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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2007
 Commission file number 000-27312
 TOLLGRADE COMMUNICATIONS, INC.
  PENNSYLVANIA
    
    25-1537134(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)493 Nixon Road, Cheswick, Pennsylvania
    
    15024(Address of principal executive offices)
    
    (Zip Code)
 412-820-1400
 Securities registered pursuant to Section 12(b) of the Act:
 Common Stock, par value $.20 per share
    
    The NASDAQ Stock Market LLC(Title of Class)
    
    (Exchange on which registered)
  o þ
  o þ
  þ o
 o þ
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ
   DOCUMENTS INCORPORATED BY REFERENCE
 Part of Form 10-K into whichDocument
    
    Document is incorporatedPortions of the Proxy Statement to be
distributed in connection with the 2008
Annual Meeting of Shareholders
    
    III




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TABLE OF CONTENTS
 Part IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    11Item 1B. Unresolved Staff Comments
    
    
    19Item 2. Properties
    
    
    19Item 3. Legal Proceedings
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    19Part IIItem 5. Market for the Registrants Common Stock, Related Stockholder Matters
and Issuer Purchases of Equity Securities
    
    
    20Item 6. Selected Financial Data
    
    
    21Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    22Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    41Item 8. Financial Statements and Supplementary Data
    
    
    41Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    70Item 9A. Controls and Procedures
    
    
    70Item 9B. Other Information
    
    
    70Part IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    71Item 11. Executive Compensation
    
    
    71Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    71Item 13. Certain Relationships and Related Transactions and Director Independence
    
    
    72Item 14. Principal Accounting Fees and Services
    
    
    72Part IVItem 15. Exhibits and Financial Statement Schedules
    
    
    72SIGNATURES
    
    
    76EX-10.37EX-10.38EX-10.39EX-10.40EX-10.41EX-21.1EX-23.1EX-31.1EX-31.2EX-32
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PART I
 CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995.
    
 Item 1. Business.
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www.sec.gov
 Products
 Telecommunications Test and Measurement Products
 â
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Systems Test Products
          - 5 -




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MCU
    Cable Testing Products
  Cheetah Cable Monitoring
     - 6 -




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CheetahIP HFC Service Assurance
    Electric Utility Monitoring Products
  Services
  Operating Segment
  Sales and Competition
  Revenue Concentrations
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Competitive Conditions
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Manufacturing
    Product and Technology Development
  Proprietary Rights
 SM
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Backlog
    Employees
  Executive Officers of the Company
  Joseph A. Ferrara
    
    Chief Executive Officer, President and Board Member of Tollgrade since November
2007; Senior Vice President, Sales and Marketing of Tollgrade from August 2007 until November
2007; prior thereto General Manager Data Networks Division of Ericsson, Inc. from January 2006
until July 2007 following Ericssons acquisition of Marconis product divisions; Chief
Executive Officer of Marconi Corporation plcs North American operations from June 2005 until
January 2006; Vice President of Business Operations of Marconis Data Networks Division
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from February until June 2005 and July 2000 until April 2004; and Vice
President of Marketing of Marconis Data Networks Division from April
2004 until February 2005; Age 41.Sara M. Antol
    
    General Counsel of the Company since December 2000;
Secretary of the Company since April 1996; Chief
Counsel of the Company from April 1996 until December
2000; prior thereto, attorney at Babst, Calland,
Clements & Zomnir, P.C., a law firm; Age 46.Grant Cushny
    
    Vice President of Global Sales and Professional
Services since August 2007; General Manager of
Broadband Test Division of Teradyne, Inc. from June
2006 until July 2007; prior thereto Director of
Professional Services from January 2004 until June 2006
and Director of Engineering from January 2000 until
January 2004; Age 44.Samuel C. Knoch
    
    Chief Financial Officer of the Company since August
1996; Treasurer since April 1997; prior thereto,
Controller of AMSCO International, Inc., a manufacturer
of health care equipment, from October 1994 until
August 1996; Age 51.Joseph G. OBrien
    
    Vice President, Human Resources of the Company since
October 1997; Director of Employee Development of the
Company from April 1997 until October 1997; prior
thereto, Coordinator, Elderberry Junction, Goodwill
Industries, a charitable organization, from May 1995
until April 1997; Age 48.Matthew J. Rosgone
    
    Vice President, Operations of the Company since
September 2001; Senior Vice President,
Purchasing/Manufacturing, of the Company from July 1998
until September 2001; prior thereto, Vice President,
Purchasing, of the Company from July 1996 until July
1998; Age 39.
 
 Item 1A. Risk Factors
  Our strategic focus on our core test and measurement competencies and cost reduction plans may be
ineffective or may limit our ability to compete.
  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 that they purchase from us, would
significantly reduce our revenues and net income.
  
    
    the conditions of the communications market and the economy in general;
    
    subscriber line loss and related reduced demand for wireline telecommunications services;
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
    
    changes or shifts in the technology utilized in the networks;
    
    labor disputes between our customers and their collective bargaining units;
    
    the failure of our customers to meet established purchase forecasts and growth projections;
    
    competition among the RBOCs, competitive exchange carriers and wireless telecommunications and cable
providers; and
    
    reorganizations, including management changes, at one or more of our customers or potential customers.
  Our operating results may vary from quarter to quarter, causing our stock price to fluctuate.
  We may experience reduced product sales caused by customers transitioning their access network
service assurance solutions.
  Our Services business is subject to a trend of reduced capital spending for our products by our
major customers.
  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.
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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.
  The sale of our products is dependent on our ability to respond to rapid technological change,
including evolving industry-wide standards, and may be adversely affected by the development, and
acceptance by our customers, of new technologies which may compete with or reduce the demand for
our products.
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Our reliance on third parties to manufacture certain aspects of our products involves risks,
including delays in product shipments and reduced control over product quality.
  Our future sales in international markets are subject to numerous risks and uncertainties.
  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.
   Our continued emphasis on our network assurance and testing solutions and cable status monitoring
products, and on software products in particular, could have a material adverse effect on our
profitability.
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If our new development efforts fail to result in products which meet our customers needs, or if
our customers fail to accept our new products, our revenues will be adversely affected.
  Our customers are subject to an evolving governmental regulatory environment that could
significantly reduce the demand for our products or increase our costs of doing business.
   Our limited ability to protect our proprietary information and technology may adversely affect our
ability to compete, and our products could infringe upon the intellectual property rights of
others, resulting in claims against us the results of which could be costly.
   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.
  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.
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Our expenses are relatively fixed in the short term, and we may be unable to adjust spending to
compensate for unexpected revenue shortfalls.
  We rely on software that we have licensed from third-party developers to perform key functions in
our products.
  We are affected by a pattern of product price decline in certain markets, which can harm our
business.
  Our common stock price may be extremely volatile.
  
    
    General market and economic conditions;
    
    Changes in the telecommunications industry;
    
    Actual or anticipated variations in operating results;
    
    Announcements of technological innovations, new products or new
services by us or by our competitors or customers;
    
    Changes in financial estimates or recommendations or failure
to continue research coverage
by stock market analysts regarding us or our competitors;
    
    Announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
    
    Announcements by 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.
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We may be subject from time to time to legal proceedings, and any adverse determinations in these
proceedings could materially harm our business.
  
 Item 1B. Unresolved Staff Comments.
  
 Item 2. Properties.
    
    
    We have 7,500 square feet of space in Bracknell, United Kingdom. The lease
expires on December 24, 2012. This facility is used primarily by engineers who
support our European customer base and by customer support personnel.
    
    We have 3,240 square feet of space in Kontich, Belgium. The lease term has an
initial term that ends on April 1, 2012 and automatically renews for three year
periods unless cancelled by either party. This facility is used primarily by
customer support and administrative personnel.
    
    We also have 2,422 square feet of space in Wuppertal, Germany. The lease expires
on January 31, 2009. This facility is used primarily by sales and customer support
personnel.
    
    We acquired a lease for 20,484 square feet of space in Deerfield, Illinois, for
property which is no longer utilized. The associated lease expires on July 31,
2008.
  
 Item 3. Legal Proceedings.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
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PART II
 
 Item 5.
    
    Market for the Registrants Common Stock, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
  2007
    
    2006High
    
    Low
    
    High
    
    LowFirst Quarter
    
    $
    12.90
    
    
    $
    9.57
    
    
    $
    16.24
    
    
    $
    9.50Second Quarter
    
    $
    13.55
    
    
    $
    10.35
    
    
    $
    15.49
    
    
    $
    8.66Third Quarter
    
    $
    11.34
    
    
    $
    8.60
    
    
    $
    10.28
    
    
    $
    7.22Fourth Quarter
    
    $
    10.31
    
    
    $
    7.08
    
    
    $
    10.66
    
    
    $
    7.74
    STOCK PERFORMANCE GRAPH
   
 2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007Tollgrade
Communications,
Inc.
    
    
    100
    
    
    
    149
    
    
    
    104
    
    
    
    93
    
    
    
    90
    
    
    
    68NASDAQ Telecomm
(IXUT)
    
    
    100
    
    
    
    169
    
    
    
    182
    
    
    
    169
    
    
    
    216
    
    
    
    236S&P 500
    
    
    100
    
    
    
    126
    
    
    
    138
    
    
    
    142
    
    
    
    161
    
    
    
    167
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Item 6. Selected Financial Data.
  (IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF EMPLOYEES)YEARS ENDED DECEMBER 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Revenues:Products
    
    $
    48,893
    
    
    $
    51,564
    
    
    $
    51,904
    
    
    $
    49,770
    
    
    $
    52,802Services
    
    
    17,667
    
    
    
    13,830
    
    
    
    14,415
    
    
    
    13,048
    
    
    
    12,29866,560
    
    
    
    65,394
    
    
    
    66,319
    
    
    
    62,818
    
    
    
    65,100Cost of sales:Products
    
    
    23,501
    
    
    
    25,277
    
    
    
    24,326
    
    
    
    22,191
    
    
    
    22,966Services
    
    
    4,989
    
    
    
    4,543
    
    
    
    3,883
    
    
    
    3,768
    
    
    
    3,766Amortization
    
    
    3,058
    
    
    
    3,419
    
    
    
    3,004
    
    
    
    2,624
    
    
    
    2,919Impairment of intangible assets
    
    
    2,263
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Write-down of inventory/acquired software
    
    
    
    
    
    
    4,308
    
    
    
    424
    
    
    
    
    
    
    
    33,811
    
    
    
    37,547
    
    
    
    31,637
    
    
    
    28,583
    
    
    
    29,651Gross profit
    
    
    32,749
    
    
    
    27,847
    
    
    
    34,682
    
    
    
    34,235
    
    
    
    35,449Operating expenses:Selling and marketing
    
    
    10,224
    
    
    
    10,552
    
    
    
    8,882
    
    
    
    9,483
    
    
    
    9,388General and administrative
    
    
    9,857
    
    
    
    7,981
    
    
    
    7,486
    
    
    
    7,346
    
    
    
    6,997Research and development
    
    
    13,572
    
    
    
    13,276
    
    
    
    14,079
    
    
    
    15,756
    
    
    
    14,925Restructuring/retirement/severance
    
    
    1,838
    
    
    
    1,840
    
    
    
    775
    
    
    
    269
    
    
    
    Impairment of goodwill
    
    
    24,958
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    60,449
    
    
    
    33,649
    
    
    
    31,222
    
    
    
    32,854
    
    
    
    31,310(Loss) income from operations
    
    
    (27,700
    )
    
    
    (5,802
    )
    
    
    3,460
    
    
    
    1,381
    
    
    
    4,139Other income, net
    
    
    2,767
    
    
    
    2,755
    
    
    
    1,359
    
    
    
    447
    
    
    
    400(Loss) income before income taxes
    
    
    (24,933
    )
    
    
    (3,047
    )
    
    
    4,819
    
    
    
    1,828
    
    
    
    4,539Provision (benefit) for income taxes
    
    
    1,220
    
    
    
    (1,213
    )
    
    
    1,301
    
    
    
    914
    
    
    
    1,719(Loss) net income
    
    $
    (26,153
    )
    
    $
    (1,834
    )
    
    $
    3,518
    
    
    $
    914
    
    
    $
    2,820EARNINGS PER SHARE INFORMATION:Net (loss) income per common share:Basic
    
    $
    (1.98
    )
    
    $
    (0.14
    )
    
    $
    0.27
    
    
    $
    0.07
    
    
    $
    0.22Diluted
    
    $
    (1.98
    )
    
    $
    (0.14
    )
    
    $
    0.27
    
    
    $
    0.07
    
    
    $
    0.21Weighted average shares
of common stock equivalents:Basic
    
    
    13,219
    
    
    
    13,239
    
    
    
    13,168
    
    
    
    13,141
    
    
    
    13,106Diluted
    
    
    13,219
    
    
    
    13,239
    
    
    
    13,217
    
    
    
    13,253
    
    
    
    13,313
 2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003BALANCE SHEET DATA:Working capital
    
    $
    77,080
    
    
    $
    83,186
    
    
    $
    80,806
    
    
    $
    70,845
    
    
    $
    65,944Total assets
    
    
    139,489
    
    
    
    162,352
    
    
    
    163,329
    
    
    
    157,145
    
    
    
    152,777Pension obligation
    
    
    908
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity
    
    
    123,000
    
    
    
    149,444
    
    
    
    150,261
    
    
    
    146,401
    
    
    
    145,152
 2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003OTHER DATA:(unaudited)Number of employees at year-end
    
    
    250
    
    
    
    225
    
    
    
    253
    
    
    
    262
    
    
    
    304
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview
    
    
    Providing innovative products, services, solutions and new technologies to current,
adjacent and new markets;
    
    Realigning our investments to support our core business;
    
    Improving existing channel partnerships and pursuing new ones;
    
    Capitalizing on our worldwide customer footprint and relationships;
    
    Achieving higher levels of execution and performance in all business areas; and
    
    Enhancing shareholder value through investment, organic growth and potential
acquisitions that promote our strategic objectives.
 Industry and Market Trends
    
    
    incumbent telephone carriers continue to lose customers and revenue to cable providers
and smaller, independent local exchange carriers, many of whom are developing their own
networks and attempting to compete on price;
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
    
    our traditional customer base of incumbent telephone carriers (especially the RBOCs)
have considerably slowed their investments in legacy POTS line capacity and instead are
focusing their capital spending on wireless and next generation wireline projects such as
xDSL services, fiber-to-the-premises or fiber-to-the-node (collectively, FTTx) and IPTV;
    
    due in part to the deregulation of the telecommunications industry that occurred in the
late 1990s, both cable and telephone companies (as well as the providers of satellite,
wireless and other information mediums) are embroiled in intense competition over the
so-called triple-play of voice, data and video broadband services;
    
    adoption of open, non-proprietary standards for status/performance monitoring systems,
such as HMS and DOCSIS, resulting in heightened competition
in that market;
    
    increased consolidation among RBOCs and others in the telecommunications industry;
    
    certain telecommunications customers who might traditionally have purchased full service
assurance solutions from us are evaluating or have chosen less expensive, integrated
testing solutions utilizing chip-based technology built into transmission equipment
(referred to as SELT/DELT) as individual components of an overall turn-key solution; and
    
    as a result of challenges in our traditional markets, we are seeking new opportunities
in adjacent markets such as the electric power industry; the utilities are at a critical
point with managing their infrastructure, and are looking to next generation network
architectures to improve the performance and reliability of the nations power grid.
 Customer Line Loss
  Investment in New Infrastructure and Technologies by our Telecommunications Customers
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Intense Competition Among Telecommunications and Cable Service Providers
    Increased Competition in Cable Markets Resulting from Standardization
    Consolidation in Telecommunications Market
  - 24 -




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Alternative Embedded Testing Methods
  Electric Power Utility Market
  Our Responses to These Industry Trends
  Development and Marketing of Solutions
  Telecommunications Solutions
   - 25 -




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Cable Solutions
    - 26 -




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Expansion into Other Industries with Similar Products
    Acquisitions and Our Expanding Geographic Footprint
  - 27 -




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Realignment of Resources
  Other Company Trends
    - 28 -




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Application of Critical Accounting Policies
  Revenue Recognition
      Intangible Assets and Goodwill
  - 29 -




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Sensitivity Analysis:
  - 30 -




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YearsRemainingOriginal
    
    Life at
    
    Carrying Value
    
    2008 ProjectedAsset Description
    
    Life
    
    12/31/07
    
    at 12/31/07
    
    Amortization(in millions)LoopCareBase Software
    
    
    10
    
    
    
    3.75
    
    
    $
    1.7
    
    
    $
    0.5Post-Warranty Maintenance Service Agreements
    
    
    50
    
    
    
    47.75
    
    
    
    30.6
    
    
    
    0.6CheetahBase Software
    
    
    10
    
    
    
    5.00
    
    
    
    1.5
    
    
    
    0.3Proprietary Technology
    
    
    10
    
    
    
    5.00
    
    
    
    0.1
    
    
    
    Customer Base
    
    
    15
    
    
    
    10.00
    
    
    
    1.6
    
    
    
    0.3EmersonProprietary Technology
    
    
    5
    
    
    
    3.25
    
    
    
    0.5
    
    
    
    0.2Customer Relationship
    
    
    5
    
    
    
    3.25
    
    
    
    0.1
    
    
    
    BTDPost Warranty Maintenance Service Agreements
    
    
    48
    
    
    
    47.60
    
    
    
    1.4
    
    
    
    0.4Post Warranty Maintenance Service Agreements
    
    
    20
    
    
    
    19.60
    
    
    
    3.4
    
    
    
    0.7Post Warranty Maintenance Service Agreements
    
    
    10
    
    
    
    9.60
    
    
    
    0.7
    
    
    
    0.2Post Warranty Maintenance Service Agreements
    
    
    6
    
    
    
    5.60
    
    
    
    0.2
    
    
    
    Technology
    
    
    3-10
    
    
    
    2.60-9.60
    
    
    
    0.7
    
    
    
    0.2Customer Relationship
    
    
    10
    
    
    
    9.60
    
    
    
    0.7
    
    
    
    0.2Other
    
    
    0.5-10
    
    
    
    1.0-10.0
    
    
    
    1.0
    
    
    
    0.4$
    44.2
    
    
    $
    4.0
  Reviews for Impairment:
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Inventory Valuation
   Income Taxes
     Warranty
  - 32 -




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Assets Held for Sale
   Restructuring Accrual
  Pension Benefits
    Stock-Based Compensation
  Foreign Currency Translation
   Results of Operations for the Year Ended December 31, 2007 Compared to the Year Ended December 31,
2006
 Revenue
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Gross Profit
  Selling and Marketing Expenses
  General and Administrative Expenses
  - 34 -




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Research and Development Expenses
  Restructuring Programs
   Balance atDecember 31,
    
    
    
    
    
    
    Cash
    
    
    
    
    
    
    Balance at2006
    
    
    Expense
    
    
    payments
    
    
    Asset write-downs
    
    
    December 31, 2007Facility
rationalization,
including
employee costs
    
    $
    341
    
    
    $
    914
    
    
    $
    (778
    )
    
    $
    (374
    )
    
    $
    103Real estate impairment
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    (28
    )
    
    
    Total
    
    $
    341
    
    
    $
    942
    
    
    $
    (778
    )
    
    $
    (402
    )
    
    $
    103
  Severance and Related Expenses
   Impairment
  - 35 -




---



##### Table of Contents



Other Income
  Provisions for Income Taxes
  Net (Loss) Income and Earnings Per Share
  Results of Operations for the Year Ended December 31, 2006 Compared to the Year Ended December
31, 2005
 Revenue
       Gross Profit
  - 36 -




---



##### Table of Contents



Selling and Marketing Expenses
  General and Administrative Expenses
  Research and Development Expenses
  Restructuring
   Balance at
    
    
    
    
    
    
    Cash
    
    
    Asset
    
    
    Balance atDecember 31, 2005
    
    
    Expense
    
    
    payments
    
    
    write-downs
    
    
    December 31, 2006Facility
rationalization,
including employee
costs
    
    $
    
    
    
    $
    1,418
    
    
    $
    (498
    )
    
    $
    (579
    )
    
    $
    341Inventory write-down
    
    
    
    
    
    
    4,308
    
    
    
    
    
    
    
    (4,308
    )
    
    
    Real estate impairment
    
    
    
    
    
    
    422
    
    
    
    
    
    
    
    (422
    )
    
    
    Total
    
    $
    
    
    
    $
    6,148
    
    
    $
    (498
    )
    
    $
    (5,309
    )
    
    $
    341
  - 37 -




---



##### Table of Contents



Retirement/Severance and Related Expenses
    Other Income
  Provisions for Income Taxes
  Net (Loss) Income and Earnings Per Share
  Liquidity and Capital Resources
  - 38 -




---



##### Table of Contents



- 39 -




---



##### Table of Contents



Off-Balance Sheet Arrangements
  Commitments and Contractual Obligations
    Payments due by periodMore than 5Total
    
    Less than 1 year
    
    1-3 years
    
    3-5 years
    
    yearsOperating Lease
Obligations
    
    $
    3,370
    
    
    $
    1,068
    
    
    $
    1,341
    
    
    $
    961
    
    
    $
    Purchase Obligations
    
    
    302
    
    
    
    254
    
    
    
    48
    
    
    
    
    
    
    
    FIN 48 Obligations
    
    
    273
    
    
    
    
    
    
    
    273
    
    
    
    
    
    
    
    Pension Obligations
    
    
    908
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    908Total
    
    $
    4,853
    
    
    $
    1,322
    
    
    $
    1,662
    
    
    $
    961
    
    
    $
    908
   Key Ratios
  - 40 -




---



##### Table of Contents



Recent Accounting Pronouncements
     
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 8. Financial Statements and Supplementary Data.
 Statements of Operations Data by Fiscal Quarter (Unaudited) (dollars in thousands)
 March 31,
    
    June 30,
    
    September 29,
    
    December 31,2007 (2)
    
    2007 (3)
    
    2007 (4)
    
    2007 (5)Revenue(1)
    
    $
    13,042
    
    
    $
    14,181
    
    
    $
    20,578
    
    
    $
    18,752Gross profit(1)
    
    
    7,018
    
    
    
    7,804
    
    
    
    10,946
    
    
    
    6,969Net income(loss)(1)
    
    $
    111
    
    
    $
    450
    
    
    $
    1,426
    
    
    $
    (28,140
    )Earnings (Loss) Per Share InformationWeighted average shares
 - 41 -




---



##### Table of Contents



March 31,
    
    June 30,
    
    September 29,
    
    December 31,2007 (2)
    
    2007 (3)
    
    2007 (4)
    
    2007 (5)Basic
    
    
    13,254
    
    
    
    13,260
    
    
    
    13,207
    
    
    
    13,156Diluted
    
    
    13,442
    
    
    
    13,516
    
    
    
    13,440
    
    
    
    13,156Basic
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    0.11
    
    
    $
    (2.14
    )Diluted
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    0.11
    
    
    $
    (2.14
    )
 April 1,
    
    July 1,
    
    September 30,
    
    December 31,2006  (6)
    
    2006  (6)
    
    2006 (7)
    
    2006 (8)Revenue(1)
    
    $
    17,607
    
    
    $
    16,253
    
    
    $
    14,949
    
    
    $
    16,584Gross profit(1)
    
    
    7,946
    
    
    
    7,620
    
    
    
    3,205
    
    
    
    9,075Net (loss) income(1)
    
    $
    (64
    )
    
    $
    (104
    )
    
    $
    (3,250
    )
    
    $
    1,583(Loss) Earnings Per Share InformationWeighted average sharesBasic
    
    
    13,214
    
    
    
    13,247
    
    
    
    13,247
    
    
    
    13,247Diluted
    
    
    13,214
    
    
    
    13,247
    
    
    
    13,247
    
    
    
    13,270Basic
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    (0.25
    )
    
    $
    0.12Diluted
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    (0.25
    )
    
    $
    0.12
 
 (1)
    
    Revenues, gross profit and net (loss) income are rounded to millions each quarter.
Therefore, the sum of the quarterly amounts may not equal the annual amounts reported.(2)
    
    During the first quarter ended March 31, 2007, the Company recorded a $0.4 million
restructuring charge primarily associated with employee severance and the refinement of estimates
related to employee relocation and lease termination costs.(3)
    
    During the second quarter ended June 30, 2007, the Company recorded a $0.2 million
restructuring charge primarily associated with the refinement of estimates related to employee
relocation and lease termination costs.(4)
    
    During the third quarter ended September 29, 2007, the Company recorded a $0.2
million restructuring charge primarily associated with the refinement of estimates related to
employee relocation and lease termination costs.(5)
    
    During the fourth quarter ended December 31, 2007, the Company recorded a charge of
$2.3 million associated with the impairment of certain intangible assets, $0.9 million severance
charge, $0.1 million restructuring charge primarily associated with the refinement of estimates
related to employee relocation, and a $25.0 million goodwill impairment charge.(6)
    
    The Company did not record a restructuring charge during this quarter.(7)
    
    During the fiscal quarter ended September 30, 2006, the Company recorded a $4.3
million inventory restructuring charge and a $1.5 million restructuring charge for employee related
costs.(8)
    
    During the fiscal quarter ended December 31, 2006, the Company recorded a $0.3
million restructuring charge for employee related costs. - 42 -




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##### Table of Contents



Financial Statements and Supplementary Data.
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
 Consolidated Balance Sheets
 Consolidated Statements of Operations
 Consolidated Statements of Changes in Shareholders Equity
 Consolidated Statements of Cash Flows
 Notes to Consolidated Financial Statements
 Schedule II  Valuation and Qualifying Accounts
 - 43 -




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
  Internal Control  Integrated Framework
    
 - 44 -




---



##### Table of Contents



Tollgrade Communications, Inc. and Subsidiaries
 
 Consolidated Balance Sheets
In thousands (except par value)
 December 31, 2007
    
    December 31, 2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    58,222
    
    
    $
    57,378Short-term investments
    
    
    632
    
    
    
    5,323Accounts receivable:Trade, net of allowance for doubtful accounts at $478 in 2007 and $535 in 2006
    
    
    14,625
    
    
    
    15,149Other
    
    
    1,601
    
    
    
    1,918Inventories
    
    
    13,687
    
    
    
    8,556Prepaid expenses and deposits
    
    
    1,120
    
    
    
    776Deferred and refundable income taxes
    
    
    503
    
    
    
    2,939Assets held for sale
    
    
    272
    
    
    
    1,190Total current assets
    
    
    90,662
    
    
    
    93,229Property and equipment, net
    
    
    4,279
    
    
    
    3,301Intangibles
    
    
    44,215
    
    
    
    41,487Goodwill
    
    
    
    
    
    
    23,836Receivable from officer
    
    
    
    
    
    
    148Other assets
    
    
    333
    
    
    
    351Total assets
    
    $
    139,489
    
    
    $
    162,352LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,214
    
    
    $
    1,580Accrued warranty
    
    
    1,937
    
    
    
    2,135Accrued expenses
    
    
    3,148
    
    
    
    2,590Accrued salaries and wages
    
    
    891
    
    
    
    658Accrued royalties payable
    
    
    707
    
    
    
    200Income taxes payable
    
    
    572
    
    
    
    97Deferred revenue
    
    
    2,113
    
    
    
    2,783Total current liabilities
    
    
    13,582
    
    
    
    10,043Pension obligation
    
    
    908
    
    
    
    Deferred tax liabilities
    
    
    1,999
    
    
    
    2,865Total liabilities
    
    
    16,489
    
    
    
    12,908Commitments and contingencies
Shareholders equity:Common stock, $ .20 par valueauthorized shares,
50,000; issued shares, 13,731 in 2007 and 13,709 in 2006
    
    
    2,744
    
    
    
    2,742Additional paid-in capital
    
    
    73,389
    
    
    
    72,477Treasury stock, at cost, 575 shares in 2007 and 462 shares in 2006
    
    
    (5,900
    )
    
    
    (4,791
    )Retained earnings
    
    
    52,863
    
    
    
    79,016Accumulated other comprehensive loss
    
    
    (96
    )
    
    
    Total shareholders equity
    
    
    123,000
    
    
    
    149,444Total liabilities and shareholders equity
    
    $
    139,489
    
    
    $
    162,352
  - 45 -




---



##### Table of Contents



Tollgrade Communications, Inc. and Subsidiaries
 
 Consolidated Statements of Operations
In thousands (except per share data)
 Years Ended December 31,2007
    
    2006
    
    2005Revenues:Products
    
    $
    48,893
    
    
    $
    51,564
    
    
    $
    51,904Services
    
    
    17,667
    
    
    
    13,830
    
    
    
    14,41566,560
    
    
    
    65,394
    
    
    
    66,319Cost of sales:Products
    
    
    23,501
    
    
    
    25,277
    
    
    
    24,326Services
    
    
    4,989
    
    
    
    4,543
    
    
    
    3,883Amortization
    
    
    3,058
    
    
    
    3,419
    
    
    
    3,004Inventory write-down
    
    
    
    
    
    
    4,308
    
    
    
    Impairment of intangible assets
    
    
    2,263
    
    
    
    
    
    
    
    42433,811
    
    
    
    37,547
    
    
    
    31,637Gross profit
    
    
    32,749
    
    
    
    27,847
    
    
    
    34,682Operating expenses:Selling and marketing
    
    
    10,224
    
    
    
    10,552
    
    
    
    8,882General and administrative
    
    
    9,857
    
    
    
    7,981
    
    
    
    7,486Research and development
    
    
    13,572
    
    
    
    13,276
    
    
    
    14,079Restructuring expense
    
    
    942
    
    
    
    1,840
    
    
    
    Severance expense
    
    
    896
    
    
    
    
    
    
    
    775Impairment of goodwill
    
    
    24,958
    
    
    
    
    
    
    
    Total operating expense
    
    
    60,449
    
    
    
    33,649
    
    
    
    31,222(Loss) income from operations
    
    
    (27,700
    )
    
    
    (5,802
    )
    
    
    3,460Other income:Interest income
    
    
    2,767
    
    
    
    2,755
    
    
    
    1,359Total other income
    
    
    2,767
    
    
    
    2,755
    
    
    
    1,359(Loss) income before income taxes
    
    
    (24,933
    )
    
    
    (3,047
    )
    
    
    4,819Provision (benefit) for income taxes
    
    
    1,220
    
    
    
    (1,213
    )
    
    
    1,301Net (loss) income
    
    $
    (26,153
    )
    
    $
    (1,834
    )
    
    $
    3,518EARNINGS PER SHARE INFORMATION:Weighted average shares of common
stock and equivalents:Basic
    
    
    13,219
    
    
    
    13,239
    
    
    
    13,168Diluted
    
    
    13,219
    
    
    
    13,239
    
    
    
    13,217Net (loss) income per common share:Basic
    
    $
    (1.98
    )
    
    $
    (0.14
    )
    
    $
    0.27Diluted
    
    $
    (1.98
    )
    
    $
    (0.14
    )
    
    $
    0.27
  - 46 -




---



##### Table of Contents



Tollgrade Communications, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders Equity
(In thousands)
 AccumulatedAdditional
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    OtherPreferred Stock
    
    
    Common Stock
    
    

Paid-In
    
    
    Treasury
    
    
    Comprehensive
    
    
    Retained
    
    
    
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    

Capital
    

    

Stock
    
    

Loss
    
    

Earnings
    
    

Total
    
    

Income
(Loss)Balance at December
31, 2004
    
    
    
    
    
    
    
    
    
    
    13,623
    
    
    $
    2,725
    
    
    $
    71,135
    
    
    $
    (4,791
    )
    
    $
    
    
    
    $
    77,332
    
    
    $
    146,401Exercise of common
stock options
    
    
    
    
    
    
    
    
    
    
    41
    
    
    
    8
    
    
    
    291
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    299Tax benefit from
exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,518
    
    
    
    3,518
    
    
    $
    3,518Balance at December
31, 2005
    
    
    
    
    
    
    
    
    
    
    13,664
    
    
    
    2,733
    
    
    
    71,469
    
    
    
    (4,791
    )
    
    
    
    
    
    
    80,850
    
    
    
    150,261Exercise of common
stock options
    
    
    
    
    
    
    
    
    
    
    45
    
    
    
    9
    
    
    
    397
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    406Tax benefit from
exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94Share based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    517
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    517Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,834
    )
    
    
    (1,834
    )
    
    $
    (1,834
    )Balance at December
31, 2006
    
    
    
    
    
    
    
    
    
    
    13,709
    
    
    
    2,742
    
    
    
    72,477
    
    
    
    (4,791
    )
    
    
    
    
    
    
    79,016
    
    
    
    149,444Exercise of common
stock options
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    2
    
    
    
    87
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89Tax benefit from
exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Purchase of
treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,109
    )
    
    
    
    
    
    
    
    
    
    
    (1,109
    )Share based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    815
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    815Issuance of
restricted stock
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    -Actuarial gain, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    32
    
    
    
    32Foreign currency
translation loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (128
    )
    
    
    
    
    
    
    (128
    )
    
    
    (128
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,153
    )
    
    
    (26,153
    )
    
    
    (26,153
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (26,249
    )Balance at December
31, 2007
    
    
    
    
    
    
    
    
    
    
    13,731
    
    
    $
    2,744
    
    
    $
    73,389
    
    
    $
    (5,900
    )
    
    $
    (96
    )
    
    $
    52,863
    
    
    $
    123,000
  - 47 -




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##### Table of Contents



Tollgrade Communications, Inc. and Subsidiaries
 
 Consolidated Statements of Cash Flows
(In thousands)
 Years Ended December 31,2007
    
    2006
    
    2005Cash flows from operating activities:Net (loss) income
    
    $
    (26,153
    )
    
    $
    (1,834
    )
    
    $
    3,518Adjustments to reconcile net (loss) income to net cash
provided by operating activities:Depreciation and amortization
    
    
    4,755
    
    
    
    5,499
    
    
    
    5,450Impairment of goodwill and intangible assets
    
    
    27,221
    
    
    
    
    
    
    
    Valuation allowance
    
    
    9,922
    
    
    
    
    
    
    
    Compensation expense related to stock plans
    
    
    815
    
    
    
    517
    
    
    
    Deferred income taxes
    
    
    (9,435
    )
    
    
    (441
    )
    
    
    548Excess tax benefits from share based compensation
    
    
    (10
    )
    
    
    (94
    )
    
    
    (43
    )Restructuring and asset impairment
    
    
    473
    
    
    
    5,309
    
    
    
    424Provision for losses on inventories
    
    
    402
    
    
    
    (90
    )
    
    
    545Provision for allowance for doubtful accounts
    
    
    86
    
    
    
    86
    
    
    
    (289
    )Changes in
assets and liabilities, net of acquisitions:Accounts receivable  trade
    
    
    4,197
    
    
    
    (3,952
    )
    
    
    1,524Accounts receivable  other
    
    
    562
    
    
    
    (512
    )
    
    
    (1,300
    )Inventories
    
    
    (4,106
    )
    
    
    (1,727
    )
    
    
    2,462Refundable income taxes
    
    
    897
    
    
    
    (231
    )
    
    
    312Prepaid expenses deposits and other assets
    
    
    (150
    )
    
    
    565
    
    
    
    1,208Accounts payable
    
    
    1,959
    
    
    
    (318
    )
    
    
    175Accrued warranty
    
    
    (198
    )
    
    
    (85
    )
    
    
    139Accrued expenses, deferred revenue and salaries and wages
    
    
    (1,902
    )
    
    
    40
    
    
    
    954Accrued royalties payable
    
    
    500
    
    
    
    (381
    )
    
    
    130Income taxes payable
    
    
    557
    
    
    
    (678
    )
    
    
    786Net cash provided by operating activities:
    
    
    10,392
    
    
    
    1,673
    
    
    
    16,543Cash flows from investing activities:Purchase of Emerson test business
    
    
    
    
    
    
    (5,501
    )
    
    
    Purchase of BTD from Teradyne
    
    
    (11,855
    )
    
    
    
    
    
    
    Purchase of investments
    
    
    (12,194
    )
    
    
    (9,646
    )
    
    
    (19,340
    )Redemption/maturity of investments
    
    
    16,885
    
    
    
    22,333
    
    
    
    19,867Capital expenditures, including capitalized software
    
    
    (2,324
    )
    
    
    (1,247
    )
    
    
    (1,049
    )Investments in other assets
    
    
    
    
    
    
    (155
    )
    
    
    Sale of assets held for sale
    
    
    892
    
    
    
    
    
    
    
    479Net cash (used in) provided by investing activities:
    
    
    (8,596
    )
    
    
    5,784
    
    
    
    (43
    )Cash flows from financing activities:Repurchase of treasury shares
    
    
    (1,109
    )
    
    
    
    
    
    
    Proceeds from the exercise of stock options
    
    
    89
    
    
    
    406
    
    
    
    299Excess tax benefit from share based compensation
    
    
    10
    
    
    
    94
    
    
    
    Net cash (used in) provided by financing activities:
    
    
    (1,010
    )
    
    
    500
    
    
    
    299Net increase in cash and cash equivalents
    
    
    786
    
    
    
    7,957
    
    
    
    16,799Effect of exchange rate change on cash and cash equivalents
    
    
    58
    
    
    
    
    
    
    
    Cash and cash equivalents at beginning of year
    
    
    57,378
    
    
    
    49,421
    
    
    
    32,622Cash and cash equivalents at end of year
    
    $
    58,222
    
    
    $
    57,378
    
    
    $
    49,421Supplemental disclosure of cash flow information:Cash paid during the year for income taxes
    
    $
    3
    
    
    $
    811
    
    
    $
    Supplemental disclosure of non-cash financing activity:Final purchase price adjustment
    
    $
    
    
    
    $
    
    
    
    $
    179See Note 4 for certain non-cash investing activities
related to the BTD and Emerson acquisition.
  - 48 -




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##### Table of Contents



TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
   USE OF ESTIMATES
  PRINCIPLES OF CONSOLIDATION
  CASH AND CASH EQUIVALENTS
  INVESTMENTS
  ALLOWANCE FOR DOUBTFUL ACCOUNTS
  INVENTORIES
  PROPERTY AND EQUIPMENT
  VALUATION OF LONG-LIVED ASSETS
  PRODUCT WARRANTY
  - 49 -




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##### Table of Contents



REVENUE RECOGNITION
      COST OF SALES
  SHIPPING AND HANDLING COSTS
  GOODWILL AND INTANGIBLE ASSETS
  - 50 -




---



##### Table of Contents



RESEARCH AND DEVELOPMENT COSTS
  CAPITALIZED SOFTWARE COSTS
  INCOME TAXES
    SEGMENT INFORMATION
  RECLASSIFICATIONS
  - 51 -




---



##### Table of Contents



RECENT ACCOUNTING PRONOUNCEMENTS
     2. ACCOUNTING FOR STOCK-BASED COMPENSATION
     Stock-Based Compensation Expense
  - 52 -




---



##### Table of Contents



Pro forma information under SFAS 123 for periods prior to January 1, 2006
  Year EndedDecember 31, 2005(in thousands)Net income
    
    $
    3,518Less: Total stock-based compensation determined under
the fair value method for all awards, net of related
tax effect
    
    
    574Pro forma net income
    
    $
    2,944Earnings per common share:Basic
    
    $
    0.27Basic  pro forma
    
    $
    0.22Diluted
    
    $
    0.27Diluted  pro forma
    
    $
    0.22
  - 53 -




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##### Table of Contents



Stock OptionsYear Ended
    
    Year Ended
    
    Year EndedDecember 31, 2007
    
    December 31, 2006
    
    December 31, 2005(A)Weighted
average grant date fair values
    
    $
    3.69
    
    
    $
    4.84
    
    
    $
    5.26Expected life (in years)
    
    
    5.0
    
    
    
    5.0
    
    
    
    4.8Risk free interest rate
    
    
    3.6
    %
    
    
    4.7
    %
    
    
    4.2
    %Volatility
    
    
    48.6
    %
    
    
    56.1
    %
    
    
    72.2
    %
 
 (A)
    
    Assumptions used in the calculation of fair value according to original provisions of SFAS No.
123.  - 54 -




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##### Table of Contents



Weighted AverageNumber of Shares
    
    Range of Exercise Price
    
    Exercise PriceOutstanding, December 31, 2004
    
    
    1,655,316
    
    
    $
    6.00  $159.19
    
    
    $
    30.57Granted
    
    
    305,904
    
    
    
    8.49  9.45
    
    
    
    8.61Exercised
    
    
    (40,850
    )
    
    
    6.00  9.81
    
    
    
    7.32Cancelled/Forfeited/Expired
    
    
    (140,333
    )
    
    
    6.00  159.19
    
    
    
    36.39Outstanding, December 31, 2005
    
    
    1,780,037
    
    
    
    7.28  159.19
    
    
    
    26.87Granted
    
    
    30,000
    
    
    
    9.00  9.19
    
    
    
    9.13Exercised
    
    
    (44,984
    )
    
    
    7.56  12.55
    
    
    
    9.02Cancelled/Forfeited/Expired
    
    
    (406,668
    )
    
    
    7.28  117.34
    
    
    
    16.28Outstanding, December 31, 2006
    
    
    1,358,385
    
    
    
    7.28  159.19
    
    
    
    30.24Granted
    
    
    160,000
    
    
    
    7.78  9.84
    
    
    
    7.91Exercised (A)
    
    
    (10,500
    )
    
    
    7.56  9.49
    
    
    
    8.49Cancelled/Forfeited/Expired
    
    
    (67,323
    )
    
    
    8.49  159.19
    
    
    
    43.74Outstanding, December 31, 2007
    
    
    1,440,562
    
    
    $
    7.28-$159.19
    
    
    $
    27.28Number of SharesOptions exercisable at:December 31, 2005
    
    
    1,605,113
    
    
    
    
    
    
    $
    28.86December 31, 2006
    
    
    1,258,092
    
    
    
    
    
    
    $
    31.96December 31, 2007
    
    
    1,280,563
    
    
    
    
    
    
    $
    29.70
 
 (A)
    
    The intrinsic value associated with exercised options which represents the difference between
the strike price and the market value of Tollgrade stock at the time of exercise was less then $0.1
million and $0.3 million in 2007 and 2006, respectively.  Stock Options Outstanding
    
    Stock Options ExercisableNumber
    
    Weighted
    
    Weighted
    
    
    
    Number
    
    WeightedOutstanding
    
    Average
    
    Average
    
    Aggregate
    
    Exercisable as
    
    Average
    
    AggregateRange of
    
    as of
    
    Remaining
    
    Exercise
    
    Intrinsic
    
    of December
    
    Exercise
    
    IntrinsicExercise Prices
    
    December 31, 2007
    
    Contractual Life
    
    Price ($)
    
    Value ($)
    
    31, 2007
    
    Price ($)
    
    Value (B) ($)$ 7.28  7.69
    
    131,000
    
    1.01
    
    $7.46
    
    $  73,024
    
    131,000
    
    $    7.46
    
    $73,0247.70  7.78
    
    150,000
    
    9.95
    
    7.78
    
    36,000
    
    
    
    
    
    7.79  8.49
    
    203,947
    
    7.78
    
    8.49
    
    
    
    203,947
    
    8.498.50  9.81
    
    159,015
    
    5.07
    
    9.26
    
    
    
    155,682
    
    9.269.82  15.84
    
    163,350
    
    4.97
    
    13.00
    
    
    
    156,684
    
    13.1315.85  21.70
    
    154,500
    
    3.79
    
    19.07
    
    
    
    154,500
    
    19.0721.71  28.40
    
    149,500
    
    3.82
    
    27.83
    
    
    
    149,500
    
    27.8328.41  55.90
    
    192,750
    
    3.36
    
    43.24
    
    
    
    192,750
    
    43.2455.91  117.34
    
    123,000
    
    2.63
    
    115.71
    
    
    
    123,000
    
    115.71117.35  159.19
    
    13,500
    
    2.53
    
    159.19
    
    
    
    13,500
    
    159.19Total
    
    1,440,562
    
    4.85
    
    27.28
    
    $109,024
    
    1,280,563
    
    $  29.70
    
    $73,024
 
 (B)
    
    The aggregate intrinsic value in the preceding table represents the difference between the
strike price and the market value of Tollgrade stock on December 31, 2007 which was $8.02. The
total number of in-the-money options exercisable as of December 31, 2007 was 131,000 shares. Weighted AverageWeighted Average
    
    
    Remaining
    
    
    Aggregate IntrinsicNo. of Shares
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    Value (1)Vested
    
    
    1,280,563
    
    
    $
    29.70
    
    
    
    4.2
    
    
    $
    73,024Expected to Vest
    
    
    159,999
    
    
    $
    7.91
    
    
    
    9.9
    
    
    
    36,000Total
    
    
    1,440,562
    
    
    $
    27.28
    
    
    
    4.9
    
    
    $
    109,024
 
 (1)
    
    The aggregate intrinsic value in the preceding table represents the difference between the
exercise price and the value of Tollgrade stock on December 31, 2007 of $8.02. - 55 -




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##### Table of Contents



3. RESTRUCTURING
   Balance atDecember 31,
    
    
    
    
    
    
    Cash
    
    
    Asset write-
    
    
    Balance at2006
    
    
    Expense
    
    
    payments
    
    
    downs
    
    
    December 31, 2007Facility
rationalization,
including
employee costs
    
    $
    341
    
    
    $
    914
    
    
    $
    (778
    )
    
    $
    (374
    )
    
    $
    103Real estate impairment
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    (28
    )
    
    
    Total
    
    $
    341
    
    
    $
    942
    
    
    $
    (778
    )
    
    $
    (402
    )
    
    $
    103
  Balance atDecember 31,
    
    
    
    
    
    
    Cash
    
    
    Asset
    
    
    Balance at2005
    
    
    Expense
    
    
    payments
    
    
    write-downs
    
    
    December 31, 2006Facility
rationalization,
including employee
costs
    
    $
    
    
    
    $
    1,418
    
    
    $
    (498
    )
    
    $
    (579
    )
    
    $
    341Inventory write-down
    
    
    
    
    
    
    4,308
    
    
    
    
    
    
    
    (4,308
    )
    
    
    Real estate impairment
    
    
    
    
    
    
    422
    
    
    
    
    
    
    
    (422
    )
    
    
    Total
    
    $
    
    
    
    $
    6,148
    
    
    $
    (498
    )
    
    $
    (5,309
    )
    
    $
    341
  4. ACQUISITION
  - 56 -




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##### Table of Contents



Accounts Receivable
    
    $
    4,579Inventories
    
    
    1,428Property and equipment
    
    
    454Intangible assets
    
    
    7,937Goodwill
    
    
    1,122Other
    
    
    26Total assets acquired
    
    
    15,546Deferred income
    
    
    1,588Accounts payable
    
    
    709Pension obligation
    
    
    870Relocation
and lease termination accrual
    
    
    524Total liabilities
    
    
    3,691Net assets acquired
    
    $
    11,855
  (In Thousands, Except Per Share Data)Unaudited Pro Forma
    
    
    Unaudited Pro FormaYear Ended
    
    
    Year EndedDecember 31, 2007
    
    
    December 31, 2006Revenues
    
    $
    77,714
    
    
    $
    85,962Loss from operations
    
    $
    (27,632
    )
    
    $
    (11,192
    )Net loss
    
    $
    (26,082
    )
    
    $
    (5,078
    )Pro forma basic and diluted loss per share
    
    $
    (1.97
    )
    
    $
    (0.38
    )Actual basis and diluted loss per share
    
    $
    (1.98
    )
    
    $
    (0.14
    )
   - 57 -




---



##### Table of Contents



Accounts receivable
    
    $
    1,827Inventories
    
    
    1,113Property and equipment
    
    
    112Intangible assets
    
    
    1,113Goodwill
    
    
    2,274Total assets acquired
    
    
    6,439Deferred income
    
    
    175Accounts payable
    
    
    636Restructuring
    
    
    127Total liabilities
    
    
    938Net assets acquired
    
    $
    5,501
  (In Thousands, Except Per Share Data)Unaudited
    
    
    UnauditedYear end
    
    
    Year endPro Forma
    
    
    Pro FormaDecember 31, 2006
    
    
    December 31, 2005Revenues
    
    $
    66,960
    
    
    $
    75,363(Loss) income from operations
    
    $
    (5,792
    )
    
    $
    3,733Net (loss) income
    
    $
    (1,822
    )
    
    $
    3,717Pro forma diluted (loss) earnings per share
    
    $
    (0.14
    )
    
    $
    0.28Actual diluted (loss) earnings per share
    
    $
    (0.14
    )
    
    $
    0.27
 - 58 -




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##### Table of Contents



5. INTANGIBLE ASSETS
  Useful
    
    
    
    
    
    
    December 31, 2007Life
    
    
    
    
    
    
    AccumulatedAmortizing Intangible Assets:
    
    (Years)
    
    
    Gross
    
    
    Amortization
    
    
    Impairments
    
    
    NetPost
Warranty Service Agreements
    
    
    6-50
    
    
    $
    38,204
    
    
    $
    2,019
    
    
    $
    
    
    
    $
    36,185Technology
    
    
    3-10
    
    
    
    19,249
    
    
    
    13,858
    
    
    
    448
    
    
    
    4,943Customer Relationships
    
    
    5-15
    
    
    
    3,626
    
    
    
    1,190
    
    
    
    
    
    
    
    2,436Tradenames and other
    
    
    0.5-10
    
    
    
    2,635
    
    
    
    169
    
    
    
    1,815
    
    
    
    651Total Intangible Assets
    
    
    
    
    
    $
    63,714
    
    
    $
    17,236
    
    
    $
    2,263
    
    
    $
    44,215
 Useful
    
    
    
    
    
    
    December 31, 2006Life
    
    
    
    
    
    
    AccumulatedAmortizing Intangible Assets:
    
    (Years)
    
    
    Gross
    
    
    Amortization
    
    
    Impairments
    
    
    NetPost Warranty Service Agreements
    
    
    50
    
    
    $
    32,000
    
    
    $
    800
    
    
    
    
    
    
    $
    31,200Technology
    
    
    5-10
    
    
    
    17,912
    
    
    
    12,057
    
    
    
    
    
    
    
    5,855Customer Relationships
    
    
    5-15
    
    
    
    2,843
    
    
    
    748
    
    
    
    
    
    
    
    2,095Other
    
    
    1-3
    
    
    
    159
    
    
    
    122
    
    
    
    
    
    
    
    37Non-Amortizing Intangible Assets:Tradenames
    
    
    
    
    
    
    2,300
    
    
    
    
    
    
    
    
    
    
    
    2,300Total Intangible Assets
    
    
    
    
    
    $
    55,214
    
    
    $
    13,727
    
    
    
    
    
    
    $
    41,487
 Goodwill
    
    December 31, 2007
    
    December 31, 2006Balance at beginning of the year
    
    $
    23,836
    
    
    $
    21,562Acquisitions
    
    
    1,122
    
    
    
    2,274Impairments
    
    
    (24,958
    )
    
    
    Balance at end of the year
    
    $
    
    
    
    $
    23,836
 Impairments
 Long-Lived Assets
  Indefinite-Lived Assets Including Goodwill
    - 59 -




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##### Table of Contents



Useful Life
    
    ValuePost-Warranty Service Agreements
    
    6  48 years
    
    $
    6,090Technology
    
    3  10 years
    
    $
    800Customer Relationships
    
    10 years
    
    $
    776Other
    
    0.5 - 10 years
    
    $
    174Goodwill
    
    
    
    
    
    $
    1,122
  Useful Life
    
    ValueCustomer Relationship
    
    5 years
    
    $
    193Technology
    
    5 years
    
    $
    761Tradename
    
    3 years
    
    $
    62Backlog
    
    6 months
    
    $
    97Goodwill
    
    
    
    
    
    $
    2,274
   6. RECEIVABLE FROM OFFICER
  7. INVENTORIES
  December 31, 2007
    
    December 31, 2006Raw materials
    
    $
    8,393
    
    
    $
    4,778Work in process
    
    
    3,582
    
    
    
    2,728Finished goods
    
    
    4,321
    
    
    
    3,47516,296
    
    
    
    10,981Reserves for slow moving and obsolete inventory
    
    
    (2,609
    )
    
    
    (2,425
    )$
    13,687
    
    
    $
    8,556
 - 60 -




---



##### Table of Contents



8. PROPERTY AND EQUIPMENT
  Years
    
    December 31, 2007
    
    December 31, 2006Test equipment and tooling
    
    
    3-5
    
    
    $
    11,246
    
    
    $
    10,436Office equipment and fixtures
    
    
    5-7
    
    
    
    9,724
    
    
    
    8,517Leasehold improvements
    
    
    1-6
    
    
    
    2,860
    
    
    
    2,30723,830
    
    
    
    21,260Less accumulated depreciation and amortization
    
    
    
    
    
    
    (19,551
    )
    
    
    (17,959
    )$
    4,279
    
    
    $
    3,301
  9. ASSETS HELD FOR SALE
  10. PRODUCT WARRANTY
  December 31, 2007
    
    December 31, 2006Balance at the beginning of the year
    
    $
    2,135
    
    
    $
    2,220Accruals for warranties issued during the year
    
    
    1,680
    
    
    
    1,595Settlements during the year
    
    
    (1,878
    )
    
    
    (1,680
    )Balance at the end of the year
    
    $
    1,937
    
    
    $
    2,135
 11. PENSIONS
    Pension Benefits(in thousands)
    
    2007Change in projected benefit obligation:Projected benefit obligation at January 1, 2007
    
    $
    Acquisition of BTD
    
    
    1,226Service cost
    
    
    37Interest cost
    
    
    27Plan participants contributions
    
    
    2Actuarial (gains)
    
    
    (32
    )Projected benefit obligation at December 31, 2007
    
    $
    1,260Change in fair value of plan assets:January 1, 2007
    
    $
    Acquisition of BTD
    
    
    332Employer contribution
    
    
    9Plan participants contributions
    
    
    2
 - 61 -




---



##### Table of Contents



Pension Benefits(in thousands)
    
    2007Actual return on plan assets (net of cost)
    
    
    9Fair value of plan assets at December 31, 2007
    
    $
    352Unfunded status of plans at December 31, 2007
    
    $
    908Amounts recognized in accumulated other comprehensive income:Prior service cost
    
    
    Actuarial gains
    
    
    32Total
    
    
    32
  Pension Benefits(in thousands)
    
    2007Noncurrent assets
    
    $
    Noncurrent liabilities
    
    
    908Net amount recognized at December 31, 2007
    
    $
    908
  Pension Benefits(in thousands)
    
    2007Projected benefit obligation in excess of plan assets:Projected benefit obligation
    
    $
    1,260Fair value of plan assets
    
    $
    352Accumulated benefit obligation in excess of plan assets:Projected benefit obligation
    
    $
    810Accumulated benefit obligation
    
    $
    701
  Pension Benefits(in thousands)
    
    2007Components of net periodic benefit cost:Service cost
    
    $
    37Interest cost
    
    
    27Expected return on plan assets
    
    
    6Net periodic benefit cost
    
    $
    70
  (in thousands)Expected benefit payments:2008  2012
    
    
    2013  2017
    
    $
    79Assumptions used to determine the benefit obligation at December 31, 2007 and net periodic benefit
cost for the year ended December 31, 2007 are detailed below:Weighted-average assumptions used to determine the benefit obligationDiscount rate
    
    
    5.39
    %Rate of compensation increase
    
    
    2.78
    %Weighted-average assumptions used to determine the net benefit costsDiscount rate
    
    
    5.39
    %Rate of compensation increase
    
    
    2.78
    %Expected annual return on plan assets
    
    
    4.0
    %
 12. PREFERRED STOCK
  - 62 -




---



##### Table of Contents



13. LICENSE AND ROYALTY FEES
  14. INCOME TAXES
  2007
    
    2006
    
    2005Current:Federal
    
    $
    (19
    )
    
    $
    (781
    )
    
    $
    741Foreign
    
    
    742
    
    
    
    
    
    
    
    State
    
    
    10
    
    
    
    9
    
    
    
    12733
    
    
    
    (772
    )
    
    
    753Deferred:Federal
    
    
    648
    
    
    
    (530
    )
    
    
    401Foreign
    
    
    (180
    )
    
    
    
    
    
    
    State
    
    
    19
    
    
    
    89
    
    
    
    147487
    
    
    
    (441
    )
    
    
    548$
    1,220
    
    
    $
    (1,213
    )
    
    $
    1,301
   - 63 -




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Years Ended December 31,2007
    
    
    2006
    
    
    2005Federal statutory tax rate
    
    
    (34
    %)
    
    
    (34
    %)
    
    
    34
    %State income taxes
    
    
    
    
    
    
    
    
    
    
    Valuation allowance
    
    
    38
    %
    
    
    3
    %
    
    
    3
    %Tax contingency reserve
    
    
    1
    %
    
    
    (2
    %)
    
    
    (1
    %)Export sales benefit
    
    
    
    
    
    
    (4
    %)
    
    
    (6
    %)Tax exempt interest
    
    
    
    
    
    
    (6
    %)
    
    
    (5
    %)Other
    
    
    
    
    
    
    3
    %
    
    
    2
    %Effective tax rate
    
    
    5
    %
    
    
    (40
    %)
    
    
    27
    %
  December 31,
    
    December 31,2007
    
    2006Deferred Tax Assets:Excess of tax basis over book basis for:Property and equipment
    
    $
    416
    
    
    $
    457Goodwill and intangible assets
    
    
    8,831
    
    
    
    Inventory
    
    
    380
    
    
    
    319Reserves recorded for:Warranty
    
    
    734
    
    
    
    815Inventory
    
    
    849
    
    
    
    784Allowance for doubtful accounts
    
    
    170
    
    
    
    187Severance
    
    
    60
    
    
    
    Federal net operating loss carryforward
    
    
    1,103
    
    
    
    776State net operating loss carryforward
    
    
    3,063
    
    
    
    2,748Stock based compensation
    
    
    417
    
    
    
    181Pension benefit
    
    
    12
    
    
    
    Other
    
    
    120
    
    
    
    (1
    )Gross deferred tax assets
    
    $
    16,155
    
    
    $
    6,266Valuation allowance
    
    
    (12,655
    )
    
    
    (2,733
    )Deferred tax assets
    
    
    3,500
    
    
    
    3,533Deferred Tax Liabilities:Excess of book basis over tax basis for:Intangible assets
    
    $
    (4,511
    )
    
    $
    (4,157
    )Property and equipment
    
    
    (93
    )
    
    
    (198
    )Other
    
    
    (120
    )
    
    
    13Total deferred tax liability
    
    
    (4,724
    )
    
    
    (4,342
    )Net deferred tax liabilities
    
    $
    (1,224
    )
    
    $
    (809
    )Reconciliation to the consolidated balance
sheet:Deferred tax asset current:
    
    $
    503
    
    
    $
    2,056Deferred tax liabilities non-current:
    
    
    (1,727
    )
    
    
    (2,865
    )Net deferred tax liability
    
    $
    (1,224
    )
    
    $
    (809
    )
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##### Table of Contents



Unrecognized Tax Benefits Tabular Reconciliation (in thousands)
 Beginning balance  January 1, 2007
    
    $
    96Additional uncertain tax positions
    
    
    201Reductions due to expirations of statute of limitations
    
    
    (25
    )Ending balance  December 31, 2007
    
    $
    272
    15. LINE OF CREDIT
  16. COMMITMENTS AND CONTINGENCIES
   At December 31, 20072008
    
    $
    8542009
    
    
    8342010
    
    
    6852011
    
    
    6542012
    
    
    485Thereafter
    
    
    $
    3,512
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17. MAJOR CUSTOMERS, REVENUE CONCENTRATION AND DEPENDENCE ON CERTAIN SUPPLIERS
       - 66 -




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18. SHORT-TERM INVESTMENTS
  December 31, 2007
    
    December 31, 2006Carrying Amount
    
    Fair Value
    
    Carrying Amount
    
    Fair ValueFinancial assets:Cash and cash equivalents
    
    $
    58,222
    
    
    $
    58,222
    
    
    $
    57,378
    
    
    $
    57,378Short-term investments
    
    $
    632
    
    
    $
    632
    
    
    $
    5,323
    
    
    $
    5,323
 19. PER SHARE INFORMATION
    December 31, 2007
    
    December 31, 2006
    
    December 31, 2005Net (loss) income
    
    $
    (26,153
    )
    
    $
    (1,834
    )
    
    $
    3,518Weighted average common shares outstanding
    
    
    13,219
    
    
    
    13,239
    
    
    
    13,168Effect of dilutive securities  stock options
    
    
    
    
    
    
    
    
    
    
    4913,219
    
    
    
    13,239
    
    
    
    13,217Earnings per share:Basic
    
    $
    (1.98
    )
    
    $
    (0.14
    )
    
    $
    0.27Diluted
    
    $
    (1.98
    )
    
    $
    (0.14
    )
    
    $
    0.27
 20. EMPLOYEE DEFINED CONTRIBUTION PLANS
  21. SEVERANCE AND RELATED EXPENSE
  - 67 -




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22. SUBSEQUENT EVENTS
   - 68 -




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##### Table of Contents



Col. A
    
    Col. B
    
    Col C.
    
    Col. D
    
    Col. EBalance at
    
    Additions
    
    
    
    
    
    Balance atBeginning
    
    Charged to
    
    Charged to
    
    
    
    
    
    Endof Year
    
    Expense
    
    Other Accounts
    
    Deductions
    
    of YearAllowance for doubtful
accounts:Year ended December 31, 2007
    
    $
    535
    
    
    
    86
    
    
    
    
    
    
    
    (143
    )
    
    $
    478Year ended December 31, 2006
    
    $
    465
    
    
    
    86
    
    
    
    
    
    
    
    (16
    )
    
    $
    535Year ended December 31, 2005
    
    $
    754
    
    
    
    81
    
    
    
    
    
    
    
    (370
    )(a)
    
    $
    465Inventory reserve:Year ended December 31, 2007
    
    $
    2,425
    
    
    
    402
    
    
    
    
    
    
    
    (218
    )
    
    $
    2,609Year ended December 31, 2006
    
    
    2,095
    
    
    
    (90
    )
    
    
    420
    
    
    
    
    
    
    
    2,425Year ended December 31, 2005
    
    
    1,420
    
    
    
    545
    
    
    
    130
    
    
    
    
    
    
    
    2,095Warranty reserve:Year ended December 31, 2007
    
    $
    2,135
    
    
    
    1,680
    
    
    
    
    
    
    
    (1,878
    )
    
    $
    1,937Year ended December 31, 2006
    
    $
    2,220
    
    
    
    1,595
    
    
    
    
    
    
    
    (1,680
    )
    
    $
    2,135Year ended December 31, 2005
    
    $
    2,081
    
    
    
    1,502
    
    
    
    
    
    
    
    (1,363
    )
    
    $
    2,220Valuation allowance on net
deferred tax assets:Year ended December 31, 2007
    
    $
    2,733
    
    
    
    9,922
    
    
    
    
    
    
    
    
    
    
    $
    12,655Year ended December 31, 2006
    
    $
    2,004
    
    
    
    729
    
    
    
    
    
    
    
    
    
    
    $
    2,733Year ended December 31, 2005
    
    $
    1,762
    
    
    
    242
    
    
    
    
    
    
    
    
    
    
    $
    2,004
 
 (a)
    
    Removed from both accounts receivable and the allowance for bad debts as a result of the
final settlement of the Cheetah acquisition. - 69 -




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
      Evaluation of Changes in Internal Controls over Financial Reporting
  
 Item 9B. Other Information.
  - 70 -




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##### Table of Contents



PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance.
   
 Item 11. Executive Compensation.
  
 Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
  Securities Authorized for Issuance Under Equity Compensation Plans
  No. of securities remainingavailable for future issuance underequity compensation plansNo. of securities to be
    
    Weighted average exercise
    
    (excluding securities to be issuedissued upon exercise of
    
    price of outstanding
    
    upon exercise of outstandingoutstanding options
    
    options
    
    options)Equity compensation plans approved
by security holders1995 Long-Term Incentive
    
    
    1,019,147
    
    
    $
    31.35
    
    
    
    Compensation Plan (1)2006 Long-Term Incentive
    
    
    176,667
    
    
    $
    8.02
    
    
    
    992,785Compensation PlanEquity compensation plans not
approved by security holders1998 Employee Incentive
    
    
    244,748
    
    
    $
    24.22
    
    
    
    164,141Compensation Plan (2)Total:
    
    
    1,440,562
    
    
    
    
    
    
    
    1,156,926
 
 (1)
    
    No further grants may be made under this plan.(2)
    
    This plan was adopted by the Companys Board of Directors and was effective as of
January 28, 1998. The plan is designed to motivate, attract and retain qualified employees
(other than officers and directors of the Company). The plan - 71 -




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##### Table of Contents



is administered by the Compensation Committee of the Companys Board of Directors (the
Committee), which has full discretion to determine the employees who receive awards
under the plan as well as the nature and size of the awards. The Committee may issue
nonqualified stock options, stock appreciation rights, restricted stock, performance
shares and performance units under the plan. Award recipients (other than recipients of
stock appreciation rights) are subject to a non-competition arrangement with the Company.
Upon change-in-control of the Company, all awards become exercisable, vested or fully
earned, as applicable. The exercise price of options and the sale price of restricted
stock granted under the plan is 100% of the fair market value on the Companys Common
Stock as of the date of grant. All options granted under the plan expire not later than
ten years after the date of grant and typically vest over two years. 990,000 shares of
the Companys Common Stock were authorized for issuance under the plan for granting
awards, of which 164,141 shares remain available for granting awards.  
 Item 13. Certain Relationships and Related Transactions and Director Independence.
  
 Item 14. Principal Accounting Fees and Services.
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
 (a)
    
    The following documents have been filed as part of this report or, where noted, incorporated by
reference:
 (1)
    
    Financial Statements
The financial statements of the Company are listed in the Index to Consolidated Financial
Statements on Page 43.(2)
    
    Financial Statement Schedule
The financial statement schedule filed in response to Item 8 and Item 15(d) of Form
10-K, Schedule II (Valuation and Qualifying Accounts), is listed in the Index to
Consolidated Financial Statements on Page 43.(3)
    
    The following exhibits are included herewith and made a part hereof:
 ExhibitNumber
    
    Description3.1
    
    Amended and Restated Articles of Incorporation of the Company (the Articles) as amended through May 6, 1998
(conformed copy), incorporated herein by reference to Exhibit 3.1 to the Annual Report of Tollgrade
Communications, Inc. (the Company) on Form 10-K, filed with the Securities and Exchange Commission (the SEC)
on March 24, 1999 (the 1998 Form 10-K).3.1a
    
    Statement with Respect to Shares dated July 23, 1996 (conformed copy), incorporated herein by reference to Exhibit
3.1a to the 1998 Form 10-K.3.1b
    
    Amendment to Articles incorporated herein by reference, filed on the Companys Current Report on Form 8-K filed
with the SEC on May 21, 2007.3.2
    
    Amended and Restated Bylaws of the Company filed as Exhibit 3.2 to the Companys Current Report on Form 8-K filed
with the SEC on May 21, 2007.4.1
    
    Rights Agreement, dated as of July 23, 1996 between the Company and Chase Mellon Shareholder Services, LLC,
incorporated herein by reference to Exhibit 1 to Registration Statement of the Company on Form 8-A file No.
000-28852), filed with the SEC on August 9, 1996.10.1*
    
    1995 Long-Term Incentive Compensation Plan, amended and restated as of January 24, 2002, incorporated herein by
reference to Exhibit B to the 2002 Proxy Statement of the Company, filed with the SEC on March 22, 2002.10.2*
    
    Stock Option Agreement entered into December 14, 1995 between the Company and R. Craig Allison, together with a
schedule listing substantially identical agreements with Gordon P. Anderson, Jeffrey Blake, John H. Guelcher,
Richard H. Heibel, Joseph T. Messina and Douglas T. Halliday, incorporated herein by reference to Exhibit 10.14 to
the Companys Form 10-K filed with the SEC on March 20, 1996 (the 1995 Form 10-K).10.3*
    
    Form of Stock Option Agreement dated December 14, 1995 and December 29, 1995 for Non-Statutory Stock Options
granted under the 1995 Long-Term Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.15 to
the Companys Form 10-K, filed with the SEC on March 19, 1997 (the 1996 Form 10-K).
 - 72 -




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ExhibitNumber
    
    Description10.4*
    
    Form of Stock Option Agreement for Non-Statutory Stock Options granted under the 1995 Long-Term Incentive
Compensation Plan, incorporated herein by reference to Exhibit 10.2 to the Companys Form 10-Q, filed with the SEC
on November 12, 1996.10.5*
    
    Form of Non-employee Director Stock Option Agreement with respect to the Companys 1995 Long-Term Incentive
Compensation Plan, incorporated herein by reference to Exhibit 10.25 to the Companys Form 10-K filed with the SEC
on March 25, 1998 (the 1997 Form 10-K).10.6*
    
    Form of Change in Control Agreement, together with a schedule listing the name of each Executive with whom the
Company has entered into an agreement in substantially identical form and in each case the date of such agreement,
filed as Exhibit 10.6 to the Companys Form 10-K filed with the SEC on March 15, 2006 (the 2006 Form 10-K).10.7*
    
    Form of Extension and Amendment of Change in Control Agreement, together with a schedule listing the name of each
Executive with whom the Company has entered into an agreement in substantially identical form and in each case the
date of such agreement, filed as Exhibit 10.7 to the 2006 Form 10-K.10.8*
    
    1998 Employee Incentive Compensation Plan, amended and restated as of January 24, 2002, incorporated herein by
reference to Exhibit 10.25 to the Companys Form 10-K, filed with the SEC on March 22, 2002 (the 2001 Form 10-K).10.9
    
    Asset Purchase Agreement by and between Lucent Technologies, Inc. and Tollgrade Communications, Inc. dated
September 28, 2001, incorporated herein by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K
filed with the SEC on October 15, 2001.10.10
    
    Purchase and Sale Agreement, entered into February 13, 2003, between the Company and Acterna, LLC, incorporated
herein by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K filed with the SEC on February 27,
2003.10.11
    
    Lease, dated February 18, 2003, between Lakewood Ranch Properties, L.L.C. and the Company, incorporated herein by
reference to Exhibit 10.32 to the 2002 Form 10-K.10.12
    
    Lease and License for Alterations dated October 18, 2007 among Tollgrade UK Limited, Tollgrade Communications,
Inc., Bedell Corporate Trustees Limited and Atrium Trustees (as Trustees of the Park One Unit Trust), filed as
Exhibit 10.2 to the Companys Form 10-Q filed with the SEC on November 8, 2007.10.13
    
    Agreement dated November 27, 2006 by and between Knightsbridge Realty L.L.C. and Tollgrade Communications, Inc.,
filed as Exhibit 10.1 to the Companys Current Report of Form 8-K filed with the SEC on November 30, 2006.10.14
    
    Lease Agreement, dated as of August 31, 2005, between Regional Industrial Development Corporation of Southwestern
Pennsylvania and the Company, incorporated herein by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed with the SEC on September 7, 2005.10.15
    
    Supply Agreement, dated July 25, 2002, between Tollgrade Communications, Inc. (as successor in interest to
Acterna Cable Networks Division) and the Electronic Manufacturing Services Division of Dictaphone Corporation
(the Supply Agreement) (exhibits omitted), filed as Exhibit 10.45 to the Companys Form 10-K filed with the SEC
on March 15, 2004 (the 2003 Form 10-K).10.16
    
    Extension Agreement dated July 21, 2004 to Supply Agreement filed as Exhibit 10.56 to the Companys Form 10-Q
filed with the SEC on November 2004 (the Third Quarter 2004 10-Q).10.17
    
    Second Extension Agreement dated August 16, 2004 to the Supply Agreement, filed as Exhibit 10.57 to the Third
Quarter 2004 10-Q.10.18
    
    Third Extension Agreement dated September 23, 2004 to the Supply Agreement, filed as Exhibit 10.58 to the Third
Quarter 2004 10-Q.10.19
    
    Fourth Extension Agreement dated December 14, 2004 to the Supply Agreement, filed as Exhibit 10.41 to the
Companys Form 10-K filed with the SEC on March 3, 2005.10.20
    
    Fifth Extension Agreement dated March 15, 2005 to the Supply Agreement, filed as Exhibit 10.19 to the 2006 Form
10-K.10.21
    
    Sixth Extension Agreement dated June 24, 2005 to the Supply Agreement, filed as Exhibit 10.2 to the Companys
Form 10-Q filed with the SEC on August 4, 2005.10.22
    
    Seventh Extension Agreement dated September 29, 2005 to the Supply Agreement, filed as Exhibit 10.2 to the
Companys Form 10-Q filed with the SEC on November 3, 2005.10.23
    
    Extension Agreement dated December 20, 2005 to the Supply Agreement, filed as Exhibit 10.22 to the 2006 Form
10-K.10.24
    
    Extension Agreement, dated March 22, 2006, between Tollgrade Communications, Inc. and Bulova Technologies EMS,
LLC, filed as Exhibit 10.2 to the Companys Form 10-Q filed with the SEC on May 10, 2006.
 - 73 -




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ExhibitNumber
    
    Description10.25
    
    Extension Agreement, dated September 26, 2006, between the Company and Bulova Technologies EMS, LLC, filed as
Exhibit 10.1 to the Companys Form 10-Q filed with the SEC on October 27, 2006.10.26*
    
    Agreement entered into as of January 17, 2005 between the Company and Christian L. Allison, filed as Exhibit 10.1
to the Companys Current Report on Form 8-K filed with the SEC on January 21, 2005.10.27*
    
    Agreement dated as of May 31, 2005 by and between Tollgrade Communications, Inc. and Mark B. Peterson, filed as
Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the SEC on June 2, 2005.10.28
    
    Asset Purchase Agreement dated February 7, 2006 by and among Emerson Electric Co., Emerson Network Power, Energy
Systems, North America, Inc. and Tollgrade Communications, Inc., filed as Exhibit 10.25 to the 2006 Form 10-K.10.29*
    
    Management Incentive Compensation Plan, as amended, filed as Exhibit 10.1 to the Companys Form 10-Q filed with
the SEC on April 27, 2007.10.30*
    
    Tollgrade Communications, Inc. 2006 Long-Term Incentive Compensation Plan filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the SEC on May 11, 2006.10.31*
    
    Form of Stock Option Agreement for Non-Statutory Stock Options granted under the 2006 Long-Term Incentive
Compensation Plan, filed as Exhibit 10.1 to the Companys Form 10-Q filed with the SEC on October 27, 2006.10.32*
    
    Amendment No. 1 dated January 24, 2007 to Agreement dated May 31, 2005 by and between Tollgrade Communications,
Inc. and Mark B. Peterson, filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the SEC
on January 29, 2007.10.33
    
    Asset Purchase Agreement dated May 31, 2007 between Tollgrade Communications, Inc. and Teradyne, Inc., filed as
Exhibit 10.1 to the Companys Form 10-Q filed with the SEC on July 27, 2007.10.34*
    
    Change-in-Control Agreement, dated August 1, 2007, between the Company and Joseph Ferrara, filed as Exhibit 10.1
to the Companys Current Report on Form 8-K filed with the SEC on August 1, 2007.10.35*
    
    Severance Agreement, dated July 3, 2007, between the Company and Joseph Ferrara, filed as Exhibit 10.2 to the
Companys Current Report on Form 8-K/A filed with the SEC on November 16, 2007.10.36*
    
    Separation and Mutual Release Agreement dated as of November 16, 2007 by and between Tollgrade Communications,
Inc. and Mark B. Peterson, filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the SEC
on November 21, 2007.10.37*
    
    Form of Employee Restricted Share Agreement for restricted share grants pursuant to the 2006 Long-Term Incentive
Compensation Plan, filed herewith.10.38*
    
    Form of Director Restricted Share Agreement for restricted share grants pursuant to the 2006 Long-Term Incentive
Compensation Plan, filed herewith.10.39*
    
    Amendment dated December 13, 2007 to the Management Incentive Compensation Plan, filed herewith.10.40*
    
    Amendment dated December 13, 2007 to the 1995 Long-Term Incentive Compensation Plan, filed herewith.10.41*
    
    Amendment dated December 13, 2007 to the 1998 Long-Term Incentive Compensation Plan, filed herewith.21.1
    
    List of subsidiaries of the Company, filed herewith.23.1
    
    Consent of PricewaterhouseCoopers LLP, 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.
 
 *
    
    Management contract or compensatory plan, contract or arrangement required to be filed by Item
601(b)(10)(iii) of Regulation S-K.  
 - 74 -




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SIGNATURES
  TOLLGRADE COMMUNICATIONS, INC.By
/s/ Joseph A. FerraraJoseph A. FerraraChief Executive Officer and President  Signature
    
    
    
    
    
    Title/s/Joseph A. Ferrara

          Joseph A. Ferrara
    
    
    
    
    
    Chief Executive Officer, President
and Director
(Principal Executive Officer)/s/James J. Barnes

           James J. Barnes
    
    
    
    
    
    Director/s/Daniel P. Barry

           Daniel P. Barry
    
    
    
    
    
    Director/s/David S. Egan

           David S. Egan
    
    
    
    
    
    Director/s/Richard H. Heibel, M.D.

           Richard H. Heibel, M.D
    
    
    .
    
    
    Director/s/Robert W. Kampmeinert

           Robert W. Kampmeinert
    
    
    
    
    
    Director/s/Brian C. Mullins

           Brian C. Mullins
    
    
    
    
    
    Director/s/Samuel C. Knoch

           Samuel C. Knoch
    
    
    
    
    
    Chief Financial Officer and Treasurer
(Principal Financial Officer)/s/ R. Joseph Fink

           R. Joseph Fink
    
    
    
    
    
    Controller
(Principal Accounting Officer)
 - 76 -




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EXHIBIT INDEX
 ExhibitNumber
    
    Description3.1
    
    Amended and Restated Articles of Incorporation of the Company (the Articles) as amended through May 6, 1998
(conformed copy), incorporated herein by reference to Exhibit 3.1 to the Annual Report of Tollgrade
Communications, Inc. (the Company) on Form 10-K, filed with the Securities and Exchange Commission (the SEC)
on March 24, 1999 (the 1998 Form 10-K).3.1a
    
    Statement with Respect to Shares dated July 23, 1996 (conformed copy), incorporated herein by reference to Exhibit
3.1a to the 1998 Form 10-K.3.1b
    
    Amendment to Articles incorporated herein by reference, filed on the Companys Current Report on Form 8-K filed
with the SEC on May 21, 2007.3.2
    
    Amended and Restated Bylaws of the Company filed as Exhibit 3.2 to the Companys Current Report on Form 8-K filed
with the SEC on May 21, 2007.4.1
    
    Rights Agreement, dated as of July 23, 1996 between the Company and Chase Mellon Shareholder Services, LLC,
incorporated herein by reference to Exhibit 1 to Registration Statement of the Company on Form 8-A file No.
000-28852), filed with the SEC on August 9, 1996.10.1
    
    1995 Long-Term Incentive Compensation Plan, amended and restated as of January 24, 2002, incorporated herein by
reference to Exhibit B to the 2002 Proxy Statement of the Company, filed with the SEC on March 22, 2002.10.2
    
    Stock Option Agreement entered into December 14, 1995 between the Company and R. Craig Allison, together with a
schedule listing substantially identical agreements with Gordon P. Anderson, Jeffrey Blake, John H. Guelcher,
Richard H. Heibel, Joseph T. Messina and Douglas T. Halliday, incorporated herein by reference to Exhibit 10.14 to
the Companys Form 10-K filed with the SEC on March 20, 1996 (the 1995 Form 10-K).10.3
    
    Form of Stock Option Agreement dated December 14, 1995 and December 29, 1995 for Non-Statutory Stock Options
granted under the 1995 Long-Term Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.15 to
the Companys Form 10-K, filed with the SEC on March 19, 1997 (the 1996 Form 10-K).10.4
    
    Form of Stock Option Agreement for Non-Statutory Stock Options granted under the 1995 Long-Term Incentive
Compensation Plan, incorporated herein by reference to Exhibit 10.2 to the Companys Form 10-Q, filed with the SEC
on November 12, 1996.10.5
    
    Form of Non-employee Director Stock Option Agreement with respect to the Companys 1995 Long-Term Incentive
Compensation Plan, incorporated herein by reference to Exhibit 10.25 to the Companys Form 10-K filed with the SEC
on March 25, 1998 (the 1997 Form 10-K).10.6
    
    Form of Change in Control Agreement, together with a schedule listing the name of each Executive with whom the
Company has entered into an agreement in substantially identical form and in each case the date of such agreement,
filed as Exhibit 10.6 to the Companys Form 10-K filed with the SEC on March 15, 2006 (the 2006 Form 10-K).10.7
    
    Form of Extension and Amendment of Change in Control Agreement, together with a schedule listing the name of each
Executive with whom the Company has entered into an agreement in substantially identical form and in each case the
date of such agreement, filed as Exhibit 10.7 to the 2006 Form 10-K.10.8
    
    1998 Employee Incentive Compensation Plan, amended and restated as of January 24, 2002, incorporated herein by
reference to Exhibit 10.25 to the Companys Form 10-K, filed with the SEC on March 22, 2002 (the 2001 Form 10-K).10.9
    
    Asset Purchase Agreement by and between Lucent Technologies, Inc. and Tollgrade Communications, Inc. dated
September 28, 2001, incorporated herein by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K
filed with the SEC on October 15, 2001.10.10
    
    Purchase and Sale Agreement, entered into February 13, 2003, between the Company and Acterna, LLC, incorporated
herein by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K filed with the SEC on February 27,
2003.10.11
    
    Lease, dated February 18, 2003, between Lakewood Ranch Properties, L.L.C. and the Company, incorporated herein by
reference to Exhibit 10.32 to the 2002 Form 10-K.10.12
    
    Lease and License for Alterations dated October 18, 2007 among Tollgrade UK Limited, Tollgrade Communications,
Inc., Bedell Corporate Trustees Limited and Atrium Trustees (as Trustees of the Park One Unit Trust), filed as
Exhibit 10.2 to the Companys Form 10-Q filed with the SEC on November 8, 2007.




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##### Table of Contents



ExhibitNumber
    
    Description10.13
    
    Agreement dated November 27, 2006 by and between Knightsbridge Realty L.L.C. and Tollgrade Communications, Inc.,
filed as Exhibit 10.1 to the Companys Current Report of Form 8-K filed with the SEC on November 30, 2006.10.14
    
    Lease Agreement, dated as of August 31, 2005, between Regional Industrial Development Corporation of Southwestern
Pennsylvania and the Company, incorporated herein by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed with the SEC on September 7, 2005.10.15
    
    Supply Agreement, dated July 25, 2002, between Tollgrade Communications, Inc. (as successor in interest to
Acterna Cable Networks Division) and the Electronic Manufacturing Services Division of Dictaphone Corporation
(the Supply Agreement) (exhibits omitted), filed as Exhibit 10.45 to the Companys Form 10-K filed with the SEC
on March 15, 2004 (the 2003 Form 10-K).10.16
    
    Extension Agreement dated July 21, 2004 to Supply Agreement filed as Exhibit 10.56 to the Companys Form 10-Q
filed with the SEC on November 2004 (the Third Quarter 2004 10-Q).10.17
    
    Second Extension Agreement dated August 16, 2004 to the Supply Agreement, filed as Exhibit 10.57 to the Third
Quarter 2004 10-Q.10.18
    
    Third Extension Agreement dated September 23, 2004 to the Supply Agreement, filed as Exhibit 10.58 to the Third
Quarter 2004 10-Q.10.19
    
    Fourth Extension Agreement dated December 14, 2004 to the Supply Agreement, filed as Exhibit 10.41 to the
Companys Form 10-K filed with the SEC on March 3, 2005.10.20
    
    Fifth Extension Agreement dated March 15, 2005 to the Supply Agreement, filed as Exhibit 10.19 to the 2006 Form
10-K.10.21
    
    Sixth Extension Agreement dated June 24, 2005 to the Supply Agreement, filed as Exhibit 10.2 to the Companys
Form 10-Q filed with the SEC on August 4, 2005.10.22
    
    Seventh Extension Agreement dated September 29, 2005 to the Supply Agreement, filed as Exhibit 10.2 to the
Companys Form 10-Q filed with the SEC on November 3, 2005.10.23
    
    Extension Agreement dated December 20, 2005 to the Supply Agreement, filed as Exhibit 10.22 to the 2006 Form
10-K.10.24
    
    Extension Agreement, dated March 22, 2006, between Tollgrade Communications, Inc. and Bulova Technologies EMS,
LLC, filed as Exhibit 10.2 to the Companys Form 10-Q filed with the SEC on May 10, 2006.10.25
    
    Extension Agreement, dated September 26, 2006, between the Company and Bulova Technologies EMS, LLC, filed as
Exhibit 10.1 to the Companys Form 10-Q filed with the SEC on October 27, 2006.10.26
    
    Agreement entered into as of January 17, 2005 between the Company and Christian L. Allison, filed as Exhibit 10.1
to the Companys Current Report on Form 8-K filed with the SEC on January 21, 2005.10.27
    
    Agreement dated as of May 31, 2005 by and between Tollgrade Communications, Inc. and Mark B. Peterson, filed as
Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the SEC on June 2, 2005.10.28
    
    Asset Purchase Agreement dated February 7, 2006 by and among Emerson Electric Co., Emerson Network Power, Energy
Systems, North America, Inc. and Tollgrade Communications, Inc., filed as Exhibit 10.25 to the 2006 Form 10-K.10.29
    
    Management Incentive Compensation Plan, as amended, filed as Exhibit 10.1 to the Companys Form 10-Q filed with
the SEC on April 27, 2007.10.30
    
    Tollgrade Communications, Inc. 2006 Long-Term Incentive Compensation Plan filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the SEC on May 11, 2006.10.31
    
    Form of Stock Option Agreement for Non-Statutory Stock Options granted under the 2006 Long-Term Incentive
Compensation Plan, filed as Exhibit 10.1 to the Companys Form 10-Q filed with the SEC on October 27, 2006.10.32
    
    Amendment No. 1 dated January 24, 2007 to Agreement dated May 31, 2005 by and between Tollgrade Communications,
Inc. and Mark B. Peterson, filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the SEC
on January 29, 2007.10.33
    
    Asset Purchase Agreement dated May 31, 2007 between Tollgrade Communications, Inc. and Teradyne, Inc., filed as
Exhibit 10.1 to the Companys Form 10-Q filed with the SEC on July 27, 2007.10.34
    
    Change-in-Control Agreement, dated August 1, 2007, between the Company and Joseph Ferrara, filed as Exhibit 10.1
to the Companys Current Report on Form 8-K filed with the SEC on August 1, 2007.10.35
    
    Severance Agreement, dated July 3, 2007, between the Company and Joseph Ferrara, filed as Exhibit 10.2 to the
Companys Current Report on Form 8-K/A filed with the SEC on November 16, 2007.




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##### Table of Contents



ExhibitNumber
    
    Description10.36
    
    Separation and Mutual Release Agreement dated as of November 16, 2007 by and between Tollgrade Communications,
Inc. and Mark B. Peterson, filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the SEC
on November 21, 2007.10.37
    
    Form of Employee Restricted Share Agreement for restricted share grants pursuant to the 2006 Long-Term Incentive
Compensation Plan, filed herewith.10.38
    
    Form of Director Restricted Share Agreement for restricted share grants pursuant to the 2006 Long-Term Incentive
Compensation Plan, filed herewith.10.39
    
    Amendment dated December 13, 2007 to the Management Incentive Compensation Plan, filed herewith.10.40
    
    Amendment dated December 13, 2007 to the 1995 Long-Term Incentive Compensation Plan, filed herewith.10.41
    
    Amendment dated December 13, 2007 to the 1998 Long-Term Incentive Compensation Plan, filed herewith.21.1
    
    List of subsidiaries of the Company, filed herewith.23.1
    
    Consent of PricewaterhouseCoopers LLP, 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.