnochChief Financial Officer and TreasurerDated: March 2, 2006
    
    /s/ Sean M. ReillySean M. ReillyController
 54