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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, 2005
 Commission file number 000-27312
 TOLLGRADE COMMUNICATIONS, INC.
  PENNSYLVANIA
    
    25-1537134(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)493 Nixon Road, Cheswick, Pennsylvania
(Address of principal executive offices)
    
    15024
(Zip Code)
 412-820-1400
 Securities registered pursuant to Section 12(g) of the Act:
 Common Stock, par value $.20 per share
  o þ
  o þ
  þ o
 o þ
  o þ o
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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 2006
Annual Meeting of Shareholders
    
    III
 -2-




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##### 



TABLE OF CONTENTS
 Part IItem 1.
    
    Business
    
    
    5Item 1A.
    
    Risk Factors
    
    
    12Item 1B.
    
    Unresolved Staff Comments
    
    
    18Item 2.
    
    Properties
    
    
    18Item 3.
    
    Legal Proceedings
    
    
    18Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    18Part IIItem 5.
    
    Market for the Registrants Common Stock and Related Security Holder Matters
    
    
    18Item 6.
    
    Selected Financial Data
    
    
    19Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 8.
    
    Financial Statements and Supplementary Data
    
    
    37Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    60Item 9A.
    
    Controls and Procedures
    
    
    60Item 9B.
    
    Other Information
    
    
    62Part IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    62Item 11.
    
    Executive Compensation
    
    
    62Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    62Item 13.
    
    Certain Relationships and Related Transactions
    
    
    62Item 14.
    
    Principal Accounting Fees and Services
    
    
    62Exhibit 10.26Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32
  -3-




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Part IVItem 15.
    
    Exhibits and Financial Statement Schedule
    
    
    62SIGNATURES
    
    
    
    
    65
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Explanatory Note
  
 PART I
 CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
    
 Item 1. Business.
    -5-




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Products
 Telecommunication Test Systems
   â
 DigiTest® and LoopCare
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
    
    the Common Object Request Broker Architecture (CORBA)-based Application Programming Interface;
    
    Benchmark Data Base;
    
    DSL Testing;
    
    the Advanced Testhead Feature Package;
    
    Batch Testing;
    
    Fax Unalert;
    
    Loop Length Reporting;
    
    Enabling Flow Through by Re-Classification of VER 55-58 Codes;
    
    LoopCare TCP/IP Communications Network;
    
    Testing Voice Services in a Broadband Passive Optical Network (bPON);
    
    Multi-DSL Prequalification Feature; and
    
    Breakthrough CPE and Fast Answering CPE Suppression.
  MCU
     Cable Testing Products
 TM
 Cheetah Cable Monitoring
  TM
 -7-




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CheetahIP HFC Service Assurance
    Services
  Operating Segment
  Sales and Competition
  Domestic Sales
    International Sales
  -8-




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Competitive Conditions
      Manufacturing
    Product and Technology Development
  -9-




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Proprietary Rights
  â â â â  SM
  Backlog
    Government Regulation
  Employees
  Executive Officers of the Company
  Mark B. Peterson
    
    Chief Executive Officer of the Company since January 2005; President
of the Company since January 2001; Executive Vice President, Sales
and Marketing, of the Company from November 1999 until January 2001;
Executive Vice President, Sales, of the Company from October 1997
until November 1999; prior thereto, Testing Application Group
product manager (MLT and Switched Access Remote Test Systems
(SARTS) product lines) of Lucent Technologies, a manufacturer of
communication systems, software and products (formerly AT&T Bell
Laboratories), from October 1995 until October 1997; Age 44.
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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 44.Richard A. Bair, Jr.
    
    Executive Vice President, Engineering/Testing, of the Company since
August 2000; Vice President Engineering, DigiTest, of the Company
from June 2000 until August 2000; Engineering Manager of the Company
from April 1999 until August 2000; prior thereto, Senior Design
Engineer of the Company from March 1996 until April 1999; Age 43.Robert E. Butter
    
    Director of Corporate Communications since January 2004; also,
Principal, Veritas Communication Advisors since January 2004; prior
thereto, Senior Vice President and Associate Director, Ketchum,
Inc.; Age 49.Carol M. Franklin
    
    Executive Vice President, Research and Development, of the Company
since January 2004; Executive Vice President, Software Products
Division, of the Company from January 2003 until January 2004;
General Manager, Software Products from July 2001 to January 2003;
Director of Order Management Development of Lucent Technologies, a
manufacturer of communication systems, software and products
(formerly AT&T Bell Laboratories), from May 2000 until July 2001;
Director for Integration Test of Lucent from September 1999 until
May 2000; Director for Starter Solutions for Emerging Carriers and
Internet Customer Care of Lucent Technologies from February 1999
until August 1999; prior thereto, Product Realization Leader of
Lucent Technologies from February 1996 until January 1999; Age 54.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 49.James R. McCall
    
    Director, Engineering, CATV Products since December 2004;
Engineering Manager, Project Engineering of the Company from
September 2000 to December 2004; prior thereto, Electrical Design
Engineer, Westinghouse Government Services Company, LLC; Age 35.Joseph G. OBrien
    
    Senior 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 46.Gregory L. Quiggle
    
    Executive Vice President, Marketing, of the Company since August
2001; Director of Marketing, Loop Products, of Acterna, LLC, a
global communications equipment company, from May 1998 until August
1998; prior thereto, Product Line Manager, TTC from May 1996 until
May 1998; Age 37.Matthew J. Rosgone
    
    Executive 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 37.Jarrod Siket
    
    Vice President, Marketing Software Solutions of the Company since
May 2005; prior thereto, Senior Director, Strategic Planning,
Marconi Communications from 2001 to May 2005; prior thereto,
Director, Product Line Planning at Marconi; Age 34.Roger A. Smith
    
    Executive Vice President, Technology, of the Company since June
2000; Senior Vice President, Test Systems, of the Company from July
1998 until June 2000; prior thereto, Senior Software Development
Engineer of Caldon Inc., a manufacturer of ultrasonic flow meters
for nuclear power industry; Age 45.Eric B. Sucharski
    
    Senior Vice President, RBOC Sales, of the Company since September
2003; Vice President, Eastern RBOC Sales, of the Company from
January 2003 until September 2003; Assistant Vice President, Sales,
from October 2002 to January 2003; Regional Sales Manager of the
Company from December 1998 to October 2002; Product Line Manager of
the Company from 1998 until 1999; Age 38.Jeffrey J. Tatusko
    
    Chief Information Officer of the Company since April 2003; prior
thereto, Director of Management Information Systems of the Company
from October 1997 until April 2003; Age 41.Gail M. Walsh
    
    Executive Vice President, Global Sales, of the Company since January
16, 2006; prior thereto, Sales Director, Lucent Technologies from
November 2000 to January 2006; prior thereto, Director, Software
Products Group at Lucent; Age 45.Stephanie M. Wedge
    
    Vice President, Professional Services, of the Company since November
1999; Sales Executive, Professional Services, of Inacom Corporation,
a reseller and integrator of client/server solutions for messaging,
from February 1998 until November 1999; prior thereto, Sales
Manager,
 - 11 -




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Business Development, of Digital Equipment Corporation, a manufacturer
and integrator of main-frame computers; Age 49.
 
 Item 1A.
 Risks Factors That Might Affect Future Operating Results and Financial Condition
  We depend upon a few major customers for a majority of our revenues, and the loss of any of these
customers, or the substantial reduction in the products that they purchase from us, would
significantly reduce our revenues and net income.
  
    
    the conditions of the telecommunications market and the economy in general;
    
    subscriber line loss and related reduced demand for wireline telecommunications services;
    
    changes or shifts in the technology utilized in the networks;
    
    labor disputes between our customers and their collective bargaining units;
    
    the failure to meet established purchase forecasts and growth projections;
    
    competition among the RBOCs, competitive exchange carriers and wireless telecommunications and cable
providers; and
    
    reorganizations, including management changes, at one or more of our customers or potential customers.
  Our operating results may vary from quarter to quarter, causing our stock price to fluctuate.
  The sales cycle for our software products is long, and the delay or failure to complete one or more
large license transactions in a quarter could cause our operating results to fall below our
expectations.
   - 12 -




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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 Services business is subject to a trend of reduced capital spending by our major customers.
  We have emphasized our network assurance and testing solutions and cable status monitoring
products.
   The sale of our products is dependent upon our ability to satisfy the proprietary requirements of
our customers and to respond to rapid technological change, including evolving industry-wide
standards.
   - 13 -




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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.
  Our products could infringe the intellectual property rights of others, and resulting claims
against us could be costly and require us to enter into disadvantageous license or royalty
arrangements.
   Our reliance on third parties to manufacture certain aspects of our products involves risks,
including, delays in product shipments and reduced control over product quality.
  If we are unable to satisfy our customers specific product quality, certification or network
requirements, our business could be disrupted and our financial condition could be harmed.
  - 14 -




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We have completed, and may pursue additional acquisitions, which will complicate our management
tasks and could result in substantial expenditures.
   The failure of acquired assets to meet expectations, or a decline on our fair value determined by
market prices of our stock, could indicate impairment of our intangible assets and result in
impairment charges.
  Our future sales in international markets are subject to numerous risks and uncertainties.
  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.
  - 15 -




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Our future results are dependent on our ability to establish, maintain and expand our distribution
channels and our existing third-party distributors.
  We face intense competition, which could result in our losing market share or experiencing a
decline in our gross margins.
   We are dependent upon our ability to attract, retain and motivate our key personnel.
  Consolidations in, or a continued slowdown in, the telecommunications industry could harm our
business.
  Our expenses are relatively fixed in the short term, and we may be unable to adjust spending to
compensate for unexpected revenue shortfalls.
  Our restructuring and cost reduction plans may be ineffective or may limit our ability to compete.
  - 16 -




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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 by stock market analysts regarding us or our competitors;
    
    Announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures
or capital commitments;
    
    Announcements by our customers regarding end market conditions and the status of existing and future
infrastructure network deployments;
    
    Additions or departures of key personnel; and
    
    Future equity or debt offerings or our announcements of these offerings.
  We may be subject from time to time to legal proceedings, and any adverse determinations in these
proceedings could materially harm our business.
  - 17 -




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Item 1B. Unresolved Staff Comments.
  
 Item 2. Properties.
    
 Item 3. Legal Proceedings.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 PART II
 
 Item 5. Market for the Registrants Common Stock and Related Security Holder Matters.
  2005
    
    2004High
    
    Low
    
    High
    
    LowFirst Quarter
    
    $
    12.21
    
    
    $
    7.07
    
    
    $
    19.69
    
    
    $
    14.84Second Quarter
    
    $
    8.00
    
    
    $
    6.64
    
    
    $
    16.45
    
    
    $
    9.75Third Quarter
    
    $
    11.47
    
    
    $
    7.28
    
    
    $
    11.08
    
    
    $
    7.57Fourth Quarter
    
    $
    11.71
    
    
    $
    8.03
    
    
    $
    12.63
    
    
    $
    8.35
    - 18 -




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Item 6. Selected Financial Data.
  (IN THOUSANDS, EXCEPT PER SHARE DATA AND
NUMBER OF EMPLOYEES)
 YEARS ENDED DECEMBER 31,2001(1)
    
    2002(1)
    
    2003(2)
    
    2004(2)Restated
    
    Restated
    
    Restated
    
    Restated
    
    2005Revenues:Products
    
    $
    77,612
    
    
    $
    48,146
    
    
    $
    52,802
    
    
    $
    49,770
    
    
    $
    53,007Services
    
    
    4,627
    
    
    
    10,428
    
    
    
    12,298
    
    
    
    13,048
    
    
    
    13,31282,239
    (3)
    
    
    58,574
    
    
    
    65,100
    (4)
    
    
    62,818
    
    
    
    66,319Cost of sales:Products
    
    
    33,134
    
    
    
    20,800
    
    
    
    22,966
    
    
    
    22,191
    
    
    
    24,326Services
    
    
    2,555
    
    
    
    3,319
    
    
    
    3,766
    
    
    
    3,768
    
    
    
    3,883Amortization
    
    
    478
    
    
    
    1,915
    
    
    
    2,919
    
    
    
    2,624
    
    
    
    3,004Impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42436,167
    
    
    
    26,034
    
    
    
    29,651
    
    
    
    28,583
    
    
    
    31,637Gross profit
    
    
    46,072
    
    
    
    32,540
    
    
    
    35,449
    
    
    
    34,235
    
    
    
    34,682Operating expenses:Selling and marketing
    
    
    9,160
    
    
    
    8,766
    
    
    
    9,388
    
    
    
    9,483
    
    
    
    8,882General and administrative
    
    
    4,827
    
    
    
    5,489
    
    
    
    6,997
    
    
    
    7,346
    
    
    
    7,486Research and development
    
    
    12,428
    
    
    
    13,839
    
    
    
    14,925
    
    
    
    15,756
    
    
    
    14,079Severance and related expense
    
    
    291
    
    
    
    176
    
    
    
    
    
    
    
    269
    
    
    
    775Total operating expenses
    
    
    26,706
    
    
    
    28,270
    
    
    
    31,310
    
    
    
    32,854
    
    
    
    31,222Income from operations
    
    
    19,366
    
    
    
    4,270
    
    
    
    4,139
    
    
    
    1,381
    
    
    
    3,460Other income, net
    
    
    2,796
    
    
    
    693
    
    
    
    400
    
    
    
    447
    
    
    
    1,359Income before income taxes
    
    
    22,162
    
    
    
    4,963
    
    
    
    4,539
    
    
    
    1,828
    
    
    
    4,819Provision for income taxes
    
    
    8,556
    
    
    
    1,886
    
    
    
    1,719
    
    
    
    914
    
    
    
    1,301Net income
    
    $
    13,606
    
    
    $
    3,077
    
    
    $
    2,820
    
    
    $
    914
    
    
    $
    3,518EARNINGS PER SHARE INFORMATION:Net income per common share:Basic
    
    $
    1.04
    
    
    $
    0.23
    
    
    $
    0.22
    
    
    $
    0.07
    
    
    $
    0.27Diluted
    
    $
    1.01
    
    
    $
    0.23
    
    
    $
    0.21
    
    
    $
    0.07
    
    
    $
    0.27Weighted average shares
of common stock equivalents:Basic
    
    
    13,038
    
    
    
    13,095
    
    
    
    13,106
    
    
    
    13,141
    
    
    
    13,168Diluted
    
    
    13,412
    
    
    
    13,314
    
    
    
    13,313
    
    
    
    13,253
    
    
    
    13,2172001(1)
    
    
    2002(1)
    
    
    2003(1)
    
    
    2004(2)
    
    
    2005BALANCE SHEET DATA:Working Capital
    
    $
    67,672
    
    
    $
    73,639
    
    
    $
    65,944
    
    
    $
    70,845
    
    
    
    80,806Total Assets
    
    
    146,561
    
    
    
    147,354
    
    
    
    152,777
    
    
    
    157,145
    
    
    
    163,329Shareholders Equity
    
    
    140,069
    
    
    
    142,007
    
    
    
    145,152
    
    
    
    146,401
    
    
    
    150,2612001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005OTHER DATA:(5)Number of employees at year end
    
    
    341
    
    
    
    250
    
    
    
    304
    
    
    
    262
    
    
    
    253
 - 19 -




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(1)
    
    The Company restated its Consolidated Financial Statements for the years ended December 31,
2004 and 2003 to correct errors relating to the amortization of LoopCare Base Software and Cheetah
Customer Base. See Note 2 to the Consolidated Financial Statements contained in Item 8 of this
Form 10-K for additional information. The selected financial data for the years ending December
31, 2002 and 2001 reflect the adjustments to recognize amortization
for intangible assets. These adjustments decrease operating income by
approximately $0.5 million and $0.1 million for the years ended December 31, 2002 and 2001,
respectively. The restatement decreased net earnings by approximately $0.3 million and
$0.1 million for the years ended December 31, 2002 and 2001, respectively.(2)
    
    This selected consolidated financial data has been derived from the consolidated financial
statements in Item 8 of this Form 10-K, which as described in Note 2 thereto, have been restated.(3)
    
    Includes $4,453 related to the LoopCare product line which was acquired on September 30, 2001.(4)
    
    Includes $14,826 related to the Cheetah product line which was acquired on February 13, 2003.(5)
    
    Data is unaudited and not derived from the Companys audited consolidated financial statements. - 20 -




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Restatement
   Overview
    
    
    incumbent telephone carriers continue to lose customers and revenue to smaller,
independent carriers many of whom are developing their own networks and intend to compete
on price;
    
    although cable providers have taken the lead in the broadband service market, primarily
because cable modem technology was perfected before DSL technology and because telephone
providers are regulated much more than cable companies, the rate of adoption of DSL
technology is quickly growing; and
    
    both cable and telephone companies (as well as the providers of satellite, wireless and
other information mediums) are eager to market the so-called triple-play of voice, data
and video broadband services.
   - 21 -




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Industry and Market Trends
     Intense Competition Among Telecommunications Service Providers
 - 22 -




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Consolidation in Telecommunications Market
  Slowdown in Build-Out of POTS Networks
  Investment in New Network Infrastructure and Technologies
   - 23 -




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Our Responses to These Industry Trends
  Expansion of Cable Status Monitoring Product Line
   Development and Marketing of Solutions
  - 24 -




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Increased Features for our Telecommunications Products
   - 25 -




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Increased International Sales
   Other Company Trends
   Application of Critical Accounting Policies
  - 26 -




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Revenue Recognition
      Intangible Assets and Goodwill
   - 27 -




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YearsCarrying
    
    
    2006Original
    
    
    Remaining Life
    
    
    Value at
    
    
    ProjectedAsset Description
    
    Life
    
    
    at 12/31/05
    
    
    12/31/05
    
    
    AmortizationLoopCareBase Software
    
    
    10
    
    
    
    5.75
    
    
    $
    2.6
    
    
    $
    0.5Post-Warranty
Maintenance Service
Agreements
    
    
    50
    
    
    
    49.75
    
    
    
    31.8
    
    
    
    0.6CheetahBase Software
    
    
    10
    
    
    
    7
    
    
    
    2.1
    
    
    
    0.3Proprietary Technology
    
    
    10
    
    
    
    7
    
    
    
    0.7
    
    
    
    0.1Customer Base
    
    
    15
    
    
    
    12
    
    
    
    2.2
    
    
    
    0.3OtherExclusivity Agreement
    
    
    5
    
    
    
    3.25
    
    
    
    0.5
    
    
    
    0.1$
    39.9
    
    
    $
    1.9
    - 28 -




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Inventory Valuation
    Allowance for Doubtful Accounts
   Income Taxes
  - 29 -




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Warranty
   Results of Operations for the Year Ended December 31, 2005 Compared to the Year Ended December 31,
2004
 Revenue
       - 30 -




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Gross Profit
  Selling and Marketing Expenses
  General and Administrative Expenses
  Research and Development Expenses
  Retirement/Severance and related expenses
     Other Income
  Provisions for Income Taxes
  - 31 -




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Net Income and Earnings Per Share
  Results of Operations for the Year Ended December 31, 2004 Compared to the Year Ended December 31,
2003
 Revenue
      Gross Profit
  Selling and Marketing Expenses
  General and Administrative Expenses
 - 32 -




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Research and Development Expenses
  Severance and related expenses
  Other Income
  Provisions for Income Taxes
  Net Income and Earnings Per Share
  Cheetah Acquisition
  Liquidity and Capital Resources
  - 33 -




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Recent Development
  Off-Balance Sheet Arrangements
  Related Party Transaction
  Commitments and Contractual Obligations
   - 34 -




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Payments due by period2005
    
    Total
    
    Less than 1 year
    
    1-3 years
    
    3-5 years
    
    More than 5 yearsOperating Lease
Obligations
    
    
    2,197
    
    
    
    1,312
    
    
    
    828
    
    
    
    57
    
    
    
    Purchase Obligations
    
    
    372
    
    
    
    364
    
    
    
    8
    
    
    
    
    
    
    
    Total
    
    
    2,569
    
    
    
    1,676
    
    
    
    836
    
    
    
    57
    
    
    
    
 Payments due by period2004
    
    Total
    
    Less than 1 year
    
    1-3 years
    
    3-5 years
    
    More than 5 yearsOperating Lease
Obligations
    
    
    3,072
    
    
    
    1,583
    
    
    
    1,343
    
    
    
    146
    
    
    
    Purchase Obligations
    
    
    1,326
    
    
    
    1,283
    
    
    
    43
    
    
    
    
    
    
    
    Total
    
    
    4,398
    
    
    
    2,866
    
    
    
    1,386
    
    
    
    146
    
    
    
    
  
 Key Ratios
  RECENT ACCOUNTING PRONOUNCEMENTS
  Shared-Based Payment.
 - 35 -




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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
  - 36 -




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Statements
of Operations Data by Fiscal Quarter (Unaudited) (dollars in Thousands)
  March 27,
    
    June 26,
    
    Sept. 25,
    
    Dec. 31,
    
    March 26,
    
    June 25,
    
    Sept. 24,2004
    
    2004
    
    2004
    
    2004
    
    2005
    
    2005
    
    2005
    
    Dec. 31,Restated
    
    Restated
    
    Restated
    
    Restated
    
    Restated
    
    Restated
    
    Restated
    
    2005Revenue
    
    
    17,607
    
    
    
    15,466
    
    
    
    13,638
    
    
    
    16,107
    
    
    
    14,275
    
    
    
    17,092
    
    
    
    16,802
    
    
    
    18,150Gross profit
    
    
    10,108
    
    
    
    7,540
    
    
    
    7,475
    
    
    
    9,112
    
    
    
    6,713
    
    
    
    9,270
    
    
    
    8,762
    
    
    
    9,937Net income (loss)
    
    $
    992
    
    
    $
    (280
    )
    
    $
    (378
    )
    
    $
    580
    
    
    $
    (845
    )
    
    $
    1,055
    
    
    $
    1,471
    
    
    $
    1,837Earnings (Loss) Per Share
InformationWeighted average sharesBasic
    
    
    13,120
    
    
    
    13,132
    
    
    
    13,148
    
    
    
    13,141
    
    
    
    13,161
    
    
    
    13,161
    
    
    
    13,162
    
    
    
    13,185Diluted
    
    
    13,352
    
    
    
    13,132
    
    
    
    13,148
    
    
    
    13,225
    
    
    
    13,161
    
    
    
    13,168
    
    
    
    13,221
    
    
    
    13,275Basic
    
    $
    0.08
    
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    0.04
    
    
    $
    (0.06
    )
    
    $
    0.08
    
    
    $
    0.11
    
    
    $
    0.14Diluted
    
    $
    0.07
    
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    0.04
    
    
    $
    (0.06
    )
    
    $
    0.08
    
    
    $
    0.11
    
    
    $
    0.14
 2004 As Originally Reported
    
    2005 As Originally ReportedMarch 27,
    
    June 26,
    
    Sept. 25,
    
    Dec. 31,
    
    March 26,
    
    June 25,
    
    Sept. 24,
    
    Dec. 31,Revenues:
    
    
    17,607
    
    
    
    15,466
    
    
    
    13,638
    
    
    
    16,107
    
    
    
    14,275
    
    
    
    17,092
    
    
    
    16,802
    
    
    
    18,150Gross profit
    
    
    10,260
    
    
    
    7,692
    
    
    
    7,627
    
    
    
    9,264
    
    
    
    6,887
    
    
    
    9,444
    
    
    
    8,937
    
    
    
    9,937Net income (loss)
    
    $
    1,080
    
    
    $
    (135
    )
    
    $
    (274
    )
    
    $
    674
    
    
    $
    (731
    )
    
    $
    1,168
    
    
    $
    1,584
    
    
    $
    1,837Earnings (Loss) Per Share Information:Weighted average sharesBasic
    
    
    13,120
    
    
    
    13,132
    
    
    
    13,148
    
    
    
    13,141
    
    
    
    13,161
    
    
    
    13,161
    
    
    
    13,162
    
    
    
    13,185Diluted
    
    
    13,352
    
    
    
    13,132
    
    
    
    13,148
    
    
    
    13,225
    
    
    
    13,161
    
    
    
    13,168
    
    
    
    13,221
    
    
    
    13,275Net income (loss) per common share:Basic
    
    $
    0.08
    
    
    
    (0.01
    )
    
    
    (0.02
    )
    
    $
    0.05
    
    
    $
    (0.06
    )
    
    $
    0.09
    
    
    $
    0.12
    
    
    $
    0.14Diluted
    
    $
    0.08
    
    
    
    (0.01
    )
    
    
    (0.02
    )
    
    $
    0.05
    
    
    $
    (0.06
    )
    
    $
    0.09
    
    
    $
    0.12
    
    
    $
    0.14
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##### Table of Contents



Financial Statements and Supplementary Data.
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Report of Independent Registered Accounting FirmConsolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statements of Changes in Shareholders EquityConsolidated Statements of Cash FlowsNotes to Consolidated Financial StatementsStatements of Operations Data by Quarter*Schedule II  Valuation and Qualifying Accounts
 
 * Not part of audited financial information - 38 -




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
   Consolidated financial statements and financial statement schedule
 
  Internal control over financial reporting
 Internal
Control  Integrated Framework Internal Control  Integrated Framework
 - 39 -




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- 40 -




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Tollgrade Communications, Inc. and Subsidiaries
 
 Consolidated Balance Sheets
 In thousands (except par value)
 December 31, 2004ASSETS
    
    Restated
    
    
    December 31, 2005Current assets:Cash and cash equivalents
    
    $
    32,622
    
    
    $
    49,421Short-term investments
    
    
    18,537
    
    
    
    18,010Accounts receivable:Trade, net of allowance for doubtful accounts at $754 in 2004 and $465 in 2005
    
    
    10,691
    
    
    
    9,456Other
    
    
    106
    
    
    
    1,406Inventories
    
    
    12,941
    
    
    
    9,934Prepaid expenses and deposits
    
    
    2,543
    
    
    
    1,397Refundable income taxes
    
    
    964
    
    
    
    652Deferred tax assets
    
    
    1,143
    
    
    
    1,151Total current assets
    
    
    79,547
    
    
    
    91,427Property and equipment, net
    
    
    7,860
    
    
    
    6,390Deferred tax assets
    
    
    197
    
    
    
    46Intangibles
    
    
    40,518
    
    
    
    39,517Goodwill
    
    
    22,220
    
    
    
    21,562Capitalized software costs, net
    
    
    6,453
    
    
    
    4,099Receivable from officer
    
    
    156
    
    
    
    153Other assets
    
    
    194
    
    
    
    135Total assets
    
    $
    157,145
    
    
    $
    163,329LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,087
    
    
    $
    1,262Accrued warranty
    
    
    2,081
    
    
    
    2,220Accrued expenses
    
    
    1,735
    
    
    
    2,579Accrued salaries and wages
    
    
    718
    
    
    
    660Accrued royalties payable
    
    
    451
    
    
    
    581Income taxes payable
    
    
    169
    
    
    
    869Deferred income
    
    
    2,461
    
    
    
    2,450Total current liabilities
    
    
    8,702
    
    
    
    10,621Deferred tax liabilities
    
    
    2,042
    
    
    
    2,447Total liabilities
    
    
    10,744
    
    
    
    13,068Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Preferred stock, $1.00 par value;
authorized shares, 10,000; issued shares, -0- in 2004 and 2005
    
    
    
    
    
    
    Common stock, $ .20 par valueauthorized shares,
50,000; issued shares, 13,623 in 2004 and 13,664 in 2005
    
    
    2,725
    
    
    
    2,733Additional paid-in capital
    
    
    71,135
    
    
    
    71,469Treasury stock, at cost, 462 shares in 2004 and 2005
    
    
    (4,791
    )
    
    
    (4,791
    )Retained earnings
    
    
    77,332
    
    
    
    80,850Total shareholders equity
    
    
    146,401
    
    
    
    150,261Total liabilities and shareholders equity
    
    $
    157,145
    
    
    $
    163,329
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Tollgrade Communications, Inc. and Subsidiaries
 
 Consolidated Statements of Operations
 In thousands (except per share data)
 Years Ended December 31,2003
    
    
    2004Restated
    
    
    Restated
    
    
    2005Revenues:Products
    
    $
    52,802
    
    
    $
    49,770
    
    
    $
    53,007Services
    
    
    12,298
    
    
    
    13,048
    
    
    
    13,31265,100
    
    
    
    62,818
    
    
    
    66,319Cost of sales:Products
    
    
    22,966
    
    
    
    22,191
    
    
    
    24,326Services
    
    
    3,766
    
    
    
    3,768
    
    
    
    3,883Amortization
    
    
    2,919
    
    
    
    2,624
    
    
    
    3,004Impairment
    
    
    
    
    
    
    
    
    
    
    42429,651
    
    
    
    28,583
    
    
    
    31,637Gross profit
    
    
    35,449
    
    
    
    34,235
    
    
    
    34,682Operating expenses:Selling and marketing
    
    
    9,388
    
    
    
    9,483
    
    
    
    8,882General and administrative
    
    
    6,997
    
    
    
    7,346
    
    
    
    7,486Research and development
    
    
    14,925
    
    
    
    15,756
    
    
    
    14,079Severance and related expense
    
    
    
    
    
    
    269
    
    
    
    775Total operating expense
    
    
    31,310
    
    
    
    32,854
    
    
    
    31,222Income from operations
    
    
    4,139
    
    
    
    1,381
    
    
    
    3,460Other income:Interest income
    
    
    400
    
    
    
    447
    
    
    
    1,359Total other income
    
    
    400
    
    
    
    447
    
    
    
    1,359Income before income taxes
    
    
    4,539
    
    
    
    1,828
    
    
    
    4,819Provision for income taxes
    
    
    1,719
    
    
    
    914
    
    
    
    1,301Net income
    
    $
    2,820
    
    
    $
    914
    
    
    $
    3,518EARNINGS PER SHARE INFORMATION:Weighted average shares of common stock
and equivalents:Basic
    
    
    13,106
    
    
    
    13,141
    
    
    
    13,168Diluted
    
    
    13,313
    
    
    
    13,253
    
    
    
    13,217Net income per common share:Basic
    
    $
    0.22
    
    
    $
    0.07
    
    
    $
    0.27Diluted
    
    $
    0.21
    
    
    $
    0.07
    
    
    $
    0.27
  - 42 -




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##### Table of Contents



Tollgrade Communications, Inc. and Subsidiaries
 
 Consolidated Statements of Changes in Shareholders Equity
 In thousands
 AdditionalPreferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Treasury
    
    
    RetainedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Earnings
    
    
    TotalBalance, December
31, 2002  as
originally reported
    
    
    
    
    
    
    
    
    
    
    13,553
    
    
    
    2,711
    
    
    
    70,489
    
    
    
    (4,791
    )
    
    
    73,947
    
    
    
    142,356Restatement -
adjustments (Note
2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (349
    )
    
    
    (349
    )Balance at
December 31, 2002-
as restated
    
    
    
    
    
    
    
    
    
    
    13,553
    
    
    
    2,711
    
    
    
    70,489
    
    
    
    (4,791
    )
    
    
    73,598
    
    
    
    142,007Exercise of common
stock options
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    5
    
    
    
    243
    
    
    
    
    
    
    
    
    
    
    
    248Tax benefit from
exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    77Net income-restated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,820
    
    
    
    2,820Balance at December
31, 2003 - restated
    
    
    
    
    
    
    
    
    
    
    13,580
    
    
    
    2,716
    
    
    
    70,809
    
    
    
    (4,791
    )
    
    
    76,418
    
    
    
    145,152Exercise of common
stock options
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    9
    
    
    
    261
    
    
    
    
    
    
    
    
    
    
    
    270Tax benefit from
exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    65Net income-restated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    914
    
    
    
    914Balance at December
31, 2004 - restated
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    3,518Balance at December
31, 2005
    
    
    
    
    
    
    
    
    
    
    13,664
    
    
    
    2,733
    
    
    
    71,469
    
    
    
    (4,791
    )
    
    
    80,850
    
    
    
    150,261
  - 43 -




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##### Table of Contents



Tollgrade Communications, Inc. and Subsidiaries
 
 Consolidated Statements of Cash Flows (In Thousands)
 Years Ended December 31,2003
    
    
    2004Restated
    
    
    Restated
    
    
    2005Cash flows from operating activities:Net income
    
    $
    2,820
    
    
    $
    914
    
    
    $
    3,518Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    5,287
    
    
    
    5,238
    
    
    
    5,450Tax benefit from exercise of stock options
    
    
    77
    
    
    
    65
    
    
    
    43Deferred income taxes
    
    
    1,050
    
    
    
    2,194
    
    
    
    548Provision for losses on inventory
    
    
    (878
    )
    
    
    (45
    )
    
    
    545Impairment of acquired intangible assets
    
    
    
    
    
    
    
    
    
    
    424Provision for allowance for doubtful accounts
    
    
    441
    
    
    
    (162
    )
    
    
    (289
    )Changes in assets and liabilities:Decrease (increase) in accounts receivable  trade
    
    
    (1,750
    )
    
    
    (1,274
    )
    
    
    1,524(Increase) decrease in accounts receivable  other
    
    
    30
    
    
    
    16
    
    
    
    (1,300
    )Decrease (increase) in inventories
    
    
    5,117
    
    
    
    (1,741
    )
    
    
    2,462Decrease (increase) in prepaid expenses deposits and other assets
    
    
    (93
    )
    
    
    (1,027
    )
    
    
    1,208Refund (utilization) of income taxes paid
    
    
    253
    
    
    
    (581
    )
    
    
    312Increase in accounts payable
    
    
    508
    
    
    
    79
    
    
    
    175Increase (decrease) in accrued warranty
    
    
    (55
    )
    
    
    (69
    )
    
    
    139Increase (decrease) in accrued expenses and deferred income
    
    
    (568
    )
    
    
    3,127
    
    
    
    1,012Increase in accrued royalties payable
    
    
    73
    
    
    
    56
    
    
    
    130(Decrease) increase in accrued salaries and wages
    
    
    368
    
    
    
    (194
    )
    
    
    (58
    )Increase (decrease) in income taxes payable
    
    
    327
    
    
    
    (850
    )
    
    
    700Net cash provided by operating activities:
    
    
    13,007
    
    
    
    5,746
    
    
    
    16,543Cash flows from investing activities:Purchase of investments
    
    
    (4,936
    )
    
    
    (15,246
    )
    
    
    (19,340
    )Redemption/maturity of investments
    
    
    6,640
    
    
    
    14,333
    
    
    
    19,867Capital expenditures, including capitalized software
    
    
    (2,800
    )
    
    
    (2,826
    )
    
    
    (1,049
    )Investments in other assets
    
    
    
    
    
    
    (715
    )
    
    
    Purchase of Cheetah
    
    
    (14,899
    )
    
    
    
    
    
    
    479Net cash used in investing activities:
    
    
    (15,995
    )
    
    
    (4,454
    )
    
    
    (43
    )Cash flows from financing activities:Proceeds from the exercise of stock options
    
    
    248
    
    
    
    270
    
    
    
    299Net cash provided by financing activities:
    
    
    248
    
    
    
    270
    
    
    
    299Net increase (decrease) in cash and cash equivalents
    
    
    (2,740
    )
    
    
    1,562
    
    
    
    16,799Cash and cash equivalents at beginning of period
    
    $
    33,799
    
    
    $
    31,060
    
    
    $
    32,622Cash and cash equivalents at end of period
    
    $
    31,059
    
    
    $
    32,622
    
    
    $
    49,421Supplemental disclosure of cash flow information:Cash paid during the year for income taxes
    
    $
    14
    
    
    $
    29
    
    
    
    Supplemental disclosure of non-cash financing activity:Final purchase price adjustment
    
    $
    212
    
    
    
    
    
    
    
    179
  - 44 -




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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
   PRODUCT WARRANTY
  - 45 -




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##### Table of Contents



REVENUE RECOGNITION
      COST OF SALES
  GOODWILL AND INTANGIBLE ASSETS
  - 46 -




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##### Table of Contents



RESEARCH AND DEVELOPMENT COSTS
  CAPITALIZED SOFTWARE COSTS
  INCOME TAXES
  SEGMENT INFORMATION
  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
  RECLASSIFICATIONS
  - 47 -




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##### Table of Contents



ACCOUNTING FOR STOCK-BASED COMPENSATION
  2003
    
    
    2004Restated
    
    
    Restated
    
    
    2005Net income, as reported
    
    $
    2,820
    
    
    $
    914
    
    
    $
    3,518Deduct: Total
stock-based employee
compensation expense
based on the fair value
method for all awards,
net of related tax
effects.
    
    
    1,855
    
    
    
    340
    
    
    
    296Pro forma net income
    
    $
    965
    
    
    $
    574
    
    
    $
    3,222Earnings per share:Basic  as reported
    
    $
    0.22
    
    
    $
    0.07
    
    
    $
    0.27Basic  pro forma
    
    $
    0.07
    
    
    $
    0.04
    
    
    $
    0.24Diluted  as reported
    
    $
    0.21
    
    
    $
    0.07
    
    
    $
    0.27Diluted  pro forma
    
    $
    0.07
    
    
    $
    0.04
    
    
    $
    0.24
  RECENT ACCOUNTING PRONOUNCEMENTS
  Shared-Based Payment.
 2. RESTATEMENT
   - 48 -




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##### Table of Contents



BALANCE SHEET
 December 31, 2003
    
    
    December 31, 2003
    
    
    December 31, 2004
    
    
    December 31, 2004ASSETS
    
    As Reported
    
    
    As Restated
    
    
    As Reported
    
    
    As RestatedCurrent assets
    
    $
    72,496
    
    
    $
    72,496
    
    
    $
    79,547
    
    
    $
    79,547Intangibles
    
    
    44,500
    
    
    
    40,518
    
    
    
    45,108
    
    
    
    40,518Goodwill
    
    
    19,340
    
    
    
    22,220
    
    
    
    19,340
    
    
    
    22,220Other assets
    
    
    17,493
    
    
    
    17,543
    
    
    
    14,839
    
    
    
    14,860Total assets
    
    $
    153,829
    
    
    $
    152,777
    
    
    $
    158,834
    
    
    $
    157,145LIABILITIES AND SHAREHOLDERS EQUITYTotal current liabilities
    
    $
    6,552
    
    
    $
    6,552
    
    
    $
    8,702
    
    
    $
    8,702Deferred tax liabilities
    
    
    1,448
    
    
    
    1,073
    
    
    
    2,623
    
    
    
    2,042Total liabilities
    
    
    8,000
    
    
    
    7,625
    
    
    
    11,325
    
    
    
    10,744Total shareholders equity
    
    
    145,829
    
    
    
    145,152
    
    
    
    147,509
    
    
    
    146,401Total liabilities and shareholders equity
    
    $
    153,829
    
    
    $
    152,777
    
    
    $
    158,834
    
    
    $
    157,145
 Years Ended December 31,2003
    
    
    2003
    
    
    2004
    
    
    2004CONSOLIDATED STATEMENTS OF OPERATIONS
    
    As Reported
    
    
    As Restated
    
    
    As Reported
    
    
    As RestatedRevenues:
    
    $
    65,100
    
    
    $
    65,100
    
    
    $
    62,818
    
    
    $
    62,818Cost of sales:Products and services
    
    
    26,732
    
    
    
    26,732
    
    
    
    25,959
    
    
    
    25,959Amortization
    
    
    2,381
    
    
    
    2,919
    
    
    
    2,017
    
    
    
    2,62429,113
    
    
    
    29,651
    
    
    
    27,976
    
    
    
    28,583Gross profit
    
    
    35,987
    
    
    
    35,449
    
    
    
    34,842
    
    
    
    34,235Total operating expenses
    
    
    31,310
    
    
    
    31,310
    
    
    
    32,854
    
    
    
    32,854Income from operations
    
    
    4,677
    
    
    
    4,139
    
    
    
    1,988
    
    
    
    1,381Total other income
    
    
    400
    
    
    
    400
    
    
    
    447
    
    
    
    447Income before taxes
    
    
    5,077
    
    
    
    4,539
    
    
    
    2,435
    
    
    
    1,828Provision for income taxes
    
    
    1,929
    
    
    
    1,719
    
    
    
    1,090
    
    
    
    914Net income
    
    $
    3,148
    
    
    $
    2,820
    
    
    $
    1,345
    
    
    $
    914EARNINGS PER SHARE INFORMATION:Basic Weighted Average Shares of Common Stock and Equivalents
    
    
    13,106
    
    
    
    13,106
    
    
    
    13,141
    
    
    
    13,141Diluted Weighted Average Shares of Common Stock and Equivalents
    
    
    13,313
    
    
    
    13,313
    
    
    
    13,253
    
    
    
    13,253Basic Net Income per Common Share
    
    $
    0.24
    
    
    $
    0.22
    
    
    $
    0.10
    
    
    $
    0.07Diluted Net Income per Common Share
    
    $
    0.24
    
    
    $
    0.21
    
    
    $
    0.10
    
    
    $
    0.07
  - 49 -




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##### Table of Contents



3. INTANGIBLE ASSETS
  December 31, 2004 (Restated)
    
    December 31, 2005EstimatedUseful Life
    
    
    
    
    
    Accumulated
    
    
    
    
    
    
    
    
    
    Accumulated(In Years)
    
    Gross
    
    Amortization
    
    Net
    
    Gross
    
    Amortization
    
    NetNon-amortized intangible
assets:Cheetah Trademark
    
    
    
    
    
    $
    1,000
    
    
    $
    
    
    
    $
    1,000
    
    
    $
    1,000
    
    
    $
    
    
    
    $
    1,000LoopCare trade name
    
    
    
    
    
    
    1,300
    
    
    
    
    
    
    
    1,300
    
    
    
    1,300
    
    
    
    
    
    
    
    1,300LoopCare post warranty
maintenance
service agreements
    
    
    
    
    
    
    32,000
    
    
    
    
    
    
    
    32,000
    
    
    
    
    
    
    
    
    
    
    
    Total Non-amortized
Intangibles
    
    
    
    
    
    $
    34,300
    
    
    $
    
    
    
    $
    34,300
    
    
    $
    2,300
    
    
    $
    
    
    
    $
    2,300Amortized intangible
assets:Cheetah Maintenance
    
    
    10
    
    
    $
    160
    
    
    $
    21
    
    
    $
    139
    
    
    $
    160
    
    
    $
    41
    
    
    $
    119Exclusivity agreement
    
    
    5
    
    
    
    715
    
    
    
    107
    
    
    
    608
    
    
    
    715
    
    
    
    250
    
    
    
    465Customer Base  Cheetah
    
    
    15
    
    
    
    2,650
    
    
    
    223
    
    
    
    2,427
    
    
    
    2,650
    
    
    
    449
    
    
    
    2,201Base software  LoopCare
    
    
    10
    
    
    
    4,510
    
    
    
    1,466
    
    
    
    3,044
    
    
    
    4,510
    
    
    
    1,918
    
    
    
    2,592LoopCare post warranty
maintenance service
agreements
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,000
    
    
    
    160
    
    
    
    31,840Total Amortized
Intangible Assets
    
    
    
    
    
    $
    8,035
    
    
    $
    1,817
    
    
    $
    6,218
    
    
    $
    40,035
    
    
    $
    2,818
    
    
    $
    37,217Total Intangible Assets
    
    
    
    
    
    $
    42,335
    
    
    $
    1,817
    
    
    $
    40,518
    
    
    $
    42,335
    
    
    $
    2,818
    
    
    $
    39,517Capitalized software:Clear Software Purchase
    
    
    1
    
    
    $
    538
    
    
    $
    11
    
    
    $
    527
    
    
    $
    538
    
    
    $
    522
    
    
    $
    16Proprietary technology -
Cheetah
    
    
    10
    
    
    
    1,000
    
    
    
    192
    
    
    
    808
    
    
    
    1,000
    
    
    
    292
    
    
    
    708Base software  Cheetah
    
    
    10
    
    
    
    2,900
    
    
    
    556
    
    
    
    2,344
    
    
    
    2,900
    
    
    
    846
    
    
    
    2,054LoopCare developed
product software
    
    
    5
    
    
    
    7,591
    
    
    
    4,817
    
    
    
    2,774
    
    
    
    7,664
    
    
    
    6,343
    
    
    
    1,321Total capitalized software
    
    
    
    
    
    $
    12,029
    
    
    $
    5,576
    
    
    $
    6,453
    
    
    $
    12,102
    
    
    $
    8,003
    
    
    $
    4,099Goodwill
    
    
    
    
    
    $
    22,220
    
    
    $
    
    
    
    $
    22,220
    
    
    $
    21,562
    
    
    $
    
    
    
    $
    21,562
    - 50 -




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##### Table of Contents



4. INVENTORIES
  December 31, 2004
    
    December 31, 2005Raw materials
    
    $
    7,631
    
    
    $
    5,582Work in process
    
    
    4,442
    
    
    
    3,449Finished goods
    
    
    2,288
    
    
    
    2,86814,361
    
    
    
    11,899Reserves for slow moving and obsolete inventory
    
    
    (1,420
    )
    
    
    (1,965
    )$
    12,941
    
    
    $
    9,934
 5. PROPERTY AND EQUIPMENT
  Years
    
    December 31, 2004
    
    December 31, 2005Test equipment and tooling
    
    
    3-7
    
    
    $
    9,810
    
    
    $
    10,383Office equipment and fixtures
    
    
    5-7
    
    
    
    8,438
    
    
    
    8,606Leasehold improvements
    
    
    1-5
    
    
    
    2,477
    
    
    
    2,486Building
    
    
    20
    
    
    
    142
    
    
    
    14220,867
    
    
    
    21,617Less accumulated depreciation and amortization
    
    
    
    
    
    
    (14,502
    )
    
    
    (16,722
    )6,365
    
    
    
    4,895Land
    
    
    
    
    
    
    1,495
    
    
    
    1,495$
    7,860
    
    
    $
    6,390
  6. PRODUCT WARRANTY
  December 31, 2004
    
    December 31, 2005Balance at the beginning of the year
    
    $
    2,150
    
    
    $
    2,081Accruals for warranties issued during the year
    
    
    1,435
    
    
    
    1,502Settlements during the year
    
    
    (1,504
    )
    
    
    (1,363
    )Balance at the end of the year
    
    $
    2,081
    
    
    $
    2,220
 7. SHAREHOLDERS EQUITY
 COMMON STOCK
  - 51 -




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##### Table of Contents



STOCK COMPENSATION PLANS
   Shares Authorized But Not GrantedDecember 31, 2004
    
    December 31, 20051995 Long-Term Incentive Compensation Plan
    
    
    251,779
    
    
    
    1998 Employee Incentive Compensation Plan
    
    
    69,468
    
    
    
    107,054Total
    
    
    321,247
    
    
    
    107,054
 - 52 -




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##### Table of Contents



Weighted AverageNumber of Shares
    
    Range of Options Price
    
    Exercise PriceOutstanding, December 31, 2002
    
    
    1,702,706
    
    
    $
    6.00-159.19
    
    
    $
    33.06Granted
    
    
    120,700
    
    
    
    12.14 - 159.19
    
    
    
    14.07Exercised
    
    
    (27,634
    )
    
    
    14.01 - 21.22
    
    
    
    8.99Cancelled
    
    
    (42,640
    )
    
    
    6.00 - 159.19
    
    
    
    41.96Outstanding, December 31, 2003
    
    
    1,753,132
    
    
    
    6.00 - 159.19
    
    
    
    31.92Granted
    
    
    33,000
    
    
    
    9.19  12.32
    
    
    
    11.73Exercised
    
    
    (42,570
    )
    
    
    6.00  12.55
    
    
    
    6.34Cancelled
    
    
    (88,246
    )
    
    
    9.26  159.19
    
    
    
    61.97Outstanding, December 31, 2004
    
    
    1,655,316
    
    
    
    6.00  159.19
    
    
    
    30.57Granted
    
    
    295,904
    
    
    
    8.49  9.45
    
    
    
    8.61Exercised
    
    
    (40,850
    )
    
    
    6.00  9.82
    
    
    
    7.32Cancelled
    
    
    (133,567
    )
    
    
    6.00  159.19
    
    
    
    37.78Outstanding, December 31, 2005
    
    
    1,776,803
    
    
    $
    6.00159.19
    
    
    $
    26.91Options exercisable at:
    
    
    
    Number of SharesDecember 31, 2003
    
    
    
    
    
    
    1,657,364
    
    
    $>
    32.97December 31, 2004
    
    
    
    
    
    
    1,629,607
    
    
    $
    30.85December 31, 2005
    
    
    
    
    
    
    1,601,879
    
    
    $
    28.90
  Stock Options Outstanding
    
    Stock Options ExercisableNumber
    
    Weighted Average
    
    Weighted
    
    Number
    
    WeightedRange of Exercise
    
    Outstanding
    
    Remaining
    
    Average
    
    Exercisable
    
    AveragePrices
    
    as of 12/31/05
    
    Contractual Life
    
    Exercise Price
    
    As of 12/31/05
    
    Exercise Price$7.28 - 7.28
    
    
    148,000
    
    
    
    2.96
    
    
    $
    7.28
    
    
    
    148,000
    
    
    $
    7.28$7.29 - 9.49
    
    
    466,853
    
    
    
    7.60
    
    
    
    8.55
    
    
    
    292,595
    
    
    
    8.50$9.50 - 12.55
    
    
    224,100
    
    
    
    4.41
    
    
    
    11.14
    
    
    
    223,434
    
    
    
    11.13$12.56 - 15.84
    
    
    177,100
    
    
    
    3.56
    
    
    
    13.64
    
    
    
    177,100
    
    
    
    13.64$15.85 - 21.93
    
    
    195,000
    
    
    
    5.77
    
    
    
    19.64
    
    
    
    195,000
    
    
    
    19.64$21.94 - 28.40
    
    
    167,250
    
    
    
    5.81
    
    
    
    27.89
    
    
    
    167,250
    
    
    
    27.89$28.41 - 55.90
    
    
    239,350
    
    
    
    5.41
    
    
    
    42.60
    
    
    
    239,350
    
    
    
    42.60$55.91 - 103.59
    
    
    10,000
    
    
    
    4.71
    
    
    
    97.25
    
    
    
    10,000
    
    
    
    97.25$103.60 - 117.34
    
    
    133,000
    
    
    
    4.62
    
    
    
    117.34
    
    
    
    133,000
    
    
    
    117.34$117.35 - 159.19
    
    
    16,150
    
    
    
    4.53
    
    
    
    159.19
    
    
    
    16,150
    
    
    
    159.19Total
    
    
    1,776,803
    
    
    
    5.48
    
    
    $
    26.91
    
    
    
    1,601,879
    
    
    $
    28.90
 SERIES A JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS
    - 53 -




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##### Table of Contents



8. LICENSE AND ROYALTY FEES
  9. INCOME TAXES
  2003
    
    2004Restated
    
    Restated
    
 2005Current:Federal
    
    $
    647
    
    
    $
    (1,280
    )
    
    $
    741State
    
    
    17
    
    
    
    
    
    
    
    12664
    
    
    
    (1,280
    )
    
    
    753Deferred:Federal
    
    
    1,072
    
    
    
    1,038
    
    
    
    401State
    
    
    (17
    )
    
    
    1,156
    
    
    
    1471,055
    
    
    
    2,194
    
    
    
    548$
    1,719
    
    
    $
    914
    
    
    $
    1,301
  Years Ended December 31,2003
    
    2004Restated
    
    Restated
    
2005Federal statutory tax rate
    
    
    34
    %
    
    
    34
    %
    
    
    34
    %State income
taxes
    
    
    
    
    
    
    
    
    
    
    Valuation allowance for state net
operating losses
    
    
    
    
    
    
    63
    %
    
    
    3
    %Tax contingency reserve
    
    
    6
    %
    
    
    (46
    %)
    
    
    (1
    %)Export sales benefit
    
    
    
    
    
    
    
    
    
    
    (6
    %)Tax exempt interest
    
    
    (4
    %)
    
    
    (4
    %)
    
    
    (5
    %)Other
    
    
    2
    %
    
    
    3
    %
    
    
    2
    %Effective tax rate
    
    
    38
    %
    
    
    50
    %
    
    
    27
    %
 - 54 -




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##### Table of Contents



December 31,
    
    Deferred
    
    December 31,
    
    Deferred2003
    
    Expense
    
    2004
    
    Expense
    
    December 31,Restated
    
    (Credit)
    
    Restated
    
    (Credit)
    
    2005Deferred Tax Assets:Excess of tax basis over book basis for:Property and equipment
    
    $
    384
    
    
    $
    78
    
    
    $
    306
    
    
    $
    (167
    )
    
    $
    473Inventory
    
    
    433
    
    
    
    54
    
    
    
    379
    
    
    
    62
    
    
    
    317Reserves recorded for:Warranty
    
    
    839
    
    
    
    33
    
    
    
    806
    
    
    
    (39
    )
    
    
    845Inventory
    
    
    571
    
    
    
    71
    
    
    
    500
    
    
    
    (163
    )
    
    
    663Allowance for doubtful accounts
    
    
    357
    
    
    
    93
    
    
    
    264
    
    
    
    101
    
    
    
    163State net operating loss carryforward
    
    
    1,816
    
    
    
    (185
    )
    
    
    2,001
    
    
    
    (110
    )
    
    
    2,111Valuation Allowance
    
    
    (450
    )
    
    
    1,312
    
    
    
    (1,762
    )
    
    
    242
    
    
    
    (2,004
    )Other
    
    
    55
    
    
    
    53
    
    
    
    2
    
    
    
    (6
    )
    
    
    8Total deferred tax assets
    
    
    4,005
    
    
    
    
    
    
    
    2,496
    
    
    
    
    
    
    
    2,576Deferred Tax Liabilities:Excess of book basis over tax basis for:Goodwill & Intangibles
    
    $
    (1,928
    )
    
    $
    704
    
    
    $
    (2,632
    )
    
    $
    777
    
    
    $
    (3,409
    )Property and equipment
    
    
    (575
    )
    
    
    8
    
    
    
    (583
    )
    
    
    (156
    )
    
    
    (427
    )Other
    
    
    (10
    )
    
    
    (27
    )
    
    
    17
    
    
    
    7
    
    
    
    10Total deferred tax liabilities
    
    
    (2,513
    )
    
    
    
    
    
    
    (3,198
    )
    
    
    
    
    
    
    (3,826
    )Net deferred taxes
    
    $
    1,492
    
    
    $
    2,194
    
    
    $
    (702
    )
    
    $
    548
    
    
    $
    (1,250
    )Reconciliation to the balance sheet:Deferred tax assets:Current
    
    $
    1,362
    
    
    
    
    
    
    $
    1,143
    
    
    
    
    
    
    $
    1,151Long-term
    
    
    1,203
    
    
    
    
    
    
    
    197
    
    
    
    
    
    
    
    46Deferred Tax Liabilities
    
    
    (1,073
    )
    
    
    
    
    
    
    (2,042
    )
    
    
    
    
    
    
    (2,447
    )Net Deferred Tax Asset (Liability)
    
    $
    1,492
    
    
    
    
    
    
    $
    (702
    )
    
    
    
    
    
    $
    (1,250
    )
  10. LINE OF CREDIT
  11. COMMITMENTS and CONTINGENCIES
  - 55 -




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##### Table of Contents



2005
    
    Payments due by periodTotal
    
    Less than 1 year
    
    1-3 years
    
    3-5 years
    
    More than 5 yearsOperating Lease
Obligations
    
    
    2,197
    
    
    
    1,312
    
    
    
    828
    
    
    
    57
    
    
    
    Purchase Obligations
    
    
    372
    
    
    
    364
    
    
    
    8
    
    
    
    
    
    
    
    Total
    
    
    2,569
    
    
    
    1,676
    
    
    
    836
    
    
    
    57
    
    
    
    
 2004
    
    Payments due by periodTotal
    
    Less than 1 year
    
    1-3 years
    
    3-5 years
    
    More than 5 yearsOperating Lease
Obligations
    
    
    3,072
    
    
    
    1,583
    
    
    
    1,343
    
    
    
    146
    
    
    
    Purchase Obligations
    
    
    1,326
    
    
    
    1,283
    
    
    
    43
    
    
    
    
    
    
    
    Total
    
    
    4,398
    
    
    
    2,866
    
    
    
    1,386
    
    
    
    146
    
    
    
    
   12. MAJOR CUSTOMERS, REVENUE CONCENTRATION AND DEPENDENCE ON CERTAIN SUPPLIERS
      13. EMPLOYEE BENEFIT PLANS
  - 56 -




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##### Table of Contents



14. SEVERANCE AND RELATED EXPENSE
    15. RECEIVABLE FROM OFFICER
  16. SHORT-TERM INVESTMENTS
  December 31, 2004
    
    December 31, 2005Carrying Amount
    
    Fair Value
    
    Carrying Amount
    
    Fair ValueFinancial assets:Cash and cash equivalents
    
    $
    32,622
    
    
    $
    32,622
    
    
    $
    49,421
    
    
    $
    49,421Short-term investments
    
    
    18,537
    
    
    
    18,538
    
    
    
    18,010
    
    
    
    17,997
 17. PER SHARE INFORMATION
   December 31, 2003
    
    December 31, 2004Restated
    
    Restated
    
December 31, 2005Net Income
    
    $
    2,820
    
    
    $
    914
    
    
    $
    3,518Weighted average common shares outstanding
    
    
    13,106
    
    
    
    13,141
    
    
    
    13,168Effect of dilutive securities  stock options
    
    
    207
    
    
    
    112
    
    
    
    4913,313
    
    
    
    13,253
    
    
    
    13,217Earnings per share:Basic
    
    $
    0.22
    
    
    $
    0.07
    
    
    $
    0.27Diluted
    
    $
    0.21
    
    
    $
    0.07
    
    
    $
    0.27
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##### Table of Contents



18. SUBSEQUENT EVENT
  - 58 -




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##### Table of Contents



Col. A
    
    Col. B
    
    Col C.
    
    Col. D
    
    Col. EBalance at
    
    Additions
    
    
    
    
    
    Balance atBeginning
    
    
    
    
    
    Charged to
    
    
    
    
    
    Endof Year
    
    Charged to Expense
    
    Other Accounts
    
    Deductions
    
    of YearAllowance for doubtful
accounts:Year ended December 31, 2003
    
    $
    475
    
    
    
    517
    
    
    
    (76
    )
    
    
    
    
    
    $
    916Year ended December 31, 2004
    
    $
    916
    
    
    
    (151
    )
    
    
    
    
    
    
    (11
    )
    
    $
    754Year ended December 31, 2005
    
    $
    754
    
    
    
    81
    
    
    
    
    
    
    
    (370
    ) (b)
    
    $
    465Warranty reserve:Year ended December 31, 2003
    
    $
    1,981
    
    
    
    690
    
    
    
    225
    (a)
    
    
    (746
    )
    
    $
    2,150Year ended December 31, 2004
    
    $
    2,150
    
    
    
    1,435
    
    
    
    
    
    
    
    (1,504
    )
    
    $
    2,081Year ended December 31, 2005
    
    $
    2,081
    
    
    
    1,502
    
    
    
    
    
    
    
    (1,363
    )
    
    $
    2,220Valuation allowance on net
deferred tax assets:Year ended December 31, 2003
    
    $
    
    
    
    
    450
    
    
    
    
    
    
    
    
    
    
    $
    450Year ended December 31, 2004
    
    $
    450
    
    
    
    1,312
    
    
    
    
    
    
    
    
    
    
    $
    1,762Year ended December 31, 2005
    
    $
    1,762
    
    
    
    242
    
    
    
    
    
    
    
    
    
    
    $
    2,004
 
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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.
 (a) Restatement of financial statements, impact on internal control over financial reporting and
disclosure controls and procedures, and remediation of material weakness
 Restatement of Financial Statements
    Impact on Internal Control over Financial Reporting and Disclosure Controls and Procedures
    Remediation of Material Weakness
 During the fourth quarter of 2005, management has remediated the material
weakness. Remedial actions included the enhancement of existing internal controls
related to intangible assets at December 31, 2005, by adding sub-controls designed
to ensure that:
 1.
    
    Documentation related to the Companys application of
accounting policies for intangible assets is considered in properly
determining and reviewing the estimates and judgments made relating to useful
or
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##### Table of Contents



indefinite lives assigned to intangible assets acquired in a business
combination. These estimates and judgments include: (a) the determination of useful lives of software-related
intangible assets under SFAS #86, (b) the critical review of indefinite life
assertions and the evaluation of the pertinent factors in support of such
assertions and (c) the critical evaluation of the views of experts, and
underlying assumptions, used in reaching complex judgments and estimates by
management.
 2.
    
    The Companys existing periodic reviews consider current
events and circumstances to ensure that all available information continues to
support the indefinite life assertions.3.
    
    Management reviews of appropriate accounting literature
encompass current guidance regarding the factors pertinent to determining and
reviewing useful or indefinite lives of intangible assets.
  (b) Evaluation of Disclosure Controls and Procedures
  (c) Managements Report on Internal Control over Financial Reporting
     (d) Evaluation of Changes in Internal Controls over Financial Reporting
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##### Table of Contents



Item 9B. Other Information.
  
 PART III
 
 Item 10. Directors and Executive Officers of the Registrant.
   
 Item 11. Executive Compensation.
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
  
 Item 13. Certain Relationships and Related Transactions.
  
 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 StatementsThe financial statements of the Company are listed in the Index to Consolidated Financial
Statements on Page 35.(2)
    
    Financial Statement ScheduleThe 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 35.(3)
    
    The following exhibits are included herewith and made a part hereof:
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##### Table of Contents



ExhibitNumber
    
    Description3.1
    
    Amended and Restated Articles of Incorporation of the Company, 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 (File No. 000-27312), 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.3.2
    
    Amended and Restated Bylaws of the Company, incorporated herein by reference to Exhibit 3(ii)
to the Form on 8-K (File No. 000-27312), filed with the SEC on January 21, 2005.4.1
    
    Rights Agreement, dated as of July 23, 1996, between the Company and Chase Mellon Shareholder
Services, L.L.C., incorporated herein by reference to Exhibit 1 to the 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 (File
No. 000-27312), 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 Annual Report of the
Company on Form 10-K (File No. 000-27312) 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 Annual Report of the Company on Form
10-K (File No. 000-27312), 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
Quarterly Report of the Company on Form 10-Q (File No. 000-27312), 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 Annual Report of the Company on Form 10-K (File No. 000-27312) 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 herewith.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 herewith.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 Annual Report of the Company on Form
10-K (File No. 000-27312), 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 Current Report of the Company on Form 8-K (File No. 000-27312) 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 Current Report of the
Company on Form 8-K (File No. 000-27312), 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 Lease Agreement, dated as of October 24, 2001, between Route 206 Associates and
the Company (as successor by merger to Tollgrade Acquisition Company), incorporated herein by
reference to Exhibit 10.33 to the 2002 Form 10-K.10.13
    
    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 Report on Form 8-K (File No. 000-27312), filed September 7,
2005.10.14
    
    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 Annual Report of the Company on Form 10-K (File No. 000-27312), filed
with the SEC on March 15, 2004 (the 2003 Form 10-K).10.15
    
    Extension Agreement dated July 21, 2004 to Supply Agreement, filed as Exhibit 10.56 to
the Quarterly Report on Form 10-Q of the Company (file No. 000-27312), filed with the SEC on
November 2004 (the Third Quarter 2004 10-Q).
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##### Table of Contents



ExhibitNumber
    
    Description10.16
    
    Second Extension Agreement dated August 16, 2004 to the Supply Agreement, filed as Exhibit
10.57 to the Third Quarter 2004 10-Q.10.17
    
    Third Extension Agreement dated September 23, 2004 to the Supply Agreement, filed as
Exhibit 10.58 to the Third Quarter 2004 10-Q.10.18
    
    Fourth Extension Agreement dated December 14, 2004 to the Supply Agreement, filed as
Exhibit 10.41 to the Annual Report on Form 10-K of the Company (File No. 000-27312), filed
with the SEC on March 3, 2005.10.19
    
    Fifth Extension Agreement dated March 15, 2005 to the Supply Agreement, filed herewith.10.20
    
    Sixth Extension Agreement dated June 24, 2005 to the Supply Agreement, filed as Exhibit
10.2 to the Quarterly Report on Form 10-Q (File No. 000-27312), filed with the SEC on August
4, 2005.10.21
    
    Seventh Extension Agreement dated September 29, 2005 to the Supply Agreement, filed as
Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 000-27312), filed with the SEC
on November 3, 2005.10.22
    
    Extension Agreement dated December 20, 2005 to the Supply Agreement, filed herewith.10.23*
    
    Agreement entered into as of January 17, 2005 between the Company and Christian L. Allison,
filed as Exhibit 10.1 to the Report on Form 8-K, (File No. 000-27312), filed with the SEC on
January 21, 2005.10.24*
    
    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 Report on Form 8-K (File No. 000-27312),
filed with the SEC on June 2, 2005.10.25
    
    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
herewith.10.26*
    
    Summary of Directors and Named Executive Officers Compensation, 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.
 
   (b)
    
    Reports on Form 8-K filed during the quarter ended December 31, 2005:A Report on Form 8-K was filed on October 20, 2005 which contained as an exhibit the Companys
Earnings Release for the third quarter of 2005.A Report on Form 8-K was filed on November 10, 2005 which described an amendment to the
employment compensation arrangement between the Company and Carol M. Franklin, and contained
as an exhibit an investor presentation furnished pursuant to Regulation FD (17 CFR
243.100-243.103).
 
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##### Table of Contents



SIGNATURES
  TOLLGRADE COMMUNICATIONS, INC.By

    /s/ Mark B. PetersonMark B. PetersonChief Executive Officer  Signature
    
    Title/s/ Mark B. Peterson
    
    Chief Executive OfficerMark B. Peterson
    
    (Principal Executive Officer)/s/ James J. Barnes
    
    DirectorJames J. Barnes/s/ Daniel P. Barry
    
    DirectorDaniel P. Barry/s/ David S. Egan
    
    DirectorDavid S. Egan/s/ Richard H. Heibel, M.D.
    
    DirectorRichard H. Heibel, M.D./s/ Robert W. Kampmeinert
    
    DirectorRobert W. Kampmeinert/s/Brian C. Mullins
    
    DirectorBrian C. Mullins/s/ Samuel C. Knoch
    
    Chief Financial Officer and TreasurerSamuel C. Knoch
    
    (Principal Financial Officer)/s/Sean M. Reilly
    
    ControllerSean M. Reilly
    
    (Principal Accounting Officer)
 
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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description3.1
    
    Amended and Restated Articles of Incorporation of the Company, 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 (File No. 000-27312), 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.3.2
    
    Amended and Restated Bylaws of the Company, incorporated herein by reference to Exhibit 3(ii) to the
Form on 8-K (File No. 000-27312), filed with the SEC on January 21, 2005.4.1
    
    Rights Agreement, dated as of July 23, 1996 between the Company and Chase Mellon Shareholder Services,
L.L.C., filed as Exhibit 1 to the 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 (File No. 000-27312), 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 Annual Report of the Company on Form 10-K (File No.
000-27312) 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 Annual Report of the Company on Form 10-K (File No. 000-27312), 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 Quarterly Report
of the Company on Form 10-Q (File No. 000-27312) 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 Annual Report of the
Company on Form 10-K (File No. 000-27312) 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.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.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 Annual Report of the Company on Form 10-K (File No.
000-27312), 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 Current Report of the
Company on Form 8-K (File No. 000-27312), 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 Current Report of the Company on Form 8-K (File
No. 000-27312), 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 Lease Agreement, dated as of October 24, 2001, between Route 206 Associates and Tollgrade
Acquisition Company (as successor by merger to Tollgrade Acquisition Company), incorporated herein by
reference to Exhibit 10.33 to the 2002 Form 10-K.10.13
    
    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 Report on Form 8-K (File No. 00027312), filed September 7, 2005.
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##### Table of Contents



ExhibitNumber
    
    Description10.14
    
    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 Annual Report of
the Company on Form 10-K (File No, 000-27312) filed with the SEC on March 15, 2004 (the 2003 Form
10-K).10.15
    
    Extension Agreement dated July 21, 2004 to the Supply Agreement, filed as Exhibit 10.56 to the
Quarterly Report on Form 10-Q of the Company (File No. 000-27312), filed with the SEC on November 2004
(the Third Quarter 2004 10-Q).10.16
    
    Second Extension Agreement dated August 16, 2004 to the Supply Agreement, filed as Exhibit 10.57 to the
Third Quarter 2004 10-Q.10.17
    
    Third Extension Agreement dated September 23, 2004 to the Supply Agreement, filed as Exhibit 10.58 to
the Third Quarter 2004 10-Q.10.18
    
    Fourth Extension Agreement dated December 14, 2004 to the Supply Agreement, filed as Exhibit 10.41 to
the Annual Report on Form 10-K of the Company (File No. 000-27312), filed with the SEC on March 3,
2005.10.19*
    
    Fifth Extension Agreement dated March 15, 2005 to the Supply Agreement.10.20
    
    Sixth Extension Agreement dated June 24, 2005 to the Supply Agreement, filed as Exhibit 10.2 to the
Quarterly Report on Form 10-Q (File No. 000-27312), filed with the SEC on August 4, 2005.10.21
    
    Seventh Extension Agreement dated September 29, 2005 to the Supply Agreement, filed as Exhibit 10.2 to
the Quarterly Report on Form 10-Q (File No. 000-27312), filed with the SEC on November 3, 2005.10.22*
    
    Extension Agreement dated December 20, 2005 to the Supply Agreement.10.23
    
    Agreement entered into as of January 17, 2005 between the Company and Christian L. Allison, filed as
Exhibit 10.1 to the Report on Form 8-K, (File No. 000-27312), filed with the SEC on January 21, 2005.10.24
    
    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 Report on Form 8-K (File No. 000-27312), filed with the SEC on
June 2, 2005.10.25*
    
    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.10.26*
    
    Summary of Directors and Named Executive Officers Compensation.21.1*
    
    List of subsidiaries of the Company.23.1*
    
    Consent of PricewaterhouseCoopers LLP.31.1*
    
    Certification of Chief Executive Officer.31.2*
    
    Certification of Chief Financial Officer.32*
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 350.
 
 * Filed herewith - 67 -