##### Table of Contents



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, 2010
 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.)3120 Unionville Road,
Suite 400, Cranberry Twp., Pennsylvania
    
    16066(Address of principal executive offices)
    
    (Zip Code)
 724-720-1400
 Securities registered pursuant to Section 12(b) of the Act:
 Common Stock, par value $0.20 per share
    
    The NASDAQ Stock Market LLC(Title of Class)
    
    (Exchange on which registered)
 o þ
 o þ
 þ o
 o 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




---



##### 



TABLE OF CONTENTS
 Part IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    10Item 1B. Unresolved Staff Comments
    
    
    20Item 2. Properties
    
    
    20Item 3. Legal Proceedings
    
    
    21Item 4. Reserved
    
    
    21Part IIItem 5. Market for the Registrants Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    21Item 6. Selected Financial Data
    
    
    23Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 8. Financial Statements and Supplementary Data
    
    
    36Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    63Item 9A. Controls and Procedures
    
    
    63Item 9B. Other Information
    
    
    63Part IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    64Item 11. Executive Compensation
    
    
    66Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    81Item 13. Certain Relationships and Related Transactions and Director Independence
    
    
    84Item 14. Principal Accountant Fees and Services
    
    
    85Part IVItem 15. Exhibits and Financial Statement Schedules
    
    
    86SIGNATURES
    
    
    89EX-10.6EX-10.16EX-10.24EX-10.26EX-10.30EX-10.31EX-10.32EX-10.34EX-10.35EX-10.37EX-23.1EX-23.2EX-31.1EX-31.2EX-32
  2




---



##### Table of Contents



PART I
 CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995.
    
 Item 1. Business.
   ® ® ®
   3




---



##### Table of Contents



www.sec.gov
 Products and Services
 Telecommunications Test and Measurement Products
    Systems Test Products
 ® ®
  4




---



##### Table of Contents



MCU Products
    Services and Managed Services
    Electric Utility Monitoring Products
  5




---



##### Table of Contents



Operating Segment
  Research and Development
        6




---



##### Table of Contents



Sales and Marketing
    Competition
      Our Customers
  7




---



##### Table of Contents



Manufacturing and Quality Control
   Proprietary Rights
 ® ® ® ® ® ® ® ® ® ® ® ® ® SM
    8




---



##### Table of Contents



Backlog
    Employees
  Executive Officers of the Company
  Edward H. Kennedy
    
    Chief Executive Officer, President and Board Member of
Tollgrade since June 2009; has served as Chairman of the
Board since March 2010 and was named Chief Executive
Officer and President in June 2010; prior thereto
served as the Chairman, Chief Executive Officer, and
President of Rivulet Communications, Inc. from September
2007 until March 2010; prior thereto, served as Venture
Partner at Columbia Capital from February 2004 until
September 2007; prior thereto, from January 2002 until
January 2004, served as President of Tellabs North
American Operations and Executive Vice President of
Tellabs. From March 1999 until January 2002, Mr.
Kennedy was President and Chief Executive Officer (and
Co-Founder) of Ocular Networks. He has also held
various executive positions at leading telecom equipment
companies, including Alcatel and Newbridge Networks
Corporation. Mr. Kennedy previously served on the
boards of directors of Visual Networks, a
publicly-traded, Nasdaq-listed company until its
acquisition by Fluke Networks, a division of Danaher
Corporation, and Imagine Communications. Mr. Kennedy
also currently serves on the board of directors of
Hatteras Networks. Age 56.Michael D. Bornak
    
    Chief Financial Officer of the Company since November
2009; served as the Companys interim Chief Financial
Officer from September 2009 to November 2009; prior
thereto served as Chief Financial Officer of Solar Power
Industries, Inc. from June 2008 until July 2009; Chief
Financial Officer for MHF Logistical Solutions, Inc.
from February 2005 to June 2008; Vice President of
Finance and Chief Financial Officer of Portec Rail
Products, Inc. from January 1998 to February 2005. Mr.
Bornak is also a Certified Public Accountant. Age 48.Gregory M. Nulty
    
    Vice President, Marketing and Business Development since
June 2010; prior thereto served as Sr. Vice President of
Product Management and Business Development at Rivulet
from 2007 to 2010; Sr. Vice President of Strategic
Direction and Business Development at Tellabs/Ocular
Networks from 2000 to 2004. Previously, Mr. Nulty held
executive technical, strategic planning and marketing
positions at companies including Pulsecom, Sprint and
Ameritech. Age 57.David L. Blakeney
    
    Vice President, Research and Development of the Company
since October 2008; prior thereto consultant to the
Company in the same capacity from March 2008 until
October 2008; Vice President, Engineering, for Altrix
Logic from December 2006 until October 2008; prior
thereto, Vice President of Engineering for the Data
Networks Division of Ericsson from April 1999 to October
2006. Age 50.
 9




---



##### Table of Contents



Jennifer M. Reinke
    
    General Counsel of the Company since November 2009 and
Secretary of the Company since December 2009; Assistant
General Counsel of the Company from February 2009 to
November 2009; Corporate Attorney for the Company from
March 2003 to February 2009; served as the Companys
Assistant Secretary from March 2003 to December 2009;
prior thereto, Associate Attorney with Reed Smith LLP,
from August 1998 to March 2003. Age 38.Robert H. King
    
    Vice President, Global Sales and Professional Services
since June 2010; Vice President, Global Sales and
Marketing of the Company from February 2009 until June
2010; Executive Director, Business Development of the
Company from December 2008 until February 2009; prior
thereto President and General Manager of the Broadband
Products Group at Sunrise Telecom Incorporated
(Sunrise) from April 2006 until June 2008; Vice
President, Sales at Sunrise from January 2000 until
April 2006. Age 49.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 51.Thomas J. Kolb
    
    Vice President, Operations of the Company since
December 2010; prior thereto, Director, Operations
Strategy of the Company from December 2008 until
December 2010; prior thereto Director North America
Trade Compliance for Ericsson Inc. from May 2007 until
December 2008 and its Manager of Supply Chain
Operations from January 2006 until May 2007; prior to
held various supply chain management positions with
Marconi and FORE Systems. Age 43
 
 Item 1A. Risk Factors
  There are risks and uncertainties associated with our proposed merger with an affiliate of Golden
Gate Capital.
    10




---



##### Table of Contents



Our business could be adversely impacted as a result of the proposed Merger.
  
    
    the attention of our management may be directed to transaction-related considerations
and may be diverted from the day-to-day operations of our business;
    
    employees may experience uncertainty about their future roles with us, which might
adversely affect our ability to retain and hire key personnel and other employees; and
    
    vendors, customers or other parties with which we maintain business relationships may
experience uncertainty about our future and seek alternative relationships with third
parties or seek to alter their business relationships with us.
  Revenue from product sales may be subject to further declines due to the mature nature of many of
our product lines and from customers transitioning their access network service assurance
solutions.
     Our service business may be negatively affected by a trend of reduced capital spending and by
delays in our ability, or by our inability, to secure and extend long-term maintenance contracts
with our existing or new customers, and by customer initiatives to consolidate services purchases
with a single supplier.
   11




---



##### Table of Contents



Our future growth depends to a large extent upon our success in developing and selling new products
and service offerings. We have focused our growth efforts and are managing our investments. If we
are unable to drive sales of new products and services to counter the expected declines in our
legacy product lines, this could have a materially adverse impact on our future financial results.
    Our restructuring efforts and cost reduction plans may be ineffective or may limit our ability to
compete.
  Failure to achieve the maximum revenues under our managed services contract could have an adverse
effect on our revenues and results of operations.
  12




---



##### Table of Contents



A continuing downturn in the global economy may adversely affect our revenue, results of operations
and financial condition.
  
    
    Poor availability of credit,
    
    Continued recession in the United States economy and other countries that we serve,
    
    Fluctuation in the value of the U.S. dollar relative to foreign currencies in
jurisdictions where we transact business,
    
    Significant act of terrorism which disrupts global trade or consumer confidence,
    
    Geopolitical tensions including war and civil unrest, and
    
    Reduced levels of economic activity or disruption of domestic or international
transportation.
   We are dependent upon our ability to attract, retain and motivate our key personnel.
  We depend upon a few major customers for a majority of our revenues, and the loss of any of these
customers, or the substantial reduction in the products or services that they purchase from us,
would significantly reduce our revenues and net income.
  
    
    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;
 13




---



##### Table of Contents




    
    Labor disputes between our customers and their collective bargaining units;
    
    Failure of our customers to meet established purchase forecasts and growth projections;
    
    Competition among the large domestic carriers, competitive exchange carriers and wireless
telecommunications; and
    
    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 have completed, and may pursue additional acquisitions, which could result in the disruption of
our current business, difficulties related to the integration of acquired businesses, and
substantial expenditures.
  The failure of acquired assets to meet expectations, or a decline in our fair value determined by
market prices of our stock, could indicate impairment of our intangible assets and result in
impairment charges.
  The sale of our products is dependent upon our ability to satisfy the proprietary requirements of
our customers.
  14




---



##### Table of Contents



The sale of our products is dependent on our ability to respond to rapid technological change and
may be adversely affected by the development, and acceptance by our customers, of new technologies
which may compete with or reduce the demand for our products.
   We depend on a single contract manufacturer to produce close to 100% of our hardware customer
product requirements. Changes to this relationship may result in delays or disruptions that could
harm our business.
  We depend on single source component parts for certain product designs, and 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 fail to accurately predict our manufacturing requirements, we could incur additional costs or
experience manufacturing delays that could harm our business.
  15




---



##### Table of Contents



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.
   16




---



##### Table of Contents



The continued adoption of industry-wide standards in the telecommunications market could have a
material adverse effect on our profitability.
  The presence of available open source software could adversely affect our ability to maximize
revenue from software products.
  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.
   17




---



##### Table of Contents



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.
  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.
  Compliance with environmental regulations could be costly, and noncompliance could have a material
adverse effect on our results of operations, expenses and financial condition.
  18




---



##### Table of Contents



We are subject to governmental export and import controls that could subject us to liability or
impair our ability to compete in international markets.
  Consolidations in, or a continued slowdown in, the telecommunications industry could harm our
business.
  Our expenses are relatively fixed in the short term, and we may be unable to adjust spending to
compensate for unexpected revenue shortfalls.
  We rely on software that we license from third-party developers to perform key functions in our
products.
  Our common stock price may be extremely volatile.
  
    
    General market and economic conditions;
    
    Changes in the telecommunications industry;
 19




---



##### Table of Contents




    
    Actual or anticipated variations in operating results;
    
    Announcements of technological innovations, new products or new services by us or by our
competitors or customers;
    
    Lack of research coverage by sell-side market analysts;
    
    Announcements by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures, capital commitments or other strategic announcements;
    
    Announcements by our customers regarding end market conditions and the status of existing
and future infrastructure network deployments;
    
    Additions or departures of key personnel; and
    
    Future equity or debt offerings or our announcements of these offerings.
  We may be subject from time to time to legal proceedings, and any adverse determinations in these
proceedings could materially harm our business.
   
 Item 1B. Unresolved Staff Comments.
  
 Item 2. Properties.
    20




---



##### Table of Contents



Item 3. Legal Proceedings.
  
    
    Stephen Tencza v. the Company and each member of the board of directors of the Company
(the Directors) filed on February 24, 2011 in the Court of Common Pleas of Allegheny
County, Pennsylvania; and
    
    Vladimir Gusinsky Revocable Trust v. the Company and the Directors filed on March 1,
2011 in the Court of Common Pleas of Allegheny County, Pennsylvania
  
 Item 4. Reserved.
 
 PART II
 
 Item 5. Market for the Registrants Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities.
  2010
    
    2009High
    
    Low
    
    High
    
    LowFirst Quarter
    
    $
    6.88
    
    
    $
    6.00
    
    
    $
    7.14
    
    
    $
    4.73Second Quarter
    
    $
    6.90
    
    
    $
    6.11
    
    
    $
    5.95
    
    
    $
    5.04Third Quarter
    
    $
    8.30
    
    
    $
    6.16
    
    
    $
    6.93
    
    
    $
    4.98Fourth Quarter
    
    $
    9.50
    
    
    $
    7.12
    
    
    $
    6.83
    
    
    $
    5.49
   21




---



##### Table of Contents



STOCK PERFORMANCE GRAPH
   
 December 31,
    
    December 31,
    
    December 31,
    
    December 31,
    
    December 31,
    
    December 31,2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010Tollgrade
    
    
    100
    
    
    
    97
    
    
    
    73
    
    
    
    44
    
    
    
    56
    
    
    
    85NASDAQ Telecomm (IXTC)
    
    
    100
    
    
    
    128
    
    
    
    139
    
    
    
    80
    
    
    
    118
    
    
    
    123S&P 500
    
    
    100
    
    
    
    114
    
    
    
    118
    
    
    
    72
    
    
    
    89
    
    
    
    101
 22




---



##### Table of Contents



Item 6. Selected Financial Data.
  (IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF EMPLOYEES)
 FOR THE YEARS ENDED DECEMBER 31:
    
    2010
    
    2009
    
    2008
    
    2007
    
    2006Revenues:Products
    
    $
    19,067
    
    
    $
    19,936
    
    
    $
    26,997
    
    
    $
    36,143
    
    
    $
    35,270Services
    
    
    26,579
    
    
    
    25,005
    
    
    
    22,055
    
    
    
    15,689
    
    
    
    11,736Total revenue
    
    
    45,646
    
    
    
    44,941
    
    
    
    49,052
    
    
    
    51,832
    
    
    
    47,006Cost of sales:Products
    
    
    8,259
    
    
    
    11,812
    
    
    
    14,181
    
    
    
    15,874
    
    
    
    14,653Services
    
    
    7,618
    
    
    
    7,143
    
    
    
    6,146
    
    
    
    4,103
    
    
    
    3,473Amortization of intangible assets
    
    
    1,570
    
    
    
    2,576
    
    
    
    3,085
    
    
    
    2,199
    
    
    
    2,597Inventory write-down
    
    
    
    
    
    
    3,070
    
    
    
    759
    
    
    
    
    
    
    
    4,101Impairment of long-lived assets
    
    
    
    
    
    
    27,151
    
    
    
    201
    
    
    
    1,090
    
    
    
    Severance
    
    
    319
    
    
    
    778
    
    
    
    
    
    
    
    
    
    
    
    Total cost of sales
    
    
    17,766
    
    
    
    52,530
    
    
    
    24,372
    
    
    
    23,266
    
    
    
    24,824Gross profit/(loss)
    
    
    27,880
    
    
    
    (7,589
    )
    
    
    24,680
    
    
    
    28,566
    
    
    
    22,182Operating expenses:Selling and marketing
    
    
    5,967
    
    
    
    6,809
    
    
    
    6,835
    
    
    
    7,807
    
    
    
    7,794General and administrative
    
    
    8,561
    
    
    
    12,141
    
    
    
    9,455
    
    
    
    9,702
    
    
    
    7,702Research and development
    
    
    6,841
    
    
    
    9,411
    
    
    
    10,789
    
    
    
    10,987
    
    
    
    9,088Restructuring/severance
    
    
    1,826
    
    
    
    1,180
    
    
    
    827
    
    
    
    922
    
    
    
    566Impairment of long-lived assets and goodwill
    
    
    
    
    
    
    293
    
    
    
    
    
    
    
    20,036
    
    
    
    Total operating expenses
    
    
    23,195
    
    
    
    29,834
    
    
    
    27,906
    
    
    
    49,454
    
    
    
    25,150Income/(Loss) income from operations
    
    
    4,685
    
    
    
    (37,423
    )
    
    
    (3,226
    )
    
    
    (20,888
    )
    
    
    (2,968
    )Other income, net
    
    
    9
    
    
    
    567
    
    
    
    1,337
    
    
    
    2,770
    
    
    
    2,741Income/(Loss) income before income taxes
    
    
    4,694
    
    
    
    (36,856
    )
    
    
    (1,889
    )
    
    
    (18,118
    )
    
    
    (227
    )Provision/(Benefit) for income taxes
    
    
    271
    
    
    
    (874
    )
    
    
    1,137
    
    
    
    1,220
    
    
    
    (1,213
    )Income/(Loss) from continuing operations
    
    
    4,423
    
    
    
    (35,982
    )
    
    
    (3,026
    )
    
    
    (19,338
    )
    
    
    986(Loss) from discontinued operations
    
    
    
    
    
    
    (223
    )
    
    
    (4,089
    )
    
    
    (6,815
    )
    
    
    (2,820
    )Net Income/(Loss)
    
    $
    4,423
    
    
    $
    (36,205
    )
    
    $
    (7,115
    )
    
    $
    (26,153
    )
    
    $
    (1,834
    )Weighted average shares of common stock equivalents:Basic
    
    
    12,736
    
    
    
    12,683
    
    
    
    13,102
    
    
    
    13,219
    
    
    
    13,239Diluted
    
    
    13,160
    
    
    
    12,683
    
    
    
    13,102
    
    
    
    13,219
    
    
    
    13,239EARNINGS PER SHARE INFORMATION:Net Income/(Loss) per common share:Basic
    
    $
    0.35
    
    
    $
    (2.85
    )
    
    $
    (0.54
    )
    
    $
    (1.98
    )
    
    $
    (0.14
    )Diluted
    
    $
    0.34
    
    
    $
    (2.85
    )
    
    $
    (0.54
    )
    
    $
    (1.98
    )
    
    $
    (0.14
    )EARNINGS PER SHARE INFORMATION:Net Income/(Loss) per common share from continuing operations:Basic
    
    $
    0.35
    
    
    $
    (2.83
    )
    
    $
    (0.23
    )
    
    $
    (1.46
    )
    
    $
    0.07Diluted
    
    $
    0.34
    
    
    $
    (2.83
    )
    
    $
    (0.23
    )
    
    $
    (1.46
    )
    
    $
    0.07EARNINGS PER SHARE INFORMATION:Net (Loss) per common share from discontinued operations:Basic
    
    $
    
    
    
    $
    (0.02
    )
    
    $
    (0.31
    )
    
    $
    (0.52
    )
    
    $
    (0.21
    )Diluted
    
    $
    
    
    
    $
    (0.02
    )
    
    $
    (0.31
    )
    
    $
    (0.52
    )
    
    $
    (0.21
    )
 23




---



##### Table of Contents



(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF EMPLOYEES)
 FOR THE YEARS ENDED DECEMBER 31:
    
    2010
    
    2009
    
    2008
    
    2007
    
    2006BALANCE SHEET DATA:Working capital
    
    $
    77,675
    
    
    $
    69,195
    
    
    $
    75,475
    
    
    $
    77,080
    
    
    $
    83,186Total assets
    
    
    91,337
    
    
    
    87,687
    
    
    
    124,347
    
    
    
    140,143
    
    
    
    162,352Pension obligation
    
    
    795
    
    
    
    983
    
    
    
    889
    
    
    
    908
    
    
    
    Shareholders equity
    
    
    84,292
    
    
    
    77,743
    
    
    
    112,454
    
    
    
    123,000
    
    
    
    149,444
 2010
    
    2009
    
    2008
    
    2007
    
    2006OTHER DATA:(unaudited)Number of full-time employees at year-end
    
    
    107
    
    
    
    167
    
    
    
    179
    
    
    
    205
    
    
    
    161
 
 Item 7. Managements Discussion and Analysis (MD&A) of Financial Condition and Results of Operations.
  Cable Product Line
  Overview
   
    
    First and foremost, to ensure profitability;
    
    Second, to target resources and spending on legacy products to allow for focused
investments; and
    
    Third, to align the business around growth initiatives and focus our resources on
near-term opportunities.
 24




---



##### Table of Contents



25




---



##### Table of Contents



Results
of Operations for the Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009
 Revenue
 2010
    
    2009
    
    Change
    
    %System Test Products
    
    $
    11,771
    
    
    $
    14,118
    
    
    $
    (2,347
    )
    
    
    -17
    %MCU
    
    
    6,658
    
    
    
    5,694
    
    
    
    964
    
    
    
    17
    %Other
    
    
    638
    
    
    
    124
    
    
    
    514
    
    
    
    415
    %Total Products
    
    
    19,067
    
    
    
    19,936
    
    
    
    (869
    )
    
    
    -4
    %Managed Services
    
    
    7,030
    
    
    
    5,078
    
    
    
    1,952
    
    
    
    38
    %Other Services
    
    
    19,549
    
    
    
    19,927
    
    
    
    (378
    )
    
    
    -2
    %Total Services
    
    
    26,579
    
    
    
    25,005
    
    
    
    1,574
    
    
    
    6
    %Total Revenue
    
    $
    45,646
    
    
    $
    44,941
    
    
    $
    705
    
    
    
    2
    %
    Gross Profit /(Loss)
  26




---



##### Table of Contents



.
 Selling and Marketing Expenses
 2010
    
    2009
    
    Change
    
    %Employee Costs
    
    $
    4,516
    
    
    $
    4,780
    
    
    $
    (264
    )
    
    
    -6
    %Travel Expenses
    
    
    508
    
    
    
    694
    
    
    
    (186
    )
    
    
    -27
    %Consulting Expenses
    
    
    323
    
    
    
    419
    
    
    
    (96
    )
    
    
    -23
    %Other
    
    
    620
    
    
    
    916
    
    
    
    (296
    )
    
    
    -32
    %Total Selling and Marketing Expenses
    
    $
    5,967
    
    
    $
    6,809
    
    
    $
    (842
    )
    
    
    -12
    %
  General and Administrative Expenses
 2010
    
    2009
    
    Change
    
    %Employee Costs
    
    $
    3,315
    
    
    $
    3,922
    
    
    $
    (607
    )
    
    
    -15
    %Legal and Professional Fees
    
    
    1,786
    
    
    
    3,880
    
    
    
    (2,094
    )
    
    
    -54
    %Stock Compensation
    
    
    914
    
    
    
    855
    
    
    
    59
    
    
    
    7
    %General Insurance
    
    
    348
    
    
    
    656
    
    
    
    (308
    )
    
    
    -47
    %Bad Debt
    
    
    152
    
    
    
    1,121
    
    
    
    (969
    )
    
    
    -86
    %Other
    
    
    2,046
    
    
    
    1,707
    
    
    
    339
    
    
    
    20
    %Total General and Administrative Expenses
    
    $
    8,561
    
    
    $
    12,141
    
    
    $
    (3,580
    )
    
    
    -29
    %
  Research and Development Expenses
 2010
    
    2009
    
    Change
    
    %Employee Costs
    
    $
    5,797
    
    
    $
    7,977
    
    
    $
    (2,180
    )
    
    
    -27
    %Professional Fees
    
    
    618
    
    
    
    722
    
    
    
    (104
    )
    
    
    -14
    %Depreciation
    
    
    567
    
    
    
    622
    
    
    
    (55
    )
    
    
    -9
    %Other
    
    
    (141
    )
    
    
    90
    
    
    
    (231
    )
    
    
    -257
    %Total Research and Development Expenses
    
    $
    6,841
    
    
    $
    9,411
    
    
    $
    (2,570
    )
    
    
    -27
    %
  27




---



##### Table of Contents



Severance Expenses
   Other Income, (net)
  Income Taxes
  Results
of Operations for the Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
 2009
    
    2008
    
    Change
    
    %System Test Products
    
    $
    14,118
    
    
    $
    18,061
    
    
    $
    (3,943
    )
    
    
    -22
    %MCU
    
    
    5,694
    
    
    
    8,936
    
    
    
    (3,242
    )
    
    
    -36
    %Other
    
    
    124
    
    
    
    
    
    
    
    124
    
    
    
    100
    %Total Products
    
    
    19,936
    
    
    
    26,997
    
    
    
    (7,061
    )
    
    
    -26
    %Managed Services
    
    
    5,078
    
    
    
    
    
    
    
    5,078
    
    
    
    100
    %Other Services
    
    
    19,927
    
    
    
    22,055
    
    
    
    (2,128
    )
    
    
    -10
    %Total Services
    
    
    25,005
    
    
    
    22,055
    
    
    
    2,950
    
    
    
    13
    %Total Revenue
    
    $
    44,941
    
    
    $
    49,052
    
    
    $
    (4,111
    )
    
    
    -8
    %
  28




---



##### Table of Contents



Gross (Loss)/profit
  Selling and Marketing Expenses
 2009
    
    2008
    
    Change
    
    %Employee Costs
    
    $
    4,780
    
    
    $
    4,583
    
    
    $
    197
    
    
    
    4
    %Travel Expenses
    
    
    694
    
    
    
    799
    
    
    
    (105
    )
    
    
    -13
    %Consulting Expenses
    
    
    419
    
    
    
    677
    
    
    
    (258
    )
    
    
    -38
    %Other
    
    
    916
    
    
    
    776
    
    
    
    140
    
    
    
    18
    %Total Selling and Marketing Expenses
    
    $
    6,809
    
    
    $
    6,835
    
    
    $
    (26
    )
    
    
    0
    %
  General and Administrative Expenses
 2009
    
    2008
    
    Change
    
    %Employee Costs
    
    $
    3,922
    
    
    $
    3,912
    
    
    $
    10
    
    
    
    0
    %Legal and Professional Fees
    
    
    3,880
    
    
    
    3,132
    
    
    
    748
    
    
    
    24
    %Bad Debt
    
    
    1,121
    
    
    
    
    
    
    
    1,121
    
    
    
    100
    %Stock Compensation
    
    
    855
    
    
    
    299
    
    
    
    556
    
    
    
    186
    %Other
    
    
    2,363
    
    
    
    2,112
    
    
    
    251
    
    
    
    12
    %Total General and Administrative Expenses
    
    $
    12,141
    
    
    $
    9,455
    
    
    $
    2,686
    
    
    
    28
    %
  29




---



##### Table of Contents



Research and Development Expenses
 2009
    
    2008
    
    Change
    
    %Employee Costs
    
    $
    7,977
    
    
    $
    8,435
    
    
    $
    (458
    )
    
    
    -5
    %Professional Services
    
    
    722
    
    
    
    1,205
    
    
    
    (483
    )
    
    
    -40
    %Depreciation
    
    
    622
    
    
    
    865
    
    
    
    (243
    )
    
    
    -28
    %Other
    
    
    90
    
    
    
    284
    
    
    
    (194
    )
    
    
    -68
    %Total Research and Development Expenses
    
    $
    9,411
    
    
    $
    10,789
    
    
    $
    (1,378
    )
    
    
    -13
    %
  Severance Expense
   Long-Lived Asset Impairments
   30




---



##### Table of Contents



Other Income, (net)
  (Benefit)/Provisions for Income Taxes
  Loss from Continuing Operations and Loss Per Share from Continuing Operations:
  Liquidity and Capital Resources
     31




---



##### Table of Contents



Off-Balance Sheet Arrangements
  Commitments and Contractual Obligations
    Payments due by period
 Less than 1
    
    
    
    
    
    
    
    
    
    
    More than 5total
    
    
    year
    
    
    1-3 years
    
    
    3-5 years
    
    
    yearsOperating Lease Obligations
    
    $
    3,830
    
    
    $
    813
    
    
    $
    1,283
    
    
    $
    818
    
    
    $
    916Purchase Obligations
    
    
    922
    
    
    
    922Uncertain Tax Obligations
    
    
    825
    
    
    
    
    
    
    
    825Pension Obligations
    
    
    795
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    795Total
    
    $
    6,372
    
    
    $
    1,735
    
    
    $
    2,108
    
    
    $
    818
    
    
    $
    1,711
   Critical Accounting Policies
  Revenue Recognition
  32




---



##### Table of Contents



Intangible Assets
   33




---



##### Table of Contents



Inventory Valuation
   Allowance for Doubtful Accounts  Accounts and Note receivables
   Income Taxes
  34




---



##### Table of Contents



Warranty
  Pension Benefits
    Stock-Based Compensation
   
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
   35




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data.
  Reports of Independent Registered Public Accounting Firms
    
    
    37Consolidated Balance Sheets
    
    
    40Consolidated Statements of Operations
    
    
    41Consolidated Statements of Changes in Shareholders Equity
    
    
    42Consolidated Statements of Cash Flows
    
    
    43Notes to Consolidated Financial Statements
    
    
    44Schedule II  Valuation and Qualifying Accounts
    
    
    62
 36




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Internal ControlIntegrated Framework
 /s/ DELOITTE & TOUCHE LLP
 37




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal
Control  Integrated Framework
    Internal Control
 Integrated Framework
  /s/ DELOITTE & TOUCHE LLP
 38




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   
 39




---



##### Table of Contents



Tollgrade Communications, Inc. and Subsidiaries


Consolidated Balance Sheets
In thousands (except par value)
 December 31, 2010
    
    
    December 31, 2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    72,194
    
    
    $
    66,046Short-term investments
    
    
    3
    
    
    
    3Accounts receivable:Trade, net of
allowance for
doubtful accounts at
$1,583 in 2010 and
$1,496 in 2009
    
    
    7,975
    
    
    
    6,998Other
    
    
    650
    
    
    
    1,007Inventories
    
    
    1,373
    
    
    
    2,119Prepaid expenses and
deposits
    
    
    798
    
    
    
    759Deferred and refundable
income taxes
    
    
    93
    
    
    
    196Total current assets
    
    
    83,086
    
    
    
    77,128Property and equipment,
net
    
    
    2,246
    
    
    
    3,101Intangibles
    
    
    5,391
    
    
    
    7,110Deferred tax assets
    
    
    191
    
    
    
    119Other assets
    
    
    423
    
    
    
    229Total assets
    
    $
    91,337
    
    
    $
    87,687LIABILITIES AND
SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,867
    
    
    $
    927Accrued warranty
    
    
    222
    
    
    
    504Accrued expenses
    
    
    986
    
    
    
    2,319Accrued salaries and
wages
    
    
    1,044
    
    
    
    1,190Accrued royalties payable
    
    
    218
    
    
    
    137Income taxes payable
    
    
    481
    
    
    
    393Deferred revenue
    
    
    593
    
    
    
    2,463Total current liabilities
    
    
    5,411
    
    
    
    7,933Pension obligation
    
    
    795
    
    
    
    983Deferred tax liabilities
    
    
    14
    
    
    
    290Other tax liabilities
    
    
    825
    
    
    
    738Total liabilities
    
    
    7,045
    
    
    
    9,944Commitments and
contingenciesShareholders equity:Common stock, $0.20 par
value 50,000 authorized
shares, issued
shares, 14,073 in 2010
and 13,788 in 2009
    
    
    2,815
    
    
    
    2,746Additional paid-in
capital
    
    
    77,326
    
    
    
    75,244Treasury stock, at cost,
1,162 shares in 2010 and
1,151 shares in 2009
    
    
    (8,632
    )
    
    
    (8,563
    )Retained earnings
    
    
    13,966
    
    
    
    9,543Accumulated other
comprehensive loss
    
    
    (1,183
    )
    
    
    (1,227
    )Total shareholders equity
    
    
    84,292
    
    
    
    77,743Total liabilities and
shareholders equity
    
    $
    91,337
    
    
    $
    87,687
  40




---



##### Table of Contents



Tollgrade Communications, Inc. and Subsidiaries


Consolidated Statements of Operations
In thousands (except per share data)
 Years Ended December 31,2010
    
    
    2009
    
    
    2008Revenues:Products
    
    $
    19,067
    
    
    $
    19,936
    
    
    $
    26,997Services
    
    
    26,579
    
    
    
    25,005
    
    
    
    22,055Total revenues
    
    
    45,646
    
    
    
    44,941
    
    
    
    49,052Cost of sales:Products
    
    
    8,259
    
    
    
    11,812
    
    
    
    14,181Services
    
    
    7,618
    
    
    
    7,143
    
    
    
    6,146Amortization of intangible assets
    
    
    1,570
    
    
    
    2,576
    
    
    
    3,085Inventory write-down
    
    
    
    
    
    
    3,070
    
    
    
    759Impairment of long-lived assets
    
    
    
    
    
    
    27,151
    
    
    
    201Severance
    
    
    319
    
    
    
    778
    
    
    
    Total cost of sales
    
    
    17,766
    
    
    
    52,530
    
    
    
    24,372Gross Profit/(Loss)
    
    
    27,880
    
    
    
    (7,589
    )
    
    
    24,680Operating expenses:Selling and marketing
    
    
    5,967
    
    
    
    6,809
    
    
    
    6,835General and administrative
    
    
    8,561
    
    
    
    12,141
    
    
    
    9,455Research and development
    
    
    6,841
    
    
    
    9,411
    
    
    
    10,789Severance expense
    
    
    1,826
    
    
    
    1,180
    
    
    
    827Impairment of long-lived assets
    
    
    
    
    
    
    293
    
    
    
    Total operating expense
    
    
    23,195
    
    
    
    29,834
    
    
    
    27,906Income/(Loss) from operations
    
    
    4,685
    
    
    
    (37,423
    )
    
    
    (3,226
    )Other income, net
    
    
    9
    
    
    
    567
    
    
    
    1,337Income/(Loss) before income taxes
    
    
    4,694
    
    
    
    (36,856
    )
    
    
    (1,889
    )Provision/(Benefit) for income taxes
    
    
    271
    
    
    
    (874
    )
    
    
    1,137Income/(Loss) from continuing operations
    
    
    4,423
    
    
    
    (35,982
    )
    
    
    (3,026
    )(Loss) from discontinued operations
    
    
    
    
    
    
    (223
    )
    
    
    (4,089
    )Net Income/(Loss)
    
    $
    4,423
    
    
    $
    (36,205
    )
    
    $
    (7,115
    )PER SHARE INFORMATION:Weighted average shares of common stock and equivalents:Basic
    
    
    12,736
    
    
    
    12,683
    
    
    
    13,102Diluted
    
    
    13,160
    
    
    
    12,683
    
    
    
    13,102Net Income/(Loss) per common share:Basic
    
    $
    0.35
    
    
    $
    (2.85
    )
    
    $
    (0.54
    )Diluted
    
    $
    0.34
    
    
    $
    (2.85
    )
    
    $
    (0.54
    )Net Income/(Loss) per common share from continuing operations:Basic
    
    $
    0.35
    
    
    $
    (2.83
    )
    
    $
    (0.23
    )Diluted
    
    $
    0.34
    
    
    $
    (2.83
    )
    
    $
    (0.23
    )Net loss per common share from discontinued operations:Basic
    
    $
    
    
    
    $
    (0.02
    )
    
    $
    (0.31
    )Diluted
    
    $
    
    
    
    $
    (0.02
    )
    
    $
    (0.31
    )
  41




---



##### Table of Contents



Tollgrade Communications, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders Equity
In thousands
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-In
    
    
    Treasury Stock
    
    
    Retained
    
    
    Comprehensive
    
    
    
    
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Shares
    
    
    Amount
    
    
    Earnings
    
    
    Loss
    
    
    Total
    
    
    Income/(Loss)Balance at December 31, 2007
    
    
    13,731
    
    
    $
    2,744
    
    
    $
    73,389
    
    
    
    575
    
    
    $
    (5,900
    )
    
    $
    52,863
    
    
    $
    (96
    )
    
    $
    123,000Purchase of Treasury Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    497
    
    
    $
    (2,181
    )
    
    
    
    
    
    
    
    
    
    $
    (2,181
    )Compensation expense for options
and restricted stock, net
    
    
    2
    
    
    
    
    
    
    $
    534
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    534Actuarial gain, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    87
    
    
    $
    87
    
    
    $
    87Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,871
    )
    
    $
    (1,871
    )
    
    $
    (1,871
    )Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (7,115
    )
    
    
    
    
    
    $
    (7,115
    )
    
    $
    (7,115
    )Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (8,899
    )Balance at December 31, 2008
    
    
    13,733
    
    
    $
    2,744
    
    
    $
    73,923
    
    
    
    1,072
    
    
    $
    (8,081
    )
    
    $
    45,748
    
    
    $
    (1,880
    )
    
    
    112,454Exercise of Common Stock Options
    
    
    10
    
    
    $
    2
    
    
    $
    52
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    54Purchase of Treasury Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79
    
    
    $
    (482
    )
    
    
    
    
    
    
    
    
    
    $
    (482
    )Compensation expense for options
and restricted stock, net
    
    
    45
    
    
    
    
    
    
    $
    1,269
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,269Actuarial loss, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (13
    )
    
    $
    (13
    )
    
    $
    (13
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    666
    
    
    $
    666
    
    
    $
    666Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (36,205
    )
    
    
    
    
    
    $
    (36,205
    )
    
    $
    (36,205
    )Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (35,552
    )Balance at December 31, 2009
    
    
    13,788
    
    
    $
    2,746
    
    
    $
    75,244
    
    
    
    1,151
    
    
    $
    (8,563
    )
    
    $
    9,543
    
    
    $
    (1,227
    )
    
    
    77,743Exercise of Common Stock Options
    
    
    165
    
    
    $
    33
    
    
    $
    848
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    881Purchase of Treasury Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    $
    (69
    )
    
    
    
    
    
    
    
    
    
    $
    (69
    )Compensation
expense for options and restricted stock, net
    
    
    120
    
    
    $
    36
    
    
    $
    1,234
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,270Actuarial gain, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    179
    
    
    $
    179
    
    
    $
    179Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (135
    )
    
    $
    (135
    )
    
    $
    (135
    )Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,423
    
    
    
    
    
    
    $
    4,423
    
    
    $
    4,423Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,467Balance at December 31, 2010
    
    
    14,073
    
    
    $
    2,815
    
    
    $
    77,326
    
    
    
    1,162
    
    
    $
    (8,632
    )
    
    $
    13,966
    
    
    $
    (1,183
    )
    
    
    84,292
  42




---



##### Table of Contents



Tollgrade Communications, Inc. and Subsidiaries
 
 Consolidated Statements of Cash Flows
(In thousands)
 Years Ended December 31,2010
    
    
    2009
    
    
    2008Cash flows from operating activities:Net income/(loss)
    
    $
    4,423
    
    
    $
    (36,205
    )
    
    $
    (7,115
    )Adjustments to reconcile net loss to net cash provided by operating activities:Loss from discontinued operations
    
    
    
    
    
    
    223
    
    
    
    4,089Depreciation and amortization
    
    
    2,761
    
    
    
    3,761
    
    
    
    4,559Impairment of long-lived assets
    
    
    
    
    
    
    27,444
    
    
    
    201Valuation allowance
    
    
    
    
    
    
    
    
    
    
    123Compensation expense related to stock plans
    
    
    1,270
    
    
    
    1,236
    
    
    
    468Loss/(Gain) on disposed assets
    
    
    12
    
    
    
    (42
    )
    
    
    Deferred income taxes
    
    
    (400
    )
    
    
    (1,030
    )
    
    
    182Write-down of inventory
    
    
    
    
    
    
    3,070
    
    
    
    759Provision for losses on inventories
    
    
    (451
    )
    
    
    231
    
    
    
    969Provision for allowance for doubtful accounts
    
    
    165
    
    
    
    1,119
    
    
    
    100Changes in assets and liabilities, net of acquisitions:Accounts receivable trade & other
    
    
    (809
    )
    
    
    3,148
    
    
    
    4,997Inventories
    
    
    1,196
    
    
    
    2,445
    
    
    
    348Prepaid expenses and deposits
    
    
    (240
    )
    
    
    284
    
    
    
    (375
    )Accounts payable
    
    
    959
    
    
    
    (1,276
    )
    
    
    (3,431
    )Accrued warranty
    
    
    (267
    )
    
    
    (434
    )
    
    
    (218
    )Accrued expenses, deferred revenue and salaries and wages
    
    
    (2,814
    )
    
    
    (310
    )
    
    
    (417
    )Accrued royalties payable
    
    
    80
    
    
    
    (152
    )
    
    
    (383
    )Income taxes payable
    
    
    (355
    )
    
    
    114
    
    
    
    (287
    )Net cash provided by discontinued operations:
    
    
    
    
    
    
    57
    
    
    
    38Net cash provided by operating activities:
    
    
    5,530
    
    
    
    3,683
    
    
    
    4,607Cash flows from investing activities:Proceeds from sale of assets
    
    
    
    
    
    
    3,074
    
    
    
    265Proceeds from note receivable
    
    
    124
    
    
    
    112
    
    
    
    Purchase of Ericsson test business
    
    
    
    
    
    
    (300
    )
    
    
    Purchase of investments
    
    
    
    
    
    
    
    
    
    
    (4,266
    )Redemption/maturity of investments
    
    
    
    
    
    
    2,416
    
    
    
    2,479Capital expenditures
    
    
    (416
    )
    
    
    (762
    )
    
    
    (469
    )Net cash used in investing activities of discontinued operations:
    
    
    
    
    
    
    (57
    )
    
    
    (38
    )Net cash (used in)provided by investing activities:
    
    
    (292
    )
    
    
    4,483
    
    
    
    (2,029
    )Cash flows from financing activities:Repurchase of treasury shares
    
    
    (69
    )
    
    
    (482
    )
    
    
    (2,181
    )Proceeds from the exercise of stock options
    
    
    881
    
    
    
    54
    
    
    
    Net cash provided by (used in) financing activities:
    
    
    812
    
    
    
    (428
    )
    
    
    (2,181
    )Net increase in cash and cash equivalents
    
    
    6,050
    
    
    
    7,738
    
    
    
    397Effect of exchange rate change on cash and cash equivalents
    
    
    98
    
    
    
    332
    
    
    
    (643
    )Cash and cash equivalents at beginning of year
    
    
    66,046
    
    
    
    57,976
    
    
    
    58,222Cash and cash equivalents at end of year
    
    $
    72,194
    
    
    $
    66,046
    
    
    $
    57,976Supplemental disclosure of cash flow information:Cash paid during the year for income taxes
    
    $
    519
    
    
    $
    7
    
    
    $
    14
  43




---



##### 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
  ALLOWANCE FOR DOUBTFUL ACCOUNTS
  FOREIGN CURRENCY TRANSLATION
  INVENTORIES
  PROPERTY AND EQUIPMENT
  44




---



##### Table of Contents



VALUATION OF LONG-LIVED ASSETS
  PRODUCT WARRANTY
  REVENUE RECOGNITION
       45




---



##### Table of Contents



COST OF SALES
  SHIPPING AND HANDLING COSTS
  INTANGIBLE ASSETS
     RESEARCH AND DEVELOPMENT COSTS
  INCOME TAXES
  46




---



##### Table of Contents



SEGMENT INFORMATION
  RECLASSIFICATIONS
  RECENT ACCOUNTING PRONOUNCEMENTS
 Revenue Recognition for Multiple-Deliverable Arrangements:
 Revenue Recognition for Certain Arrangements that Include Software Elements:
 2. ACCOUNTING FOR STOCK-BASED COMPENSATION
     47




---



##### Table of Contents



Stock-Based Compensation Expense
  Stock OptionsYear Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31, 2010
    
    
    December 31, 2009
    
    
    December 31, 2008Weighted average grant date fair values
    
    $
    3.19
    
    
    $
    2.60
    
    
    $
    2.68Expected life (in years)
    
    
    5
    
    
    
    5
    
    
    
    5Risk free interest rate
    
    
    2.01
    %
    
    
    1.90
    %
    
    
    2.80
    %Expected Volatility
    
    
    55.01
    %
    
    
    53.80
    %
    
    
    48.10
    %
  48




---



##### Table of Contents



Range of
    
    
    Weighted AverageNumber of Shares
    
    
    Exercise Price
    
    
    Exercise PriceOutstanding December 31, 2007
    
    
    1,440,562
    
    
    $
    3.27-159.19
    
    
    $
    27.28Granted
    
    
    684,400
    
    
    
    3.27-6.57
    
    
    $
    5.97Exercised (A)
    
    
    
    
    
    
    
    
    
    
    Cancelled/Forfeited/Expired
    
    
    (519,472
    )
    
    
    6.57-55.90
    
    
    $
    12.16Outstanding December 31, 2008
    
    
    1,605,490
    
    
    
    3.27-159.19
    
    
    $
    23.08Granted
    
    
    615,500
    
    
    
    5.17-5.86
    
    
    $
    5.47Exercised (A)
    
    
    (10,000
    )
    
    
    5.87-6.48
    
    
    $
    6.11Cancelled/Forfeited/Expired
    
    
    (526,195
    )
    
    
    3.27-159.19
    
    
    $
    19.10Outstanding December 31, 2009
    
    
    1,684,795
    
    
    
    3.27-159.19
    
    
    $
    27.29Granted
    
    
    502,501
    
    
    
    6.48-8.52
    
    
    $
    6.58Exercised (A)
    
    
    (164,527
    )
    
    
    5.35
    
    
    $
    5.35Cancelled/Forfeited/Expired
    
    
    (709,777
    )
    
    
    5.99-51.45
    
    
    $
    32.40Outstanding December 31, 2010
    
    
    1,312,992
    
    
    
    3.27-32.90
    
    
    $
    8.03Number of SharesOptions exercisable at:December 31, 2008
    
    
    
    
    
    
    937,757
    
    
    $
    35.14December 31, 2009
    
    
    
    
    
    
    957,353
    
    
    $
    27.29December 31, 2010
    
    
    
    
    
    
    612,335
    
    
    $
    9.97
 
 (A)
    
    The intrinsic value associated with exercised options which represent the difference between
the strike price and the market value of Tollgrade stock at the time of exercise was
approximately $1.3 million in 2010 and less than $0.1 million in 2009 and 2008, respectively.  Stock Options Outstanding
    
    
    Stock Options ExercisableNumber Outstanding
    
    
    Weighted Average
    
    
    Weighted
    
    
    (B) Aggregate
    
    
    Number Exercisable
    
    
    Weighted
    
    
    (B) AggregateRange of Exercise
    
    as of December 31,
    
    
    Remaining
    
    

Average Exercise
    
    
    Intrinsic
    
    
    as of December 31,
    
    

Average Exercise
    
    
    IntrinsicPrices
    
    2010
    
    
    Contractual Life
    
    
    Price ($)
    
    

    Value ($)
    
    
    2010
    
    
    Price ($)
    
    

    Value ($)$        3.27-5.38
    
    
    195,498
    
    
    
    7.48
    
    
    $
    5.18
    
    
    $
    801,587
    
    
    
    102,826
    
    
    $
    5.27
    
    
    $
    412,1125.74-6.03
    
    
    148,000
    
    
    
    8.91
    
    
    
    5.96
    
    
    
    491,150
    
    
    
    72,669
    
    
    
    5.89
    
    
    
    246,3246.43-6.43
    
    
    5,000
    
    
    
    9.49
    
    
    
    6.43
    
    
    
    14,250
    
    
    
    
    
    
    
    06.48-6.48
    
    
    442,500
    
    
    
    9.46
    
    
    
    6.48
    
    
    
    1,239,000
    
    
    
    
    
    
    
    06.57-6.57
    
    
    228,771
    
    
    
    5.65
    
    
    
    6.57
    
    
    
    619,970
    
    
    
    168,617
    
    
    
    6.57
    
    
    
    456,9527.78-8.49
    
    
    155,840
    
    
    
    2.97
    
    
    
    8.16
    
    
    
    174,594
    
    
    
    130,840
    
    
    
    8.10
    
    
    
    154,8449.49-28.7
    
    
    120,883
    
    
    
    1.38
    
    
    
    20.13
    
    
    
    
    
    
    
    120,883
    
    
    
    20.1331.44-31.44
    
    
    3,000
    
    
    
    0.02
    
    
    
    31.44
    
    
    
    
    
    
    
    3,000
    
    
    
    31.4432.28-32.28
    
    
    2,500
    
    
    
    0.12
    
    
    
    32.28
    
    
    
    
    
    
    
    2,500
    
    
    
    32.2832.90-32.90
    
    
    11,000
    
    
    
    0.97
    
    
    
    32.90
    
    
    
    
    
    
    
    11,000
    
    
    
    32.90Total $3.27-32.90
    
    
    1,312,992
    
    
    
    6.81
    
    
    $
    8.03
    
    
    $
    3,340,551
    
    
    
    612,335
    
    
    $
    9.97
    
    
    $
    1,270,232
 
 (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, 2010, which was $9.28.
The total number of exercisable shares in-the-money was 474,952 and 116,001 shares on December
31, 2010 and December 31, 2009, respectively. 49




---



##### Table of Contents



Weighted AverageWeighed Average
    
    
    Remaining
    
    
    Aggregate IntrinsicNo. of Shares
    
    
    Exercise Price
    
    
    Contractual Life
    
    
    Value (1)Vested
    
    
    612,335
    
    
    $
    9.97
    
    
    
    4.27
    
    
    $
    1,270,232Expected to Vest
    
    
    700,657
    
    
    $
    8.07
    
    
    
    6.73
    
    
    $
    2,070,319Total
    
    
    1,312,992
    
    
    $
    8.03
    
    
    
    6.81
    
    
    $
    3,340,551
 
 (1)
    
    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, 2010, which was $9.28.  3. ACQUISITIONS AND DISCONTINUED OPERATIONS
     Twelve Months EndedDecember 31, 2009
    
    
    December 31, 2008Revenues:Products
    
    $
    2,376
    
    
    $
    6,377Services
    
    
    723
    
    
    
    1,795$
    3,099
    
    
    $
    8,172Loss from discontinued operationsLoss from discontinued operations, before tax
    
    $
    (223
    )
    
    $
    (4,089
    )Income tax expense
    
    
    
    
    
    
    Loss from discontinued operations, net of tax
    
    $
    (223
    )
    
    $
    (4,089
    )
 4. INTANGIBLES
  50




---



##### Table of Contents



December 31, 2010Accumulated
    
    
    Impairments DuringAmortization and
    
    
    the ReportingUseful Life (Years)
    
    
    Gross
    
    
    Impairments
    
    
    Period
    
    
    NetAmortizing Intangible Assets:Post Warranty Service Agreements
    
    
    6-15
    
    
    $
    37,539
    
    
    $
    33,113
    
    
    
    
    
    
    $
    4,426Technology
    
    
    2-10
    
    
    
    13,986
    
    
    
    13,275
    
    
    
    
    
    
    
    711Customer Relationships
    
    
    5-15
    
    
    
    905
    
    
    
    704
    
    
    
    
    
    
    
    201Trade names and other
    
    
    0.5-10
    
    
    
    574
    
    
    
    521
    
    
    
    
    
    
    
    53Total Intangible Assets
    
    
    
    
    
    $
    53,004
    
    
    $
    47,613
    
    
    
    
    
    
    $
    5,391
 December 31, 2009Accumulated
    
    
    Impairments DuringAmortization and
    
    
    the ReportingUseful Life (Years)
    
    
    Gross
    
    
    Impairments
    
    
    Period
    
    
    NetAmortizing Intangible Assets:Post Warranty Service Agreements
    
    
    6-15
    
    
    $
    37,779
    
    
    $
    5,438
    
    
    $
    26,960
    
    
    $
    5,381Technology
    
    
    2-10
    
    
    
    14,000
    
    
    
    12,488
    
    
    
    191
    
    
    
    1,321Customer Relationships
    
    
    5-15
    
    
    
    927
    
    
    
    613
    
    
    
    
    
    
    
    314Trade names and other
    
    
    0.5-10
    
    
    
    537
    
    
    
    443
    
    
    
    
    
    
    
    94Total Intangible Assets
    
    
    
    
    
    $
    53,243
    
    
    $
    18,982
    
    
    $
    27,151
    
    
    $
    7,110
    51




---



##### Table of Contents



5. INVENTORIES
  December 31, 2010
    
    
    December 31, 2009Raw materials
    
    $
    804
    
    
    $
    1,019Work in process
    
    
    179
    
    
    
    344Finished goods
    
    
    390
    
    
    
    756Total Inventory
    
    
    1,373
    
    
    
    2,119
  6. PROPERTY AND EQUIPMENT
  Years
    
    
    December 31, 2010
    
    
    December 31, 2009Test equipment and tooling
    
    
    3-5
    
    
    $
    2,354
    
    
    $
    10,747Office equipment and fixtures
    
    
    5-7
    
    
    
    4,295
    
    
    
    10,187Leasehold Improvements
    
    
    1-6
    
    
    
    2,868
    
    
    
    2,777Gross Property and Equipment
    
    
    
    
    
    
    9,517
    
    
    
    23,711Less accumulated depreciationa and amortization
    
    
    
    
    
    
    (7,271
    )
    
    
    (20,610
    )Net Property and Equipment
    
    
    
    
    
    $
    2,246
    
    
    $
    3,101
  7. PRODUCT WARRANTY
  December 31, 2010
    
    
    December 31, 2009Balance at the beginning of the year
    
    $
    504
    
    
    $
    926Accruals for warranties issued during the year
    
    
    251
    
    
    
    894Settlements during the year
    
    
    (533
    )
    
    
    (1,316
    )Balance at the end of the year
    
    $
    222
    
    
    $
    504
 8. PENSIONS
    52




---



##### Table of Contents



Pension
    
    
    PensionBenefits
    
    
    Benefits(in thousands)
    
    2010
    
    
    2009Change in projected benefit obligation:Projected benefit obligation at January 1,
    
    $
    1,425
    
    
    $
    1,257Curtailments
    
    
    (42
    )
    
    
    (70
    )Service cost
    
    
    74
    
    
    
    80Interest cost
    
    
    77
    
    
    
    76Plan participants contributions
    
    
    
    
    
    
    5Actuarial loss(gains)
    
    
    (184
    )
    
    
    (35
    )Effect of foreign currency
    
    
    (107
    )
    
    
    41Gross benefits paid
    
    
    (12
    )
    
    
    Projected benefit obligation at December 31,
    
    $
    1,231
    
    
    $
    1,424
 2010
    
    
    2009Change in fair value of plan assets:Fair value of plan assets at January 1,
    
    $
    442
    
    
    $
    368Employer contributions
    
    
    17
    
    
    
    24Plan participants contributions
    
    
    
    
    
    
    5Actual return on plan assets (net of cost)
    
    
    22
    
    
    
    32Effect of foreign currency
    
    
    (33
    )
    
    
    12Gross benefits paid
    
    
    (12
    )
    
    
    Fair value of plan assets at December 31,
    
    $
    436
    
    
    $
    441Unfunded status of plans at December 31,
    
    $
    795
    
    
    $
    983
 2010
    
    
    2009Amounts recognized in accumulated other comprehensive income:Prior service cost
    
    
    
    
    
    
    Actuarial gains
    
    $
    286
    
    
    $
    106Total
    
    $
    286
    
    
    $
    106
  Pension
    
    
    PensionBenefits
    
    
    Benefits(in thousands)
    
    2010
    
    
    2009Noncurrent assets
    
    $
    
    
    
    $
    Noncurrent liabilities
    
    
    795
    
    
    
    983Net amount recognized at December 31,
    
    $
    795
    
    
    $
    983
  2010
    
    
    2009
    
    
    2008Curtailments (gain)/loss
    
    $
    
    
    
    $
    (6
    )
    
    $
    Current year actuarial (gain)/loss
    
    $
    (190
    )
    
    
    17
    
    
    
    (87
    )Amortization of actuarial gain/(loss)
    
    $
    3
    
    
    
    5
    
    
    
    Foreign currency exchange rate change
    
    $
    8
    
    
    
    (3
    )Total recognized in other comprehensive income
    
    $
    (179
    )
    
    $
    13
    
    
    $
    (87
    )
  Pension
    
    
    PensionBenefits
    
    
    Benefits(in thousands)
    
    2010
    
    
    2009Projected benefit obligation in excess of plan assets:Projected benefit obligation
    
    $
    1,231
    
    
    $
    1,424Fair value of plan assets
    
    $
    436
    
    
    $
    441Accumulated benefit obligation in excess of plan assets:Accumulated benefit obligation
    
    $
    1,041
    
    
    $
    1,126Fair value of plan assets
    
    $
    436
    
    
    $
    441
 53




---



##### Table of Contents



Pension
    
    
    PensionBenefits
    
    
    Benefits(in thousands)
    
    2010
    
    
    2009Components of net periodic benefit cost:Service cost
    
    $
    74
    
    
    $
    80Interest cost
    
    
    77
    
    
    
    76Actuarial (gain)
    
    
    (2
    )
    
    
    (4
    )Curtailment (gain)
    
    
    (42
    )
    
    
    (65
    )Expected return on plan assets
    
    
    (16
    )
    
    
    (15
    )Net periodic benefit cost
    
    $
    91
    
    
    $
    72
  (in thousands)Expected benefit payments:2011  2015
    
    $
    32016  2020
    
    $
    248
  2010
    
    
    2009Weighted-average assumptions used to determine the benefit obligationDiscount rate
    
    
    5.75
    %
    
    
    5.75
    %Rate of compensation increase
    
    
    3.00
    %
    
    
    3.00
    %
 2010
    
    
    2009Weighted-average assumptions used to determine the net benefit costsDiscount rate
    
    
    5.75
    %
    
    
    6.00
    %Rate of compensation increase
    
    
    3.00
    %
    
    
    3.00
    %Expected annual return on plan assets
    
    
    4.00
    %
    
    
    3.80
    %
  9. LICENSE AND ROYALTY FEES
  10. INCOME TAXES
  2010
    
    
    2009
    
    
    2008U.S.
    
    $
    2,165
    
    
    $
    (36,657
    )
    
    $
    (3,154
    )Foreign
    
    $
    2,529
    
    
    $
    199
    
    
    $
    1,265Total
    
    $
    4,694
    
    
    $
    (36,458
    )
    
    $
    (1,889
    )
 54




---



##### Table of Contents



2010
    
    
    2009
    
    
    2008Current:Federal
    
    $
    (43
    )
    
    $
    (202
    )
    
    $
    (16
    )Foreign
    
    
    507
    
    
    
    482
    
    
    
    777State
    
    
    23
    
    
    
    15
    
    
    
    7487
    
    
    
    295
    
    
    
    768Deferred:Federal
    
    
    (262
    )
    
    
    (1,105
    )
    
    
    Foreign
    
    
    54
    
    
    
    (32
    )
    
    
    369State
    
    
    (8
    )
    
    
    (32
    )
    
    
    (216
    )
    
    
    (1,169
    )
    
    
    369$
    271
    
    
    $
    (874
    )
    
    $
    1,137
  Years Ended December 31,2010
    
    
    2009
    
    
    2008Federal statutory tax rate
    
    
    34
    %
    
    
    -34
    %
    
    
    -34
    %State income taxes
    
    
    1
    %
    
    
    -1
    %
    
    
    Foreign income taxes
    
    
    -17
    %
    
    
    
    
    
    
    -1
    %Valuation allowance
    
    
    -15
    %
    
    
    35
    %
    
    
    49
    %Tax contingency reserve
    
    
    3
    %
    
    
    1
    %
    
    
    5
    %Intangible write down
    
    
    
    
    
    
    -3
    %
    
    
    Other
    
    
    -1
    %
    
    
    0
    %
    
    
    5
    %
    
    
    -2
    %
    
    
    19
    %
  55




---



##### Table of Contents



December 31, 2010
    
    
    December 31, 2009Deferred Tax Assets:Excess of tax basis over book basis for:Property and equipment
    
    $
    10
    
    
    $
    295Goodwill and intangible assets
    
    
    8,991
    
    
    
    10,233Inventory
    
    
    1,534
    
    
    
    691Reserves recorded for:Warranty
    
    
    46
    
    
    
    44Inventory
    
    
    1,158
    
    
    
    1,649Allowance for doubtful accounts
    
    
    554
    
    
    
    524Severance
    
    
    29
    
    
    
    138Federal net operating loss carryforward
    
    
    10,840
    
    
    
    9,737State net operating loss carryforward
    
    
    4,052
    
    
    
    4,152Stock based compensation
    
    
    726
    
    
    
    774Unrealized foreign exchange
    
    
    
    
    
    
    453Pension benefit
    
    
    48
    
    
    
    42Other
    
    
    33
    
    
    
    31Gross deferred tax assets
    
    
    28,021
    
    
    
    28,763Valuation allowance
    
    
    (27,449
    )
    
    
    (28,567
    )Deferred tax assets
    
    $
    572
    
    
    $
    196Deferred Tax Liabilities:Excess of book basis over tax basis for:Intangible assets
    
    $
    (57
    )
    
    $
    (78
    )Property and equipment
    
    
    (323
    )
    
    
    (154
    )Other
    
    
    (15
    )
    
    
    (117
    )Total deferred tax liabilities
    
    
    (395
    )
    
    
    (349
    )Net deferred taxes
    
    $
    177
    
    
    $
    (153
    )Reconciliation to the consolidated balance sheet:Deferred tax assets current:
    
    $
    
    
    
    $
    18Deferred tax assets noncurrent:
    
    
    191
    
    
    
    119Deferred tax liabilities noncurrent:
    
    
    (14
    )
    
    
    (290
    )Net deferred tax liabilities
    
    $
    177
    
    
    $
    (153
    )
     56




---



##### Table of Contents



Unrecognized Tax Benefits Tabular Reconciliation (in thousands)
 2010
    
    
    2009
    
    
    2008Beginning balance  January 1,
    
    $
    738
    
    
    $
    489
    
    
    $
    272Additional uncertain tax positions
    
    
    132
    
    
    
    285
    
    
    
    244Reductions due to settlements with taxing authorities
    
    
    (18
    )
    
    
    
    
    
    
    Reductions due to expirations of statute of limitations
    
    
    (27
    )
    
    
    (36
    )
    
    
    (27
    )Ending balance  December 31,
    
    $
    825
    
    
    $
    738
    
    
    $
    489
    11. COMMITMENTS AND CONTINGENCIES
    At December 31, 20102011
    
    $
    8132012
    
    
    6712013
    
    
    6122014
    
    
    4222015
    
    
    396Thereafter
    
    
    916$
    3,830
   57




---



##### Table of Contents



12. MAJOR CUSTOMERS, REVENUE CONCENTRATION AND DEPENDENCE ON CERTAIN SUPPLIERS
  2010
    
    
    
    
    
    
    2009
    
    
    
    
    
    
    2008System Test Products
    
    $
    11,771
    
    
    
    26
    %
    
    $
    14,118
    
    
    
    31
    %
    
    $
    18,061
    
    
    
    37
    %MCU
    
    
    6,658
    
    
    
    15
    %
    
    
    5,694
    
    
    
    13
    %
    
    
    8,936
    
    
    
    18
    %Other
    
    
    638
    
    
    
    1
    %
    
    
    124
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %Total Products
    
    
    19,067
    
    
    
    42
    %
    
    
    19,936
    
    
    
    44
    %
    
    
    26,997
    
    
    
    55
    %Managed Services
    
    
    7,030
    
    
    
    15
    %
    
    
    5,078
    
    
    
    11
    %
    
    
    
    
    
    
    0
    %Other Services
    
    
    19,549
    
    
    
    43
    %
    
    
    19,927
    
    
    
    44
    %
    
    
    22,055
    
    
    
    45
    %Total Services
    
    
    26,579
    
    
    
    58
    %
    
    
    25,005
    
    
    
    56
    %
    
    
    22,055
    
    
    
    45
    %Total Revenue
    
    $
    45,646
    
    
    
    100
    %
    
    $
    44,941
    
    
    
    100
    %
    
    $
    49,052
    
    
    
    100
    %
   December 31, 2010
    
    
    December 31, 2009
    
    
    December 31, 2008Company A
    
    $
    10,359
    
    
    
    23
    %
    
    $
    10,262
    
    
    
    23
    %
    
    $
    13,436
    
    
    
    27
    %Company B
    
    
    7,034
    
    
    
    15
    %
    
    
    5,254
    
    
    
    12
    %
    
    
    
    
    
    
    0
    %Company C
    
    
    5,441
    
    
    
    12
    %
    
    
    4,534
    
    
    
    10
    %
    
    
    3,796
    
    
    
    8
    %Company D
    
    
    2,014
    
    
    
    4
    %
    
    
    3,118
    
    
    
    7
    %
    
    
    7,448
    
    
    
    15
    %Company E
    
    
    1,144
    
    
    
    3
    %
    
    
    4,523
    
    
    
    10
    %
    
    
    4,554
    
    
    
    9
    %Total
    
    $
    25,992
    
    
    
    
    
    
    $
    27,691
    
    
    
    
    
    
    $
    29,234
  December 31, 2010
    
    December 31, 2009
    
    December 31, 2008Region :Europe/Africa
    
    $
    15,569
    
    
    
    34
    %
    
    $
    12,479
    
    
    
    28
    %
    
    $
    18,029
    
    
    
    37
    %Americas
    
    
    2,044
    
    
    
    5
    %
    
    
    3,408
    
    
    
    8
    %
    
    
    2,390
    
    
    
    5
    %Asia
    
    
    1,436
    
    
    
    3
    %
    
    
    1,079
    
    
    
    2
    %
    
    
    828
    
    
    
    1
    %Total International
    
    
    19,049
    
    
    
    42
    %
    
    
    16,966
    
    
    
    38
    %
    
    
    21,247
    
    
    
    43
    %Total Domestic
    
    
    26,597
    
    
    
    58
    %
    
    
    27,975
    
    
    
    62
    %
    
    
    27,805
    
    
    
    57
    %Total Revenue
    
    $
    45,646
    
    
    
    100
    %
    
    $
    44,941
    
    
    
    100
    %
    
    $
    49,052
    
    
    
    100
    %
  13. SHORT-TERM INVESTMENTS
  December 31, 2010
    
    
    December 31, 2009Carrying Amount
    
    
    Fair Value
    
    
    Carrying Amount
    
    
    Fair ValueFinancial assets:Cash and cash equivalents
    
    $
    72,194
    
    
    $
    72,194
    
    
    $
    66,046
    
    
    $
    66,046Short-term investments
    
    $
    3
    
    
    $
    3
    
    
    $
    3
    
    
    $
    3
 58




---



##### Table of Contents




    
    Level 1  Unadjusted quoted prices in active markets that are accessible at
the measurement date for identical, unrestricted assets or liabilities;
    
    Level 2  Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly, including quoted
prices for similar assets or liabilities in active markets; quoted prices for identical or
similar assets or liabilities in markets that are not active; inputs other than quoted
prices that are observable for the asset or liability (e.g., interest rates); and inputs
that are derived principally from or corroborated by observable market data by correlation
or other means; and
    
    Level 3  Inputs that are both significant to the fair value measurement and
unobservable.
 14. PER SHARE INFORMATION
    December 31, 2010
    
    
    December 31, 2009
    
    
    December 31, 2008Net Income/(Loss)
    
    $
    4,423
    
    
    $
    (36,205
    )
    
    $
    (7,115
    )Weighted average common shares outstanding
    
    
    12,736
    
    
    
    12,683
    
    
    
    13,102Effect of dilutive securities  stock options
    
    
    424
    
    
    
    
    
    
    
    13,160
    
    
    
    12,683
    
    
    
    13,102Income/(Loss) per common share:Basic
    
    $
    0.35
    
    
    $
    (2.85
    )
    
    $
    (0.54
    )Diluted
    
    $
    0.34
    
    
    $
    (2.85
    )
    
    $
    (0.54
    )Income/(Loss) per common share from continuing operations:Basic
    
    $
    0.35
    
    
    $
    (2.83
    )
    
    $
    (0.23
    )Diluted
    
    $
    0.34
    
    
    $
    (2.83
    )
    
    $
    (0.23
    )Loss per common share from discontinued operations:Basic
    
    $
    
    
    
    $
    (0.02
    )
    
    $
    (0.31
    )Diluted
    
    $
    
    
    
    $
    (0.02
    )
    
    $
    (0.31
    )
 59




---



##### Table of Contents



15. EMPLOYEE DEFINED CONTRIBUTION PLANS
  16. SEVERANCE EXPENSE
   60




---



##### Table of Contents



17. QUARTERLY FINANCIAL DATA (Unaudited)
  March 31, 2010
    
    
    June 30, 2010
    
    
    September 30, 2010
    
    
    December 31, 2010Revenue
    
    $
    11,167
    
    
    $
    11,500
    
    
    $
    11,056
    
    
    $
    11,923Gross profit
    
    
    6,492
    
    
    
    7,026
    
    
    
    7,040
    
    
    
    7,322Net (Loss)/Income
    
    $
    (1,663
    )
    
    $
    1,227
    
    
    $
    2,493
    
    
    $
    2,366(Loss)/Earnings Per Share InformationWeighted average sharesBasic
    
    
    12,656
    
    
    
    12,649
    
    
    
    12,723
    
    
    
    12,851Diluted
    
    
    12,656
    
    
    
    12,815
    
    
    
    13,167
    
    
    
    13,594Basic
    
    $
    (0.13
    )
    
    $
    0.10
    
    
    $
    0.20
    
    
    $
    0.18Diluted
    
    $
    (0.13
    )
    
    $
    0.10
    
    
    $
    0.19
    
    
    $
    0.17
 March 28, 2009
    
    
    June 27, 2009
    
    
    September 26, 2009
    
    
    December 31, 2009Revenue
    
    $
    10,317
    
    
    $
    10,643
    
    
    $
    11,326
    
    
    $
    12,655Gross profit
    
    
    5,284
    
    
    
    5,197
    
    
    
    2,230
    
    
    
    (20,300
    )Net Loss
    
    $
    (1,223
    )
    
    $
    (1,509
    )
    
    $
    (7,082
    )
    
    $
    (26,391
    )(Loss) Per Share InformationWeighted average sharesBasic
    
    
    12,679
    
    
    
    12,681
    
    
    
    12,682
    
    
    
    12,690Diluted
    
    
    12,679
    
    
    
    12,681
    
    
    
    12,682
    
    
    
    12,690Basic
    
    $
    (0.09
    )
    
    $
    (0.12
    )
    
    $
    (0.56
    )
    
    $
    (2.08
    )Diluted
    
    $
    (0.09
    )
    
    $
    (0.12
    )
    
    $
    (0.56
    )
    
    $
    (2.08
    )
 18. SUBSEQUENT EVENTS
   61




---



##### 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, 2010
    
    $
    1,496
    
    
    
    259
    
    
    
    
    
    
    
    (172
    )
    
    $
    1,583Year ended December 31, 2009
    
    $
    222
    
    
    
    1,274
    
    
    
    
    
    
    
    
    
    
    $
    1,496Year ended December 31, 2008
    
    $
    309
    
    
    
    100
    
    
    
    
    
    
    
    (187
    )
    
    $
    222Warranty reserve:Year ended December 31, 2010
    
    $
    504
    
    
    
    251
    
    
    
    
    
    
    
    (533
    )
    
    $
    222Year ended December 31, 2009
    
    $
    926
    
    
    
    894
    
    
    
    
    
    
    
    (1,316
    )
    
    $
    504Year ended December 31, 2008
    
    $
    1,148
    
    
    
    1,682
    
    
    
    
    
    
    
    (1,904
    )
    
    $
    926Valuation allowance on net deferred tax assets:Year ended December 31, 2010
    
    $
    28,567
    
    
    
    
    
    
    
    (1,118
    )
    
    
    
    
    
    $
    27,449Year ended December 31, 2009
    
    $
    15,848
    
    
    
    
    
    
    
    12,719
    
    
    
    
    
    
    $
    28,567Year ended December 31, 2008
    
    $
    12,655
    
    
    
    123
    
    
    
    3,070
    
    
    
    
    
    
    $
    15,848
 62




---



##### 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.
   63




---



##### Table of Contents



PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  Scott C. Chandler
 Richard H. Heibel, M.D.
 Charles E. Hoffman
 Robert W. Kampmeinert
 64




---



##### Table of Contents



Edward B. Meyercord, III
 Jeffrey M. Solomon
 Other Information
  Executive Officers
  Section 16(a) Beneficial Ownership Reporting Compliance
  65




---



##### Table of Contents



Code of Ethics; Code of Business Conduct
 www.tollgrade.com
 Audit Committee
   
 Item 11. Executive Compensation
 COMPENSATION DISCUSSION AND ANALYSIS
 Overview
  Compensation Objectives and Philosophy
  Setting Executive Compensation
  66




---



##### Table of Contents



Use of Compensation Consultants and Peer Group Company Data
   th th
  Tax Considerations
   67




---



##### Table of Contents



Components of Named Executive Officer Compensation
  Base Salary
   CEO Base Salary
  Bonus and Non-Equity Incentive Plan Compensation
  
    
    to increase profitability and growth in a manner that is consistent with the goals of
the Company, its shareholders and its employees;
    
    to provide the potential for executive compensation that is competitive with other
similarly situated technology companies in our peer group;
 68




---



##### Table of Contents




    
    to attract and retain personnel of outstanding ability and encourage excellence in
the performance of individual responsibilities;
    
    to motivate and reward those members of management who contribute to our success; and
    
    to allow the Compensation Committee flexibility to administer the MICP to reflect the
changing organizational goals and objectives of the Company.
       69




---



##### Table of Contents



(I) Low
    
    
    (II) MediumSalary Percentage
    
    
    
    
    
    
    
    
    
    
    Threshold
    
    
    Threshold
    
    
    (III) High Thresholdfor computing
    
    
    2010 Salary
    
    
    Target Bonus Amount
    
    
    Bonus Amounts
    
    
    Bonus Amounts
    
    
    Bonus AmountsName
    
    Target Bonus Amount
    
    
    ($)
    
    
    ($)
    
    
    Achieved ($)
    
    
    Achieved ($)
    
    
    Achieved ($)Edward H. Kennedy
    
    
    45
    %
    
    
    350,000
    
    
    
    157,500
    
    
    
    78,750
    
    
    
    94,500
    
    
    
    315,000Joseph A. Ferrara*
    
    
    45
    %
    
    
    350,000
    
    
    
    157,500
    
    
    
    78,750
    
    
    
    94,500
    
    
    
    315,000Michael D. Bornak
    
    
    35
    %
    
    
    250,000
    
    
    
    87,500
    
    
    
    43,750
    
    
    
    52,500
    
    
    
    175,000Gregory M. Nulty
    
    
    35
    %
    
    
    240,000
    
    
    
    84,000
    
    
    
    42,000
    
    
    
    50,400
    
    
    
    168,000David L. Blakeney
    
    
    25
    %
    
    
    200,018
    
    
    
    50,005
    
    
    
    25,003
    
    
    
    30,003
    
    
    
    100,010Kenneth J. Shebek*
    
    
    25
    %
    
    
    200,018
    
    
    
    50,005
    
    
    
    25,003
    
    
    
    30,003
    
    
    
    100,010
 
 *
    
    Employment terminated during 2010, and therefore ineligible for all or part of the MICP
award as described below.  November 2010
    
    
    
    
    
    
    Total Amount EarnedPayment
    
    
    January 2011
    
    
    under 2010 BonusName
    
    ($)
    
    

Payment ($)
    
    
    Plan ($)Edward H. Kennedy
    
    
    32,138
    
    
    
    71,452
    
    
    
    103,590Joseph A. Ferrara
    
    
    
    
    
    
    
    
    
    
    Michael D. Bornak
    
    
    30,625
    
    
    
    68,088
    
    
    
    98,713Gregory M. Nulty
    
    
    17,140
    
    
    
    38,108
    
    
    
    55,248David L. Blakeney
    
    
    17,502
    
    
    
    38,911
    
    
    
    56,413Kenneth J. Shebek
    
    
    17,502
    
    
    
    
    
    
    
    17,502
  Commission Program for VP, Global Sales and Services
    70




---



##### Table of Contents



Equity Compensation
   Stock Options
  Restricted Shares
  Size of Equity Grants
  71




---



##### Table of Contents



2010 Equity Awards
   Post-Employment Compensation
 Change in Control and Severance Agreements
      Perquisites and Other Benefits
   72




---



##### Table of Contents



Summary Compensation Table
  Stock Awards
    
    
    Option Awards
    
    
    Non-Equity Incentive
    
    
    All OtherName/Principal Position
    
    Year
    
    
    Salary ($)
    
    
    Bonus ($)
    
    
    ($)(1)
    
    
    ($)(1)
    
    
    Plan Compensation ($)
    
    
    Compensation ($)
    
    
    Total ($)Edward H. Kennedy
    
    
    2010
    
    
    
    197,313
    
    
    
    
    
    
    
    (3) 315,000
    
    
    
    (3),(4) 1,280,760
    
    
    
    (5) 103,590
    
    
    
    (6), (7) 54,056
    
    
    
    1,950,719CEO and
President(2)Joseph A. Ferrara
    
    
    2010
    
    
    
    153,611
    
    
    
    
    
    
    
    (9)  
    
    
    
    
    
    
    
    
    
    
    
    (7),(10) 824,139
    
    
    
    977,750Former CEO and President(8)
    
    
    2009
    
    
    
    351,346
    
    
    
    94,500
    
    
    
    
    
    
    
    354,564
    
    
    
    
    
    
    
    2,680
    
    
    
    803,0902008
    
    
    
    350,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,633
    
    
    
    352,633Michael D. Bornak
    
    
    2010
    
    
    
    250,000
    
    
    
    
    
    
    
    (11) 126,000
    
    
    
    
    
    
    
    (5) 98,713
    
    
    
    (7) 2,716
    
    
    
    477,429CFO and Treasurer
    
    
    2009
    
    
    
    (7) 91,546
    
    
    
    17,500
    
    
    
    
    
    
    
    141,975
    
    
    
    
    
    
    
    
    
    
    
    251,021Robert H. King
    
    
    2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4) 78,585
    
    
    
    (12) 463,368
    
    
    
    (7) 2,114
    
    
    
    544,067VP, Global Sales and Services
    
    
    2009
    
    
    
    220,179
    
    
    
    
    
    
    
    
    
    
    
    89,031
    
    
    
    74,348
    
    
    
    1,328
    
    
    
    384,8862008
    
    
    
    3,270
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,270Gregory M. Nulty
    
    
    2010
    
    
    
    (13) 130,000
    
    
    
    (14) 10,000
    
    
    
    
    
    
    
    (4) 157,170
    
    
    
    (5) 55,248
    
    
    
    (7) 1,975
    
    
    
    354,393VP, Marketing and
Business DevelopmentDavid L. Blakeney
    
    
    2010
    
    
    
    200,018
    
    
    
    
    
    
    
    
    
    
    
    (4) 62,868
    
    
    
    (5) 56,413
    
    
    
    (7) 1,341
    
    
    
    320,640VP, Research and Development
    
    
    2009
    
    
    
    200,787
    
    
    
    30,003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    230,7902008
    
    
    
    34,619
    
    
    
    
    
    
    
    
    
    
    
    53,015
    
    
    
    
    
    
    
    
    
    
    
    87,634
 
 Notes to Summary Compensation Table:(1)
    
    The amounts in the Stock Awards and Option Awards columns reflect the aggregate grant
date fair value of awards computed in accordance with FASB ASC Topic 718. Assumptions used in
calculating these amounts are included in Note 2 to our audited financial statements for the
years ended December 31, 2010, December 31, 2009 and December 31, 2008, appearing in this
Annual Report on Form 10-K, and in our Annual Reports on Form 10-K filed with the SEC on March
10, 2010 and March 13, 2009, respectively.(2)
    
    Until his appointment as our CEO and President effective June 8, 2010, Mr. Kennedy served as
one of the Companys non-employee directors during 2010 (serving as Chairman since March
2010). Amounts reflected in the Summary Compensation Table include, where noted, compensation
that Mr. Kennedy received solely in his capacity as a non-employee director. All other
amounts were earned by Mr. Kennedy for his service during 2010 as our CEO and President. Mr.
Kennedys base salary as CEO and President was $350,000 during 2010.(3)
    
    On March 23, 2010, Mr. Kennedy was awarded 50,000 restricted shares and 250,000 stock
appreciation rights in connection with his service as the non-executive Chairman of the Board
of Directors. The entire amount reflected under the Stock Awards column is attributable to
the restricted shares award, and $809,250 of the amount reflected under the Option Awards
column is attributable the award of stock appreciation rights, which were received by Mr.
Kennedy solely in his capacity as a non-employee director.(4)
    
    On June 17, 2010, each of Messrs. Kennedy, King, Nulty and Blakeney received stock option
awards, the details of which are summarized in the Grant of Plan-Based Awards table.(5)
    
    As described above under the heading, Bonus and Non-Equity Incentive Plan Compensation,
each of our named executive officers who remained employed at the time of payment, received
cash incentive compensation for performance during 2010 pursuant to the terms of our
Management Incentive Compensation Plan.(6)
    
    Mr. Kennedy received cash compensation of $52,030 for his service as a non-employee director
during 2010 prior to his becoming employed as the Companys CEO and President. 73




---



##### Table of Contents



(7)
    
    As described above under the heading, Perquisites and Other Benefits, for each of our named
executive officers, the Company pays the premiums on an additional, long-term disability
policy, and provides the executive with a tax-gross up payment in connection with the
Company-paid premiums. These amounts are included in the All Other Compensation column of
the Summary Compensation Table as follows: Kennedy  $2,026; Ferrara  $2,370; Bornak -
$2,716; King  $2,114; Nulty  $1,975; Blakeney  $1,341.(8)
    
    During 2010, Mr. Ferrara served as CEO and President until June 8, 2010.(9)
    
    Mr. Ferrara received an award of 30,000 restricted shares on March 23, 2010; however the
awards were forfeited in connection with his termination of employment on June 8, 2010.(10)
    
    The amount reflected under the column All Other Compensation for Mr. Ferraras 2010
compensation includes $2,370 for the long-term disability insurance benefit described in note
7, above, $10,096 paid at the time of employment termination for unused vacation, and pursuant
to the agreements in effect between Mr. Ferrara and the Company, $794,500 severance paid at
the time of employment termination, $9,173 for continuation of benefits during 2010 following
termination of employment, and $8,000 for reimbursement of executive outplacement services
fees. A description of Mr. Ferraras employment agreement, including the separation and
mutual release agreement executed with Mr. Ferrara, is included under the heading Employment
Agreement, Separation of Employment and Change-in-Control Agreements.(11)
    
    On March 23, 2010, Mr. Bornak received an award of 20,000 restricted shares, the details of
which are included in the Grant of Plan-Based Awards table.(12)
    
    As described above, under the heading Commission Program for VP, Global Sales and Services,
pursuant to Mr. Kings Commission Program for 2010, he earned $463,368 in commission for
performance during 2010. Commission amounts were earned in lieu of, and not in addition to,
salary.(13)
    
    Mr. Nulty was hired in June 2010 with an annual salary of $240,000. The amount reflected for
Mr. Nultys 2010 salary reflects his having been employed for a partial year.(14)
    
    In connection with the start of his employment, Mr. Nulty was paid a one-time signing bonus
of $10,000. Grant of Plan-Based Awards Table
  All Other OptionEstimated Possible Payouts Under
    
    
    Estimated Future Payouts Under
    
    
    All Other Stock
    
    
    Awards; Number of
    
    
    
    
    
    
    Grant Date FairNon-Equity Incentive Plan Awards(1)
    
    
    Equity Incentive Plan Awards
    
    
    Awards; Number of
    
    
    Securities
    
    
    Exercise or Base
    
    
    Value of Stock andThreshold
    
    
    Target
    
    
    Maximum
    
    
    Threshold
    
    
    Target
    
    
    Maximum
    
    
    Shares of Stock or
    
    
    Underlying Options
    
    
    Price of Option
    
    
    Option AwardsName
    
    Grant Date
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    Units (#)
    
    
    (#)(2)
    
    
    Awards ($/Sh)
    
    
    ($)(3)Edward H. Kennedy
    
    
    
    
    
    
    78,750
    
    
    
    94,500
    
    
    
    315,0003/23/2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4) 50,000
    
    
    
    
    
    
    
    
    
    
    
    315,0003/23/2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4) 250,000
    
    
    
    6.31
    
    
    
    809,2506/17/2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    6.48
    
    
    
    471,510Joseph A. Ferrara
    
    
    
    
    
    
    78,750
    
    
    
    94,500
    
    
    
    315,0003/30/2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5)  30,000Michael D. Bornak
    
    
    
    
    
    
    43,750
    
    
    
    52,500
    
    
    
    175,0003/26/2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6)   20,000
    
    
    
    
    
    
    
    
    
    
    
    126,000Robert H. King
    
    
    
    
    
    
    
    
    
    
    (7) 465,0006/17/2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    6.48
    
    
    
    78,585Gregory M. Nulty
    
    
    
    
    
    
    42,000
    
    
    
    50,400
    
    
    
    168,0006/17/2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    6.48
    
    
    
    157,170David L. Blakeney
    
    
    
    
    
    
    25,003
    
    
    
    30,003
    
    
    
    100,0106/17/2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    6.48
    
    
    
    62,868
 
 Notes to Grant of Plan-Based Awards Table:(1)
    
    A description of the Companys 2010 non-equity incentive plan for Messrs. Kennedy, Ferrara,
Bornak, Nulty and Blakeney, including the amounts actually paid under the plan, is included
above under the heading, Bonus and Non-Equity Incentive Plan Compensation. A description
of the 2010 non-equity incentive plan for Mr. King, including the amounts actually paid
thereunder, is included above under the heading, Commission Program for VP, Global Sales and
Services. 74




---



##### Table of Contents



(2)
    
    Except where otherwise specifically noted in other footnotes, options granted vest in three
equal installments on each of the first, second, and third anniversaries of the date of grant
and expire ten years from the date of grant.(3)
    
    Amounts reflect the grant date fair value of awards computed in accordance with FASB ASC
Topic 718. Assumptions used in calculating these amounts are included in Note 2 to our
audited financial statements for the year ended December 31, 2010 appearing in this Annual
Report on Form 10-K.(4)
    
    The awards of 50,000 restricted shares and 250,000 stock appreciation rights were granted to
Mr. Kennedy in his capacity as non-executive Chairman of the Board of Directors, and prior to
his becoming employed by the Company as its President and CEO. The restricted share award
will vest on the first anniversary of the date of grant. The stock appreciation rights will
vest only in the event and upon the effectiveness of a corporate transaction as defined in the
(award agreement).(5)
    
    The award of 30,000 restricted shares to Mr. Ferrara in March 2010 was scheduled to vest on
the third anniversary of the grant date; however the award was forfeited in its entirety in
connection with Mr. Ferraras termination of employment in June 2010 pursuant to the terms of
the 2006 Long-Term Incentive Plan.(6)
    
    The award of 20,000 restricted shares to Mr. Bornak in March 2010 is scheduled to vest on the
third anniversary of the date of grant.(7)
    
    Under the terms of Mr. Kings non-equity incentive compensation plan, if Mr. King were to
reach the target amount of commissions under his non-equity incentive plan, commissions would
be paid in lieu of, and not in addition to, his base salary of $228,000. A description of the
2010 non-equity incentive plan for Mr. King, including the amounts actually paid thereunder,
is included above under the heading, Commission Program for VP, Global Sales and Services. Outstanding Equity Awards at Fiscal Year-End 2010
  Option Awards
    
    
    Stock AwardsEquity Incentive
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity IncentiveNumber of
    
    
    
    
    
    
    Plan Awards: Number
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity Incentive
    
    
    Plan Awards: MarketSecurities
    
    
    Number of Securities
    
    
    of Securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market Value of
    
    
    Plan Awards: Number
    
    
    or Payout Value ofUnderlying
    
    
    Underlying
    
    
    Underlying
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares or Units of
    
    
    of Unearned Shares,
    
    
    Unearned Shares,Unexercised Options
    
    
    Unexercised Options
    
    
    Unexercised
    
    
    
    
    
    
    
    
    
    
    Number of Shares or
    
    
    Stock That Have Not
    
    
    Units or Other
    
    
    Units or Other(#)
    
    
    (#)
    
    
    Unearned Options
    
    
    Option Exercise
    
    
    Option Expiration
    
    
    Units of Stock That
    
    
    Vested
    
    
    Rights That Have
    
    
    Rights That HaveName
    
    Exercisable
    
    
    Unexercisable
    
    
    (#)
    
    
    Price ($)
    
    
    Date(1)
    
    
    Have Not Vested (#)
    
    
    ($)(2)
    
    
    Not Vested (#)
    
    
    Not Vested ($)Edward H. Kennedy
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    464,00035,000
    
    
    
    
    
    
    
    
    
    
    
    5.17
    
    
    
    7/20/2019150,000
    
    
    
    
    
    
    
    6.48
    
    
    
    6/17/2020(3) 250,000
    
    
    
    
    
    
    
    6.31
    
    
    
    3/23/2020Joseph A. Ferrara
    
    
    72,508
    
    
    
    
    
    
    
    
    
    
    
    7.78
    
    
    
    6/8/2011Michael D. Bornak
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    185,60016,667
    
    
    
    33,333
    
    
    
    
    
    
    
    6.03
    
    
    
    12/10/2019Robert H. King
    
    
    8,333
    
    
    
    16,667
    
    
    
    
    
    
    
    5.38
    
    
    
    1/26/20193,333
    
    
    
    6,667
    
    
    
    
    
    
    
    5.32
    
    
    
    5/12/2019
    
    
    
    25,000
    
    
    
    
    
    
    
    6.48
    
    
    
    6/17/2020Gregory M. Nulty
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    6.48
    
    
    
    6/17/2020David L. Blakeney
    
    
    
    
    
    
    11,666
    
    
    
    
    
    
    
    3.27
    
    
    
    10/20/2018
    
    
    
    20,000
    
    
    
    
    
    
    
    6.48
    
    
    
    6/17/2020
 
 Notes to Outstanding Equity Awards at Fiscal Year End 2010 Table:(1)
    
    Except in the case of Mr. Ferraras options, the option expiration dates stated are based on
the original terms of the grant. Under the terms of our 2006 Long-Term Incentive Compensation
Plan, non-qualified stock options that are exercisable at the time of termination of
employment under certain circumstances must be exercised on or before the earlier of the
expiration date or the date which is one year following termination of employment. Mr.
Ferraras employment terminated on June 8, 2010, and as such his options will expire on June
8, 2011. 75




---



##### Table of Contents



(2)
    
    Market value of unvested shares is based on $9.28 per share, which was the closing price of
our common stock on December 31, 2010.(3)
    
    Award of 250,000 stock appreciation rights, which, subject to vesting, represent the right to
receive the difference between fair market value on the date of exercise and the exercise
price of $6.31. This award was granted to Mr. Kennedy in his capacity as non-executive
Chairman of the Board of Directors, and prior to his becoming employed by the Company as its
CEO and President.
 Option Exercises and Stock Vested
  Option Awards
    
    
    Stock AwardsNumber of Shares
    
    
    Value Realized on
    
    
    Number of Shares
    
    
    Value Realized onName
    

Acquired on Exercise (#)
    
    
    Exercise ($)
    
    
    Acquired on Vesting (#)
    
    
    Vesting ($)Edward H. Kennedy
    
    
    
    
    
    
    
    
    
    
    6,098
    
    
    
    45,003Joseph A. Ferrara
    
    
    74,158
    
    
    
    140,405
    
    
    
    2,870
    
    
    
    21,956Michael D. Bornak
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Robert H. King
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gregory M. Nulty
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    David L. Blakeney
    
    
    23,334
    
    
    
    93,919
    
    
    
    
    
    
    
    
 Employment Agreement, Separation of Employment and Change-in-Control Agreements
 Employment Agreement with Edward H. Kennedy
      (i)
    
    the greater of (a) his annual base salary on the date of termination (provided
that in the case of good reason for termination, the date immediately preceding the date
of the event that gave rise to the good reason for termination shall be used instead of
the date of termination) or (b) his annual base salary in effect when the
change-in-control occurred, plus(ii)
    
    the greater of (a) his average annual cash award for the two calendar years prior
to the date of termination (provided that in the case of good reason for termination,
the date immediately preceding the date of the event that gave rise to
 76




---



##### Table of Contents



the good reason for termination shall be used instead of the date of termination) or
(b) his average annual cash award for the two calendar years prior to the date of the
change-in-control.
   Base salary ($350,000) x 3
    
    $
    1,050,000Average bonus payment ($103,590) x3
    
    
    310,770Estimated annual benefits ($28,000) x3
    
    
    84,000Estimated outplacement fees (15% of base salary)
    
    
    52,500Acceleration of vesting of options, stock appreciation rights
and restricted shares (based on closing stock price (9.28) and
awards outstanding on 12/31/10)
    
    
    1,626,500Total
    
    $
    3,123,770
     Base Salary ($350,000) x 2
    
    $
    700,000Average Bonus Payment ($103,590) x2
    
    
    207,180Estimated annual benefits ($28,000) x2
    
    
    56,000Estimated outplacement fees (15% of base salary)
    
    
    52,500Total
    
    $
    1,015,680
    77




---



##### Table of Contents



Employment Agreement with Joseph A. Ferrara
   Separation and Mutual Release Agreement with Joseph A. Ferrara
  Base salary ($350,000) x 2
    
    $
    700,000Average Bonus Payment ($47,250) x 2
    
    
    94,500Continuation of benefits and long-term disability gross-up
    
    
    39,610Outplacement fees (entitled to up to 15% of base salary)
    
    
    52,500Total
    
    $
    886,610
   Severance and Change in Control Agreements with Michael D. Bornak and Gregory M. Nulty
  78




---



##### Table of Contents



Bornak
    
    
    NultyBase salary
    
    $
    250,000
    
    
    $
    240,000Estimated annual benefits (one year)
    
    
    16,000
    
    
    
    16,000Outplacement fees
    
    
    6,000
    
    
    
    6,000Total
    
    $
    272,000
    
    
    $
    262,000
   Bornak
    
    
    NultyBase salary x2
    
    $
    500,000
    
    
    $
    480,000Average bonus x2
    
    
    116,214
    
    
    
    110,496Estimated annual benefits x2
    
    
    32,000
    
    
    
    32,000Outplacement fees
    
    
    6,000
    
    
    
    6,000Acceleration of vesting of options and restricted
shares based on closing stock price ($9.28) and
awards outstanding at 12/31/10
    
    
    293,932
    
    
    
    140,000Total
    
    $
    942,146
    
    
    $
    768,496
   Severance Agreements with David L. Blakeney and Robert H. King
   79




---



##### Table of Contents



Blakeney
    
    
    KingBase salary
    
    $
    200,018
    
    
    $
    228,000Estimated annual benefits (one year)
    
    
    16,000
    
    
    
    16,000Outplacement fees
    
    
    6,000
    
    
    
    6,000Total
    
    $
    222,018
    
    
    $
    250,000
  Director Compensation
  Non-Employee
    
    Fees Earned or PaidDirector Name
    
    in Cash ($)
    
    
    Stock Awards ($)(1)
    
    
    Option Awards ($)(1)
    
    
    Total ($)Scott C. Chandler
    
    
    20,000
    
    
    
    58,560
    
    
    
    
    
    
    
    78,560Richard H. Heibel, M.D.
    
    
    21,935
    
    
    
    58,560
    
    
    
    
    
    
    
    80,495Charles E. Hoffman
    
    
    36,440
    
    
    
    58,560
    
    
    
    
    
    
    
    95,000Robert W. Kampmeinert
    
    
    21,250
    
    
    
    58,560
    
    
    
    
    
    
    
    79,810Edward B.
Meyercord, III
    
    
    23,179
    
    
    
    58,560
    
    
    
    
    
    
    
    81,739Jeffrey M. Solomon
    
    
    20,000
    
    
    
    58,560
    
    
    
    
    
    
    
    78,560
 
 Note (1):
    
    Amounts reflect the grant date fair value of awards computed in accordance with FASB ASC
Topic 718. Assumptions used in calculating these amounts are included in Note 2 to our audited
financial statements for the year ended December 31, 2010 appearing in this Annual Report on Form
10-K. Non-Employee Director Compensation
    80




---



##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
 Security Ownership of Certain Beneficial Owners and Management
  Name and Address of
    
    Amount and Nature of
    
    
    Percentage of Common StockBeneficial Owner(1)
    

Beneficial Ownership (2)
    
    

Outstanding (3)Edward H. Kennedy
    
    (4)(5)
    
    
    91,098
    
    
    *Michael D. Bornak
    
    (4)(6)
    
    
    36,667
    
    
    *David L. Blakeney
    
    
    
    
    23,334
    
    
    *Robert H. King
    
    (4)
    
    
    19,999
    
    
    *Gregory M. Nulty
    
    
    
    
    0
    
    
    Scott C. Chandler
    
    (7)
    
    
    16,598
    
    
    *Richard H. Heibel
    
    (4)(7)(8)
    
    
    119,973
    
    
    *Charles E. Hoffman
    
    (4)(7)
    
    
    49,098
    
    
    *Robert W. Kampmeinert
    
    (4)(7)
    
    
    50,764
    
    
    *Edward B. Meyercord, III
    
    (7)
    
    
    16,798
    
    
    *Jeffrey M. Solomon
    
    (7)(9)
    
    
    2,109,055
    
    
    16.25%All directors and executive officers
as a group (14 persons)
    
    (4)  (9)
    
    
    2,580,884
    
    
    19.88Ramius LLC
599 Lexington Avenue 
20th
Floor 
New York, NY 10022
    
    (10)
    
    
    2,094,957
    
    
    16.14Bradford
Capital Partners 
133 Freeport Rd. 
Pittsburgh, PA 15215
    
    (11)
    
    
    1,547,053
    
    
    11.91Dimensional
Fund Advisors LP 
Palisades West, Building One, 
6300 Bee Cave Road 
Austin, Texas 78746
    
    (12)
    
    
    1,073,801
    
    
    8.27Royce &
Associates, LLC
745 Fifth
Avenue 
New York, NY 10151
    
    (13)
    
    
    828,060
    
    
    6.38Renaissance
Technologies, LLC
800 Third
Avenue 
New York, NY 10022
    
    (14)
    
    
    709,800
    
    
    5.47Wellington
Management Company, LLP
280 Congress
Street 
Boston, MA 02210
    
    (15)
    
    
    666,200
    
    
    5.13Wellington
Trust Company, NA
c/o
Wellington Management Company, LLP 
280 Congress Street 
Boston, MA 02210
    
    (16)
    
    
    666,200
    
    
    5.13
 
  81




---



##### Table of Contents



(1)
    
    If not provided above, the address of listed shareholders is c/o Tollgrade Communications,
Inc., 3120 Unionville Rd, Suite 400, Cranberry Twp., PA 16066.(2)
    
    Under regulations of the SEC, a person who has or shares voting or investment power with
respect to a security is considered a beneficial owner of the security. Voting power is the
power to vote or direct the voting of shares, and investment power is the power to dispose of
or direct the disposition of shares. Unless otherwise indicated in the other footnotes below,
each person has sole voting power and sole investment power as to all shares listed opposite
his name. The inclusion of any shares of stock deemed to be beneficially owned does not
constitute an admission of beneficial ownership of those shares.(3)
    
    In computing the percentage ownership of any person, the number of shares outstanding
includes 13,007,388 shares of common stock outstanding as of February 28, 2011, plus any
 shares subject to outstanding stock options exercisable within 60 days after February 28,
2011, held by the applicable person or persons.(4)
    
    Includes options there were exercisable on or within 60 days of February 28, 2011 of such
individual for the following number of shares: Kennedy (35,000), Bornak (16,667), King
(19,999), Heibel (35,000), Hoffman (35,000), Kampmeinert (35,000) and other executive officers
as a group (80,481).(5)
    
    Includes 50,000 restricted share units issued to Mr. Kennedy on March 23, 2010, which vest on
March 23, 2011.(6)
    
    Includes 20,000 restricted shares granted to Mr. Bornak on March 26, 2010, which vest on
March 26, 2013.(7)
    
    Includes 8,000 restricted shares granted to each of our non-employee directors on October 1,
2010, which vest on October 1, 2011.(8)
    
    Includes 32,246 shares held by the spouse of Dr. Heibel, as to which Dr. Heibel shares
voting and dispositive power.(9)
    
    Includes 965,199 shares held by Ramius Value and Opportunity Master Fund Ltd., 794,514 shares
held by Ramius Navigation Master Fund Ltd., and 335,244 shares held by Ramius Enterprise
Master Fund Ltd., which Mr. Solomon may be deemed to beneficially own as described in Note 10,
below. Mr. Solomon disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein.(10)
    
    Information taken solely from the Form 4 filed with the SEC on May 1, 2010 by Ramius LLC, C4S
& Co LLC, Peter A. Cohen, Morgan B. Stark, Thomas W. Strauss, Jeffrey M. Solomon, Cowen Group,
Inc. and RGC Holdings, LLC (collectively the Reporting Persons for purposes of this footnote
10). Based on the matters reported in such filing, as of May 1, 2010:
 
    
    Ramius Value and Opportunity Master Fund Ltd. (Value and Opportunity Master Fund)
is the beneficial owner of 965,199 shares.
    
    Ramius PB, Ltd. is the beneficial owner of 794,514 shares.
    
    Ramius Navigation Master Fund Ltd. is the beneficial owner of 335,244 shares.
    
    RCG PB Ltd. (RCG PB), as the sole shareholder of Navigation Master Fund, may be
deemed to beneficially own the common stock beneficially owned by Navigation Master
Fund.
 Each Reporting Person (other than Ramius Enterprise Master Fund Ltd, Value and Opportunity
Master Fund, Ramius Navigation Master Fund Ltd and RCG PB) disclaims beneficial ownership of
the shares of common stock except to the extent of his or its pecuniary interest therein.As the sole member of Ramius Advisors, LLC (Ramius Advisors), the investment advisor of
Ramius Enterprise Master Fund Ltd (Enterprise Master Fund), Ramius LLC (Ramius) may be
deemed to beneficially own the shares of common stock beneficially owned by Enterprise Master
Fund. As the sole member of Ramius, Cowen Group, Inc. (Cowen) may be deemed to beneficially
own the shares of common stock beneficially owned by Enterprise Master Fund. As a significant
shareholder of Cowen, RCG Holdings LLC (RCG Holdings) may be deemed to beneficially own the
 shares of common stock beneficially owned by Enterprise Master Fund. As the managing member
of RCG Holdings, C4S, & Co., L.L.C. (C4S) may be deemed to beneficially own the shares of
common stock beneficially owned by Enterprise Master Fund. As the managing members of C4S,
each of Messrs. Cohen, Stark, Solomon and Strauss may be deemed to beneficially own the shares
of common stock beneficially owned by Enterprise Master Fund.As the sole member of Ramius Advisors, the investment advisor of Ramius Navigation Master Fund
Ltd (Navigation Master Fund), Ramius may be deemed to beneficially own the shares of common
stock beneficially owned by Navigation Master Fund. As the sole member of Ramius, Cowen may
be deemed to beneficially own the shares of common stock beneficially owned by Navigation
Master Fund. As a significant shareholder of Cowen, RCG Holdings may be deemed to
beneficially own the shares of common stock beneficially owned by Navigation Master Fund. As
the managing member of RCG Holdings, C4S may be deemed to beneficially own the shares of
common stock beneficially owned by Navigation Master Fund. As the
 82




---



##### Table of Contents



managing members of C4S each of Peter A. Cohen, Morgan B. Stark, Jeffrey M. Solomon and Thomas
W. Strauss may be deemed to beneficially own the shares of common stock beneficially owned by
Navigation Master Fund.As the sole member of RCG Starboard Advisors, LLC (RCG Starboard Advisors), the investment
manager of Ramius Value and Opportunity Master Fund Ltd (Value and Opportunity Master
Fund)., Ramius may be deemed to beneficially own the shares of common stock beneficially
owned by Value and Opportunity Master Fund. As the sole member of Ramius, Cowen may be deemed
to beneficially own the shares of common stock beneficially owned by Value and Opportunity
Master Fund. As a significant shareholder of Cowen, RCG Holdings may be deemed to beneficially
own the shares of common stock beneficially owned by Value and Opportunity Master Fund. As
the managing member of RCG Holdings, C4S may be deemed to beneficially own the shares of
common stock beneficially owned by Value and Opportunity Master Fund. As the managing members
of C4S, each of Messrs. Cohen, Stark, Solomon and Strauss may be deemed to beneficially own
the shares of common stock beneficially owned by Value and Opportunity Master Fund.As the sole member of Ramius Advisors, the investment advisor of RCG PB, Ramius may be deemed
to beneficially own the shares of common stock beneficially owned by RCG PB. As the sole
member of Ramius, Cowen may be deemed to beneficially own the shares of common stock
beneficially owned by RCG PB. As the majority shareholder of Cowen, RCG Holdings may be deemed
to beneficially own the shares of common stock beneficially owned by RCG PB. As the managing
member of RCG Holdings, C4S may be deemed to beneficially own the shares of common stock
beneficially owned by RCG PB. As the managing members of C4S, each of Messrs. Cohen, Stark,
Solomon and Strauss may be deemed to beneficially own the shares of common stock beneficially
owned by RCG PB.(11)
    
    Information taken solely from the Schedule 13D/A filed with the SEC on December 1, 2008
reflecting ownership of our common stock as of December 1, 2008. The filing reflects that
Bradford Capital Partners, BCP Investment LLC, Stephen J. Lynch and Joseph L. Calihan have
shared voting and dispositive power over 1,547,053 shares. No more recent filings were
available as of February 2011.(12)
    
    Information taken solely from the Schedule 13G/A filed on February 11, 2011 reflecting
ownership of our common stock as of December 31, 2011. The filing indicates that Dimensional
Fund Advisors LP, an investment adviser registered under Section 203 of the Investment
Advisors Act of 1940, furnishes investment advice to four investment companies registered
under the Investment Company Act of 1940, and serves as investment manager to certain other
commingled group trusts and separate accounts (such investment companies, trusts and accounts,
collectively referred to as the Funds). The filing reflects that Dimensional Fund Advisors
LP has sole voting power over 1,057,376 shares and has sole power over 1,073,801 shares. In
certain cases, subsidiaries of Dimensional Fund Advisors LP may act as an adviser or
sub-adviser to certain Funds. In its role as investment advisor, sub-adviser and/or manager,
neither Dimensional Fund Advisors LP or its subsidiaries (collectively, Dimensional) possess
voting and/or investment power over the securities of the Issuer that are owned by the Funds,
and may be deemed to be the beneficial owner of the shares of the Issuer held by the Funds.
However, according to the filing, all securities reported are owned by the Funds. The filing
indicates that Dimensional disclaims beneficial ownership of such securities and shall not be
construed as an admission that the reporting person or any of its affiliates is the beneficial
owner of any securities covered by this Schedule 13G for any other purposes than Section 13(d)
of the Securities Exchange Act of 1934.(13)
    
    Information taken solely from the Schedule 13G/A filed with the SEC on January 25, 2011
reflecting ownership of our common stock as of December 31, 2010. The filing reflects that
Royce & Associates, LLC has sole voting and dispositive power over 828,060 shares.
Accordingly to the Schedule 13 G/A, the interests of one account, Royce Opportunity Fund, an
investment company registered under the Investment Company Act of 1940 and managed by Royce &
Associates, LLC amounted to 651,988 shares or 5.1% of the total shares outstanding.(14)
    
    Information taken solely from the Schedule 13G/A filed with the SEC on February 14, 2011
reflecting ownership of our common stock as of December 31, 2010. The filing indicates that it
was filed pursuant to a joint filing agreement between Renaissance Technologies LLC (RTC),
James H. Simons and Renaissance Technologies Holdings Corporation (RTHC). The filing
reflects that each of RTC, in its capacity as investment advisor, and RTHC beneficially owns
and has sole voting and dispositive power over 790,800 shares of our common stock. Certain
funds and accounts managed by RTC have the right to receive dividends and proceeds from the
sale of the securities covered by the filing. According to the filing, as of January 1, 2010,
James H. Simons ceased to be the beneficial owner of any of these shares.(15)
    
    Information taken solely from the Schedule 13G filed with the SEC on February 14, 2011
reflecting ownership of our common stock as of December 31, 2010. The filing reflects that
Wellington Management, in its capacity as investment adviser, may be deemed to beneficially
own 666,200 of our shares or 5.21% which are held of record by clients of Wellington
Management. According to the Schedule 13G, the securities are owned of record by clients of
Wellington Management and those clients have the right to receive, or the power to direct the
receipt of, dividends from, or the proceeds from the sale of, such securities. According to
the Schedule 13G, no such client is known to have such right or power with respect to more
than five percent of this class of securities other than Wellington Trust, which is disclosed
in the Note below.(16)
    
    Information taken solely from the Schedule 13G filed with the SEC on February 14, 2011
reflecting ownership of our common stock as of December 31, 2010. The filing reflects that
Wellington Trust, in its capacity as investment adviser, may be deemed
 83




---



##### Table of Contents



to beneficially own 666,200 of our shares or 5.21% which are held of record by clients of
Wellington Trust. According to the Schedule 13G, the securities are owned of record by
clients of Wellington Trust and those clients have the right to receive, or the power to
direct the receipt of, dividends from, or the proceeds from the sale of, such securities.
According to the Schedule 13G, no such client is known to have such right or power with
respect to more than five percent of this class of securities.
 Securities Authorized for Issuance Under Equity Compensation Plans
  No. of securitiesremaining available forfuture issuance underNo. of securities
    
    
    
    
    
    
    equity compensationto be issued upon
    
    
    
    
    
    
    plans (excludingexercise of
    
    
    Weighted average
    
    
    securities to be issuedoutstanding
    
    
    exercise price of
    
    
    upon exercise ofoptions
    
    
    outstanding options
    
    
    outstanding optionsEquity compensation plans approved by security
holders1995 Long-Term Incentive Compensation Plan (1)
    
    
    142,382
    
    
    $
    14.99
    
    
    
    2006 Long-Term Incentive Compensation Plan
    
    
    1,117,277
    
    
    $
    6.33
    
    
    
    1,306,787Equity compensation plans not approved by security
holders1998 Employee Incentive Compensation Plan (1)
    
    
    53,333
    
    
    $
    24.96
    
    
    
    Total:
    
    
    1,312,992
    
    
    
    
    
    
    
    1,306,787
 
 (1)
    
    No further grants may be made under these plans.  
 Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
 Related Party Transaction Policy
 www.tollgrade.com
     84




---



##### Table of Contents



Related Party Transactions
  Director Independence
  
 Item 14.
    
    Principal Accounting Fees and Services
  Applicable Fees
    
    Year ended December 31, 2009
    
    
    Year ended December 31, 2010Audit Fees
    
    $
    598,585
    
    
    $
    327,600Audit-Related Fees
    
    
    57,800
    
    
    
    Tax Fees
    
    
    13,998
    
    
    
    154,553All Other Fees
    
    
    207,000
    
    
    
    40,271Total Fees
    
    $
    877,383
    
    
    $
    522,424
    85




---



##### Table of Contents



de minimus
 
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
  (1)
    
    Financial StatementsThe financial statements of the Company are listed in the Index to Consolidated Financial
Statements(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(3)
    
    The following exhibits are included herewith and made a part hereof:
 ExhibitNumber
    
    Description2.1
    
    Agreement and Plan of Merger, dated as of February 21, 2011, by and among Talon
Merger Sub, Inc., a Pennsylvania corporation, Talon Holdings, Inc., a Delaware
corporation, and Tollgrade Communications, Inc., a Pennsylvania corporation,
incorporated by reference to Exhibit 2.1 to the Companys Report on Form 8-K,
filed with the SEC on February 25, 20113.1
    
    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 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 10-K3.1b
    
    Amendment to Articles incorporated herein by reference, filed on the Companys
Report on Form 8-K filed with the SEC on May 21, 20073.2
    
    Amended and Restated Bylaws of the Company filed as Exhibit 3.2 to the
Companys Report on Form 8-K filed with the SEC on May 21, 200710.1
    
    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, 200710.2
    
    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
Report on Form 8-K filed with the SEC on November 30, 200610.3
    
    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 filed with the SEC on September 7, 200510.4
    
    Amendment of Lease, dated May 22, 2009, between the Regional Industrial
Development Corporation of Southwestern Pennsylvania and Tollgrade
Communications, Inc., filed as Exhibit 10.3 to the Quarterly Report on Form
10-Q filed with the SEC on August 6, 2009
 86




---



##### Table of Contents



ExhibitNumber
    
    Description10.5
    
    Amendment of Lease, dated September 14, 2009, between the Regional Industrial
Development Corporation of Southwestern Pennsylvania and Tollgrade
Communications, Inc., filed as Exhibit 10.10 to the Companys Form 10-K filed
with the SEC on March 10, 2010 (the 2009 10-K)10.6
    
    Lease Agreement dated October 13, 2010 between CBP 110 LP and Tollgrade
Communications, Inc., filed herewith10.7 *
    
    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, 200210.8 *
    
    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, 199610.9 *
    
    Amendment dated December 13, 2007 to the 1995 Long-Term Incentive Compensation
Plan, filed as Exhibit 10.40 to the Companys Form 10-K filed with the SEC on
March 17, 2008 (the 2007 10-K)10.10 *
    
    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 10-K)10.11 *
    
    Amendment dated December 13, 2007 to the 1998 Long-Term Incentive Compensation
Plan, filed as Exhibit 10.41 to the 2007 10-K10.12 *
    
    Tollgrade Communications, Inc. 2006 Long-Term Incentive Compensation Plan as
amended and restated as of August 5, 2009, filed as Exhibit 10.12 to the 2009
10-K10.13 *
    
    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, 200610.14 *
    
    Form of Employee Restricted Share Agreement for restricted share grants
pursuant to the 2006 Long-Term Incentive Compensation Plan, filed as Exhibit
10.37 to the Companys Form 10-K filed with the SEC on March 17, 2008 (the
2007 10-K)10.15 *
    
    Form of Director Restricted Share Agreement for restricted share grants
pursuant to the 2006 Long-Term Incentive Compensation Plan, filed as Exhibit
10.38 to the 2007 10-K10.16 *
    
    Stock Appreciation Rights Agreement dated March 25, 2010 between the Company
and Edward H. Kennedy, filed herewith10.17 *
    
    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, 200710.18 *
    
    Amendment dated December 13, 2007 to the Management Incentive Compensation
Plan, filed as Exhibit 10.39 to the 2007 10-K10.19 *
    
    Appendix I to Management Incentive Compensation Plan for 2010 Award Year,
adopted February 19, 2010, filed as Exhibit 10.1 to the Companys Form 10-Q
filed with the SEC on May 6, 201010.20 *
    
    Severance Policy, filed as Exhibit 10.1 to the Report on Form 8-K filed with
the SEC on January 31, 200810.21 *
    
    Severance Agreement dated March 17, 2009 between Tollgrade Communications, Inc.
and Joe OBrien, filed as Exhibit 10.3 to the March 19, 2009 8-K10.22 *
    
    Severance Agreement dated March 17, 2009 between Tollgrade Communications, Inc.
and Robert King, filed as Exhibit 10.4 to the March 19, 2009 8-K10.23 *
    
    Severance Agreement dated March 17, 2009 between Tollgrade Communications, Inc.
and David L. Blakeney, filed as Exhibit 10.6 to the March 19, 2009 8-K10.24 *
    
    Form of Amendment to Severance Agreement dated December 15, 2010 in effect
between the Company and each of David L. Blakeney, Robert H. King and Joseph G.
OBrien, filed herewith10.25 *
    
    Summary of 2010 Commission Program for Robert H. King, as described in the
Report on Form 8-K filed with the SEC on April 30, 2010
 87




---



##### Table of Contents



ExhibitNumber
    
    Description10.26*
    
    Summary of 2011 Commission Program for Robert H. King, filed herewith10.27*
    
    Agreement dated September 23, 2010 by and between Tollgrade Communications,
Inc. and Edward H. Kennedy, incorporated by reference to Exhibit 10.1 of the
Companys Report on Form 8-K, filed with the SEC on September 29, 201010.28*
    
    Amendment dated February 20, 2011 to the Agreement dated September 23, 2010 by
and between the Company and Edward H. Kennedy, incorporated by reference to
Exhibit 10.2 of the Companys Report on Form 8-K, filed with the SEC on
February 25, 201110.29*
    
    Agreement dated March 12, 2010 between Tollgrade Communications, Inc. and
Michael D. Bornak, filed as Exhibit 10.1 to the Companys Report on Form 8-K,
filed with the SEC on March 24, 201010.30*
    
    Agreement dated March 12, 2010 between Tollgrade Communications, Inc. and
Jennifer M. Reinke, filed herewith10.31*
    
    Agreement dated June 21, 2010 between Tollgrade Communications, Inc. and
Gregory M. Nulty, filed herewith10.32*
    
    Form of Amendment dated December 15, 2010 to Agreement in effect between the
Company and each of Michael D. Bornak, Gregory M. Nulty and Jennifer M. Reinke,
filed herewith10.33*
    
    Amendment dated February 20, 2011 to Agreement in effect between the Company
and Michael D. Bornak, incorporated by reference to Exhibit 10.1 of the
Companys Report on Form 8-K, filed with the SEC on February 25, 201110.34*
    
    Amendment dated February 20, 2011 to Agreement in effect between the Company
and Gregory M. Nulty, filed herewith10.35*
    
    Amendment dated February 20, 2011 to Agreement in effect between the Company
and Jennifer M. Reinke, filed herewith10.36*
    
    Separation and Mutual Release Agreement, dated June 18, 2010, between Tollgrade
Communications, Inc. and Joseph A. Ferrara, filed as Exhibit 10.2 to the
Companys Form 10-Q filed with the SEC on August 3, 201010.37*
    
    Severance Agreement, dated December 7, 2010, between the Company and Thomas J.
Kolb, filed herewith21.1
    
    List of subsidiaries of the Company, filed as Exhibit 21.1 to the 2007 Form 10-K23.1
    
    Consent of Deloitte & Touche LLP, filed herewith23.2
    
    Consent of PricewaterhouseCoopers LLP, filed herewith31.1
    
    Certification of Chief Executive Officer, filed herewith31.2
    
    Certification of Chief Financial Officer, filed herewith32
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant
to 18 U.S.C. Section 350, filed herewith
 
 *
    
    Management contract or compensatory plan, contract or arrangement required to be filed by
Item 601(b)(10)(iii) of Regulation S-K.Copies of the exhibits filed as part of this Form 10-K are available free of charge to any
shareholder of record upon written request to the Secretary,
Tollgrade Communications, Inc., 3120 Unionville Road,
Suite 400, Cranberry Twp., PA 16066.LoopCare is a trademark of Tollgrade Communications, Inc.N(x)Test is a trademark of Tollgrade Communications, Inc.LTSC is a trademark of Tollgrade Communications, Inc.®Tollgrade is a registered trademark of Tollgrade Communications, Inc.®DigiTest is a registered trademark of Tollgrade Communications, Inc.®ICE is a registered trademark of Tollgrade Communications, Inc.®LightHouse is a registered trademark of Tollgrade Communications, Inc.®EDGE is a registered trademark of Tollgrade Communications, Inc.®MCU is a registered trademark of Tollgrade Communications, Inc.®4TEL is a registered trademark of Tollgrade Communications, Inc.®Celerity is a registered trademark of Tollgrade Communications, Inc.All other trademarks are the property of their respective owners. 88




---



##### Table of Contents



SIGNATURES
  TOLLGRADE COMMUNICATIONS, INC.By
    /s/ Edward H. KennedyEdward H. KennedyChief Executive Officer and President  Signature
    
    Title/s/ Edward H. Kennedy

Edward M. Kennedy
    
    Chairman, Chief Executive Officer and President
(Principal
Executive Officer)/s/ Scott C. Chandler

Scott C. Chandler
    
    Director/s/ Richard H. Heibel

Richard H. Heibel
    
    Director/s/ Charles E. Hoffman

Charles E. Hoffman
    
    Director/s/ Robert W. Kampmeinert

Robert W. Kampmeinert
    
    Director/s/ Edward B. Meyercord

Edward B. Meyercord, III
    
    Director/s/ Jeffrey M. Solomon

Jeffrey M. Solomon
    
    Director/s/ Michael D. Bornak

Michael D. Bornak
    
    Chief Financial Officer and Treasurer
 (Principal Financial Officer)/s/ Mark C. Lang

Mark C. Lang
    
    Corporate Controller
 (Principal Accounting Officer)
 89




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description2.1
    
    Agreement and Plan of Merger, dated as of February 21, 2011, by and among Talon
Merger Sub, Inc., a Pennsylvania corporation, Talon Holdings, Inc., a Delaware
corporation, and Tollgrade Communications, Inc., a Pennsylvania corporation,
incorporated by reference to Exhibit 2.1 to the Companys Report on Form 8-K,
filed with the SEC on February 25, 20113.1
    
    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 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 10-K3.1b
    
    Amendment to Articles incorporated herein by reference, filed on the Companys
Report on Form 8-K filed with the SEC on May 21, 20073.2
    
    Amended and Restated Bylaws of the Company filed as Exhibit 3.2 to the
Companys Report on Form 8-K filed with the SEC on May 21, 200710.1
    
    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, 200710.2
    
    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
Report on Form 8-K filed with the SEC on November 30, 200610.3
    
    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 filed with the SEC on September 7, 200510.4
    
    Amendment of Lease, dated May 22, 2009, between the Regional Industrial
Development Corporation of Southwestern Pennsylvania and Tollgrade
Communications, Inc., filed as Exhibit 10.3 to the Quarterly Report on Form
10-Q filed with the SEC on August 6, 200910.5
    
    Amendment of Lease, dated September 14, 2009, between the Regional Industrial
Development Corporation of Southwestern Pennsylvania and Tollgrade
Communications, Inc., filed as Exhibit 10.10 to the Companys Form 10-K filed
with the SEC on March 10, 2010 (the 2009 10-K)10.6
    
    Lease Agreement dated October 13, 2010 between CBP 110 LP and Tollgrade
Communications, Inc., filed herewith10.7
    
    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, 200210.8
    
    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, 1996.10.9
    
    Amendment dated December 13, 2007 to the 1995 Long-Term Incentive Compensation
Plan, filed as Exhibit 10.40 to the Companys Form 10-K filed with the SEC on
March 17, 2008 (the 2007 10-K)10.10
    
    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 10-K)10.11
    
    Amendment dated December 13, 2007 to the 1998 Long-Term Incentive Compensation
Plan, filed as Exhibit 10.41 to the 2007 10-K
 90




---



##### Table of Contents



ExhibitNumber
    
    Description10.12
    
    Tollgrade Communications, Inc. 2006 Long-Term Incentive Compensation Plan as
amended and restated as of August 5, 2009, filed as Exhibit 10.12 to the 2009
10-K10.13
    
    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, 200610.14
    
    Form of Employee Restricted Share Agreement for restricted share grants
pursuant to the 2006 Long-Term Incentive Compensation Plan, filed as Exhibit
10.37 to the Companys Form 10-K filed with the SEC on March 17, 2008 (the
2007 10-K)10.15
    
    Form of Director Restricted Share Agreement for restricted share grants
pursuant to the 2006 Long-Term Incentive Compensation Plan, filed as Exhibit
10.38 to the 2007 10-K10.16
    
    Stock Appreciation Rights Agreement dated March 25, 2010 between the Company
and Edward H. Kennedy, filed herewith10.17
    
    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, 200710.18
    
    Amendment dated December 13, 2007 to the Management Incentive Compensation
Plan, filed as Exhibit 10.39 to the 2007 Form 10-K10.19
    
    Appendix I to Management Incentive Compensation Plan for 2010 Award Year,
adopted February 19, 2010, filed as Exhibit 10.1 to the Companys Form 10-Q
filed with the SEC on May 6, 201010.20
    
    Severance Policy, filed as Exhibit 10.1 to the Current Report on Form 8-K filed
with the SEC on January 31, 200810.21
    
    Severance Agreement dated March 17, 2009 between Tollgrade Communications, Inc.
and Joe OBrien, filed as Exhibit 10.3 to the March 19, 2009 8-K10.22
    
    Severance Agreement dated March 17, 2009 between Tollgrade Communications, Inc.
and Robert King, filed as Exhibit 10.4 to the March 19, 2009 8-K10.23
    
    Severance Agreement dated March 17, 2009 between Tollgrade Communications, Inc.
and David L. Blakeney, filed as Exhibit 10.6 to the March 19, 2009 8-K10.24
    
    Form of Amendment to Severance Agreement dated December 15, 2010 in effect
between the Company and each of David L. Blakeney, Robert H. King and Joseph G.
OBrien, filed herewith10.25
    
    Summary of 2010 Commission Program for Robert H. King, as described in the
Report on Form 8-K filed with the SEC on April 30, 201010.26
    
    Summary of 2011 Commission Program for Robert H. King, filed herewith10.27
    
    Agreement dated September 23, 2010 by and between Tollgrade Communications,
Inc. and Edward H. Kennedy, incorporated by reference to Exhibit 10.1 of the
Companys Report on Form 8-K, filed with the SEC on September 29, 201010.28
    
    Amendment dated February 20, 2011 to the Agreement dated September 23, 2010 by
and between the Company and Edward H. Kennedy, incorporated by reference to
Exhibit 10.2 of the Companys Report on Form 8-K, filed with the SEC on
February 25, 201110.29
    
    Agreement dated March 12, 2010 between Tollgrade Communications, Inc. and
Michael D. Bornak, filed as Exhibit 10.1 to the Companys Report on Form 8-K,
filed with the SEC on March 24, 201010.30
    
    Agreement dated March 12, 2010 between Tollgrade Communications, Inc. and
Jennifer M. Reinke, filed herewith10.31
    
    Agreement dated June 21, 2010 between Tollgrade Communications, Inc. and
Gregory M. Nulty, filed herewith10.32
    
    Form of Amendment dated December 15, 2010 to Agreement in effect between the
Company and each of Michael D. Bornak, Gregory M. Nulty and Jennifer M. Reinke,
filed herewith10.33
    
    Amendment dated February 20, 2011 to Agreement in effect between the Company
and Michael D. Bornak, incorporated by reference to Exhibit 10.1 of the
Companys Report on Form 8-K, filed with the SEC on February 25, 2011
 91




---



##### Table of Contents



ExhibitNumber
    
    Description10.34
    
    Amendment dated February 20, 2011 to Agreement in effect between the Company
and Gregory M. Nulty, filed herewith10.35
    
    Amendment dated February 20, 2011 to Agreement in effect between the Company
and Jennifer M. Reinke, filed herewith10.36
    
    Separation and Mutual Release Agreement, dated June 18, 2010, between Tollgrade
Communications, Inc. and Joseph A. Ferrara, filed as Exhibit 10.2 to the
Companys Form 10-Q filed with the SEC on August 3, 201010.37
    
    Severance Agreement, dated December 7, 2010, between the Company and Thomas J.
Kolb, filed herewith21.1
    
    List of subsidiaries of the Company, filed as Exhibit 21.1 to the 2007 Form 10-K23.1
    
    Consent of Deloitte & Touche LLP, filed herewith23.2
    
    Consent of PricewaterhouseCoopers LLP, filed herewith31.1
    
    Certification of Chief Executive Officer, filed herewith31.2
    
    Certification of Chief Financial Officer, filed herewith32
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant
to 18 U.S.C. Section 350, filed herewith
 92