UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


þ		Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~September~~March 3031, ~~2010~~2011


o		Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 000-27312

TOLLGRADE COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)


Pennsylvania		25-1537134
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

~~493~~3120 ~~Nixon~~Unionville ~~Rd.~~Road, Suite 400 ~~Cheswick~~Cranberry Township, PA ~~15024~~16066 (Address of principal executive offices, including zip code)

~~412~~724-~~820~~720-1400 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or ~~for~~ for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ~~Yes þ Noo~~

~~Indicate~~Yes byþ ~~check~~No mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o ~~Noo~~

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


		Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o (Do not check if a smaller reporting company) ~~Smaller reporting company o~~

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ~~Yes o Noþ~~

AsYes ofo ~~October 27,~~No ~~2010, there were 12,786,019 shares of the Registrant’s Common Stock, $0.20 par value per share, outstanding.~~ þ

As of May 3, 2011, there were 13,084,449 shares of the Registrant’s Common Stock, $0.20 par value per share, outstanding.

TOLLGRADE COMMUNICATIONS, INC.

Quarterly Report on Form 10-Q For the Quarter Ended ~~September~~March 3031, ~~2010~~2011 Table of Contents

	Page No.
PART I. FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009		3
Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010		3
Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2010 and September 26, 2009		4
Condensed Consolidated Statements of Operations for the three month periods ended March 31, 2011 and March 31, 2010		4
Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2010 and September 26, 2009		5
Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2011 and March 31, 2010		5
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine month period ended September 30, 2010		6
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three month period ended March 31, 2011		6
Notes to Condensed Consolidated Financial Statements		7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		1312
Item 3 Quantitative and Qualitative Disclosures about Market Risk		2318
Item 4 Controls and Procedures		2319
PART II. OTHER INFORMATION
Item 1A Risk Factors		24
Item 1 Legal Proceedings		19
Item 6 Exhibits		24
Item 1A Risk Factors		20
SIGNATURES		25
Item 6 Exhibits		20
EXHIBIT INDEX		26
SIGNATURES		21
Exhibit 10.1
EXHIBIT INDEX		22
Exhibit 31.1
Exhibit 31.2
Exhibit 32
EX-31.1
EX-31.2
EX-32

PART I. FINANCIAL INFORMATION


Item 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES ~~CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value) (Unaudited)~~

	September 30, 2010			December 31, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	69,564		$	66,046
Short-term investments		3			3
Trade accounts receivable, net of allowance for doubtful accounts of $1,386 and $1,496 in 2010 and 2009		9,611			6,998
Other receivables		194			1,007
Inventories, net		1,582			2,119
Prepaid expenses and deposits		610			759
Deferred and refundable income taxes		240			196
Total current assets		81,804			77,128
Property and equipment, net		2,330			3,101
Intangibles, net		5,834			7,110
Deferred tax assets		114			119
Other assets		143			229
Total assets	$	90,225		$	87,687
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,583		$	927
Accrued warranty		272			504
Accrued expenses		1,398			2,456
Accrued salaries and wages		1,302			1,190
Income taxes payable		700			393
Deferred revenue		2,322			2,463
Total current liabilities		7,577			7,933
Pension obligation		1,034			983
Other tax liabilities		845			738
Deferred tax liabilities		235			290
Total liabilities		9,691			9,944
Commitments and contingencies		—			—
Shareholders’ equity:
Common stock, $0.20 par value; 50,000 authorized shares, issued shares, 13,882 in 2010 and 13,788 in 2009		2,777			2,746
Additional paid-in capital		76,022			75,244
Treasury stock, at cost, 1,162 shares in 2010 and 1,151 in 2009		(8,632	)		(8,563	)
Retained earnings		11,600			9,543
Accumulated other comprehensive loss		(1,233	)		(1,227	)
Total shareholders’ equity		80,534			77,743
Total liabilities and shareholders’ equity	$	90,225		$	87,687

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value) (Unaudited)


	March 31, 2011			December 31, 2010

ASSETS
Current assets:
Cash and cash equivalents	$	70,886		$	72,194
Short-term investments		—			3
Accounts receivable:
Trade, net of allowance for doubtful accounts at $1,658 in 2011 and $1,496 in 2010		8,798			7,975
Other		906			650
Inventories		1,256			1,373
Prepaid expenses and deposits		751			798
Deferred and refundable income taxes		111			93

Total current assets		82,708			83,086
Property and equipment, net		3,877			2,246
Intangibles		5,190			5,391
Deferred tax assets		241			191
Other assets		423			423

Total assets	$	92,439		$	91,337


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	544		$	1,867
Accrued warranty		189			222
Accrued expenses		2,139			986
Accrued salaries and wages		509			1,044
Accrued royalties payable		67			218
Income taxes payable		489			481
Deferred revenue		927			593

Total current liabilities		4,864			5,411
Pension obligation		864			795
Deferred tax liabilities		14			14
Other liabilities		1,748			825

Total liabilities		7,490			7,045
Commitments and contingencies
Shareholders’ equity:
Common stock, $0.20 par value 50,000 authorized shares, issued shares, 14,270 in 2011 and 14,073 in 2010		2,854			2,815
Additional paid-in capital		78,854			77,326
Treasury stock, at cost, 1,162 shares in 2010 and 2009		(8,632	)		(8,632	)
Retained earnings		12,789			13,966
Accumulated other comprehensive loss		(916	)		(1,183	)

Total shareholders’ equity		84,949			84,292

Total liabilities and shareholders’ equity	$	92,439		$	91,337

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ~~(In thousands, except per share data) (Unaudited)~~

	Three Months Ended						Nine Months Ended
	September 30,			September 26,			September 30,			September 26,
	2010			2009			2010			2009
Revenue:
Products	$	4,716		$	5,016		$	13,874		$	14,986
Services		6,340			6,310			19,849			17,300
Total Revenue		11,056			11,326			33,723			32,286
Cost of sales:
Products		1,645			2,537			5,732			8,090
Services		2,081			2,137			5,937			5,497
Amortization of intangible assets		388			659			1,177			1,949
Impairment of intangible assets		—			191			—			191
Inventory write-down		—			3,070			—			3,070
Severance		(98	)		502			319			778
Total cost of sales		4,016			9,096			13,165			19,575
Gross profit		7,040			2,230			20,558			12,711
Operating expenses:
Selling and marketing		1,243			1,567			4,579			4,850
General and administrative		1,813			4,111			5,985			9,525
Research and development		1,428			2,353			5,468			6,795
Severance		(111	)		1,114			1,774			1,179
Other impairments		—			293			—			293
Total operating expenses		4,373			9,438			17,806			22,642
Income (loss) from operations		2,667			(7,208	)		2,752			(9,931	)
Other income/(expense)		677			46			(47	)		555
Income (loss) before income taxes		3,344			(7,162	)		2,705			(9,376	)
Provision (benefit) for income taxes		851			(80	)		648			215
Income (loss) from continuing operations		2,493			(7,082	)		2,057			(9,591	)
(Loss) from discontinued operations		—			—			—			(223	)
Net Income (loss)	$	2,493			($7,082	)	$	2,057			($9,814	)
Per share information:
Weighted average shares of common stock and equivalents:
Basic		12,723			12,682			12,697			12,681
Diluted		13,167			12,682			12,926			12,681
Income (loss) per common and common equivalent shares:
Basic	$	0.20			($0.56	)	$	0.16			($0.78	)
Diluted	$	0.19			($0.56	)	$	0.16			($0.78	)
Income (loss) per common and common equivalent shares from continuing operations:
Basic	$	0.20			($0.56	)	$	0.16			($0.76	)
Diluted	$	0.19			($0.56	)	$	0.16			($0.76	)
Net Income (loss) per common and common equivalent shares from discontinued operations:
Basic	$	0.00		$	0.00		$	0.00			($0.02	)
Diluted	$	0.00		$	0.00		$	0.00			($0.02	)

(In thousands, except per share data) (Unaudited)


	Three Months Ended
	March 31, 2011			March 31, 2010

Revenues:
Products	$	2,830		$	4,222
Services		6,566			6,945

Total revenues		9,396			11,167
Cost of sales:
Products		1,596			1,814
Services		1,700			1,993
Amortization		302			400
Severance		—			468

Total cost of sales		3,598			4,675

Gross profit		5,798			6,492

Operating expenses:
Selling and marketing		1,390			2,063
General and administrative		3,509			2,218
Research and development		1,774			2,360
Severance		245			1,258

Total operating expense		6,918			7,899

Loss from operations		(1,120	)		(1,407	)
Other income		90			(409	)

Loss before income taxes		(1,030	)		(1,816	)
Provision/(benefit) for income taxes		147			(153	)

Net loss		(1,177	)		(1,663	)

PER SHARE INFORMATION:

Weighted average shares of common stock and equivalents:
Basic		13,018			12,656
Diluted		13,018			12,656

Net loss per common share:
Basic	$	(0.09	)	$	(0.13	)
Diluted	$	(0.09	)	$	(0.13	)

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ~~(In thousands) (Unaudited)~~

	September 30,			September 26,
	2010			2009
Cash flows from operating activities :
Net Income (loss)	$	2,057			($9,814	)
Adjustments to reconcile net loss to net cash provided by operating activities
Loss from discontinued operations		—			223
Impairment of intangible assets		—			191
Impairment of other long live assets		—			293
Amortization expense		1,177			1,949
Depreciation expense		905			865
Stock-based compensation expense		730			720
Deferred income taxes		(267	)		247
Inventory write-down		—			3,070
Provision for losses on inventory		(279	)		268
Provision for allowance for doubtful accounts		(92	)		1,178
Changes in assets and liabilities:
Accounts receivable-trade		(3,595	)		1,608
Other receivable		1,918			(588	)
Inventories		815			1,384
Prepaid expenses, deposits and other assets		231			506
Accounts payable		674			(752	)
Accrued warranty		(219	)		(307	)
Accrued expenses, deferred revenue and salaries & wages		(371	)		1,050
Income taxes payable		(121	)		(21	)
Net cash provided by operating activities of discontinued operations		—			12
Net cash provided by operating activities		3,563			2,082
Cash flows from investing activities:
Proceeds on sale of cable product line		—			3,012
Proceeds from note receivable		124			53
Redemption/maturity of short term investments		—			2,220
Purchase of acquired assets		—			(300	)
Purchase of property and equipment		(206	)		(505	)
Net cash used in investing activities of discontinued operations		—			(57	)
Net cash (used in)/provided by investing activities		(82	)		4,423
Cash flows from financing activities:
Exercise of common stock options		104			—
Repurchase of treasury stock		(69	)		—
Net cash provided by financing activities		35			—
Net increase in cash and cash equivalents		3,516			6,505
Effect of exchange rate changes on cash and cash equivalents		2			698
Cash and cash equivalents, beginning of period		66,046			57,976
Cash and cash equivalents, end of period	$	69,564		$	65,179
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes		515			(8	)

(In thousands) (Unaudited)


	March 31,			March 31,
	2011			2010

Cash flows from operating activities :
Net Loss	$	(1,177	)	$	(1,663	)
Adjustments to reconcile net loss to net cash used in operating activities
Amortization expense		302			400
Depreciation expense		298			327
Stock-based compensation expense		172			506
Deferred income taxes		(46	)		(825	)
Loss on disposed assets		5			—
Inventory impairment		73			—
Provision for allowance for doubtful accounts		75			—
Changes in assets and liabilities:
Accounts receivable-trade and other		(967	)		(1,065	)
Inventories		44			267
Prepaid expenses, deposits and other assets		52			5
Accounts payable		(1,272	)		115
Accrued warranty		(36	)		(2	)
Accrued expenses		(420	)		410
Income taxes payable		339			(494	)
Other		843			—

Net cash used in operating activities		(1,715	)		(2,019	)

Cash flows from investing activities:
Redemption of short term investments		3			—
Purchase of property and equipment		(1,132	)		(151	)

Net cash used in investing activities		(1,129	)		(151	)

Cash flows from financing activities:

Proceeds from the exercise of stock options		1,395			—
Other		114
Repurchase of treasury stock		—			(69	)

Net cash provided by/(used) in financing activities		1,509			(69	)

Net (decrease)/increase in cash and cash equivalents		(1,335	)		2,239
Effect of exchange rate changes on cash and cash equivalents		27			(50	)
Cash and cash equivalents, beginning of period		72,194			66,046

Cash and cash equivalents, end of period	$	70,886		$	63,757


Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes		231			704

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

~~TOLLGRADE~~Tollgrade ~~COMMUNICATIONS~~Communications, ~~INC~~Inc. ~~AND~~and ~~SUBSIDIARIES~~Subsidiaries

~~CONSOLIDATED~~Consolidated ~~STATEMENTS~~Statements OFof ~~CHANGES~~Changes INin ~~SHAREHOLDERS~~Shareholder’s ~~EQUITY (In thousands) (Unaudited)~~ Equity

					Additional									Accumulated Other
	Common Stock				Paid-In		Treasury Stock					Retained		Comprehensive
	Shares		Amount		Capital		Shares		Amount			Earnings		Loss			Total
Balance at December 31, 2009		13,788	$	2,746	$	75,244		1,151		($8,563	)	$	9,543		($1,227	)	$	77,743
Exercise of common stock options		24		5		99												104
Purchase of treasury stock								11		(69	)							(69	)
Compensation expense for options and restricted stock, net		70		26		679												705
Foreign currency translation															(6	)		(6	)
Net income													2,057					2,057
Balance at September 30, 2010		13,882	$	2,777	$	76,022		1,162		($8,632	)	$	11,600		($1,233	)	$	80,534

In thousands (Unaudited)


	Common Stock						Treasury Stock
					Additional										Accumulated Other
					Paid-In							Retained			Comprehensive
	Shares		Amount		Capital		Shares		Amount			Earnings			Loss			Total

Balance at December 31, 2010		14,073	$	2,815	$	77,326		1,162	$	(8,632	)	$	13,966		$	(1,183	)	$	84,292


Exercise of common stock options		197	$	39	$	1,356												$	1,395

Compensation expense for options and restricted stock, net					$	172												$	172

Foreign currency translation															$	267		$	267

Net Loss												$	(1,177	)				$	(1,177	)

Balance at March 31, 2011		14,270	$	2,854	$	78,854		1,162	$	(8,632	)	$	12,789		$	(916	)	$	84,949

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. BASIS OF PRESENTATION

InWe ~~2010,~~have ~~Tollgrade~~prepared ~~Communications,~~the ~~Inc.~~accompanying ~~(“Tollgrade,”~~unaudited ~~the~~condensed ~~“Company”,~~consolidated ~~“we”)~~financial ~~will~~statements ~~report our~~included ~~quarterly~~herein ~~results~~in asaccordance ofwith ~~the~~accounting ~~end~~principles ofgenerally ~~each~~accepted ~~calendar~~in ~~quarter beginning with~~ the ~~quarter~~United ~~ended~~States ~~March 31,~~of America ~~2010.~~for ~~Prior~~interim tofinancial ~~2010,~~information ~~we reported our quarterly results based on fiscal quarters~~ and, ~~as such, our prior year quarters ended on March~~Article ~~28,~~10 ~~2009,~~of ~~June~~Regulation ~~27,~~S-X. ~~2009,~~The ~~September 26,~~unaudited ~~2009 and December 31,~~condensed ~~2009.~~consolidated ~~For~~financial ~~comparative~~statements ~~purposes,~~as ~~for~~of ~~the third quarter~~ and ~~the~~for ~~first nine months of 2009, we have evaluated~~ the ~~four~~three ~~days~~month ~~business~~period ~~activity~~ended ~~between September~~March 2631, ~~2009~~2011 ~~and September 30, 2009 and~~should ~~found~~be noread ~~material differences~~ in ~~revenue,~~conjunction ~~cost~~with ~~of sales, operating expenses, assets, liabilities and equity that would cause us to restate~~ our ~~2009~~consolidated ~~third quarter or nine month~~ financial ~~results. We~~statements ~~have~~(and ~~prepared~~notes ~~the~~thereto) ~~unaudited condensed consolidated financial statements~~ included ~~herein~~ in ~~accordance~~our ~~with~~Annual ~~accounting~~Report ~~principles~~on ~~generally~~Form ~~accepted~~10-K infor the ~~United~~year ~~States~~ended ~~of America for interim financial information and Article~~December 1031, ~~of Regulation S-X~~2010. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements, although we believe that the disclosures are adequate to make the information presented not misleading. In the opinion of our management, all adjustments considered necessary for a fair statement of the accompanying unaudited condensed consolidated financial statements were included, and all adjustments are of a normal and recurring nature. Operating results for the quarter ended ~~September~~March 3031, ~~2010~~2011 are not necessarily indicative of the results that ~~may~~ may be expected for the year ending December 31, ~~2010~~2011. ~~The unaudited condensed consolidated~~ financial statements as of and for the three month and nine month periods ended September 30, 2010 should be read in conjunction with our consolidated financial statements (and notes thereto) included in our Annual Report on Form 10-K for the year ended December 31, 2009.

~~RECENTLY~~As ~~ISSUED~~of ~~ACCOUNTING~~March 31, ~~GUIDANCE~~2011, we have adopted accounting guidance for revenue arrangements with multiple deliverables that are outside the scope of software revenue recognition guidance. This adoption has not had a material impact on our financial position, results of operations or cash flows.

InAs ~~October~~of March ~~2009~~31, ~~the~~2011, ~~Financial~~we ~~Accounting~~have ~~Standards~~also ~~Board~~adopted ~~(“FASB”) issued revised~~ accounting guidance for ~~multiple-deliverable~~revenue arrangements. ~~The amended guidance requires~~ that ~~arrangement~~ ~~considerations~~include beboth ~~allocated~~tangible atproducts ~~the inception of the arrangement to all deliverables using the relative selling price method~~ and ~~provides~~software ~~for expanded disclosures related to such arrangements~~elements. It isThis ~~effective~~adoption ~~for~~has ~~revenue~~not ~~arrangements~~had ~~entered~~a ~~into~~material ~~or materially modified in fiscal years~~impact ~~beginning~~ on orour ~~after~~financial ~~June 15~~position, ~~2010.~~results ~~The company is still evaluating the impact~~ of ~~adopting~~operations ~~the new~~or ~~guidance~~cash flows.

2. FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

	•		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

	•		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.

The fair value of cash equivalents was $70.9 million and $72.2 million at March 31, 2011 and December 31, 2010, respectively. These financial instruments are classified in Level 1 of the fair value hierarchy.

~~are~~3. ~~derived~~STOCK ~~principally~~BASED ~~from or corroborated by observable market data by correlation or other means; and~~COMPENSATION

•We ~~Level~~currently 3sponsor —one ~~Inputs~~active ~~that~~stock ~~are~~compensation ~~both~~plan. ~~significant~~Our 2006 Long-Term Incentive Compensation Plan (the “2006 Plan”) was adopted by our Board of Directors in March 2006 and was approved by our shareholders in May 2006. The 2006 Plan originally authorized up to 1,300,000 shares under the Plan, ~~fair~~and ~~value~~was ~~measurement~~amended during 2009 to increase the shares authorized for issuance under the 2006 Plan to 2,800,000 shares, provided however, that, the maximum number of restricted shares of that total shall be 300,000. This amendment was adopted by our Board of Directors in May 2009 and approved ~~unobservable~~by our shareholders in August 2009. Awards in the form of stock options, restricted shares, stock appreciation rights, performance shares or performance units may be granted to directors, officers and other employees under the 2006 Plan.

Options granted under our equity compensation plans prior to 2007 generally vested over a two-year period with one-third vesting upon grant. Beginning in 2007, options were granted which generally vest over a three-year period, with one-third vesting at the end of each year during such period. Options granted under our equity compensation plans expire ten years from the date of the grant. The grant price on any such shares or options is equal to the quoted fair market value of ~~cash~~our shares ~~equivalents~~at ~~was~~the ~~$69~~date of the grant, as defined in the 2006 Plan.~~6 million~~ Restricted shares and ~~$66.0 million~~stock appreciation atrights ~~September 30,~~will ~~2010~~vest in accordance with the terms of the applicable award agreement and ~~December 31,~~the ~~2009,~~2006 ~~respectively~~Plan. ~~These~~The ~~financial~~2006 ~~instruments~~Plan ~~are~~requires ~~classified~~that non-performance-based restricted stock grants to employees vest in ~~Level~~no 1less ofthan ~~the~~three ~~fair~~years, while performance-based restricted stock grants may ~~value~~vest ~~hierarchy~~after one year. Grants of restricted stock to directors may vest after one year.

3. STOCK-BASED COMPENSATION

We currently sponsor one active stock compensation plan. Our 2006 Long-Term Incentive Compensation Plan (the “2006 Plan”) was adopted by our Board of Directors in March 2006 and was approved by our shareholders in May 2006. The 2006 Plan originally authorized up to 1,300,000 shares for issuance under the Plan, and was amended during 2009 to increase the number of shares authorized for issuance to 2,800,000 shares, provided however, that the maximum number of restricted shares of that total shall be 300,000. This amendment was adopted by our Board of Directors in May 2009 and approved by our shareholders in August 2009. Awards in the form of stock options, restricted shares, stock appreciation rights, performance shares or performance units may be granted to directors, officers and other employees under the 2006 Plan.

Options granted to employees under our equity compensation plans prior to 2007 generally vested over a two-year period with one-third vesting upon grant. Beginning in 2007, options granted to employees under the 2006 Plan generally vest over a three-year period, with one-third vesting at the end of each year during such period. Options granted to non-employee directors are generally fully vested on the date of the grant. Options granted under our equity compensation plans expire ten years from the date of the grant. The grant price on any such shares or options is equal to the fair market value of our shares at the date of the grant, as defined in the 2006 Plan. Restricted shares and stock appreciation rights will vest in accordance with the terms of the applicable award agreement and the 2006 Plan. The 2006 Plan requires that non-performance-based restricted stock grants to employees vest in no less than three years, while performance-based restricted stock grants may vest after one year. Grants of restricted stock to directors may vest after one year. Under the terms of the 2006 Plan, during the restriction period, a holder of restricted shares has the right to vote the shares, but is not permitted to trade them.

Stock-Based Compensation Expense

~~During~~We ~~the~~recognized ~~first~~total ~~quarter of 2010, in connection with his appointment as Chairman of the Board, the Compensation Committee of the Board of Directors approved a grant of~~ stock-based ~~appreciation~~compensation ~~rights (“SARS”)~~expense ~~with respect to 250,000 shares~~ of ~~our~~approximately ~~common stock to Edward Kennedy~~$0.2 million ~~The~~and ~~SARS vest only upon the satisfaction of certain conditions, none of which are considered probable at September~~$0.5 ~~30,~~million ~~2010;~~for ~~however, such conditions may be satisfied in~~ the ~~future.~~three Inmonth ~~addition,~~period inended ~~connection with his appointment as Chairman, Mr.~~March ~~Kennedy received a grant of 50~~31,~~000~~ ~~restricted~~2011 ~~shares.~~and ~~As Mr.~~March ~~Kennedy~~31, ~~who~~ ~~has since been named our President and CEO~~2010, was a non-employee director at the time of the grant, the terms of the restricted share award provide that the shares will vest, and the restrictions on the shares will be lifted, one year from the date of grant, unless Mrrespectively. ~~Kennedy is~~ ~~removed from the Board for cause during that time.~~

AThe ~~total~~unamortized ofstock-based ~~50,000~~compensation ~~restricted~~expense ~~shares~~from ~~were~~operations ~~also~~related ~~granted under the 2006 Plan during the first quarter of 2010~~ to ~~executive~~stock ~~officers.~~options ~~Of these grants, 30,000 shares were issued to our former Chief~~and ~~Executive~~restricted ~~Officer,~~stock ~~and~~totaled ~~20,000 shares were issued to our Chief Financial Officer~~$1.5 million The terms of these awards provide that they will vest, and the restrictions on the shares will be released, on the third anniversary of the grant date, provided in each case that the employee is still in our employ at ~~such time. The 30~~March 31,~~000~~ ~~restricted shares granted to our former CEO were forfeited when he left the Company in June 2010~~2011.

Transactions involving stock options under the Company’s various plans and otherwise are summarized below:


	Number of			Range of Option		Weighted Average
	Shares			Prices		Exercise Price
Outstanding, December 31, 2010		1,312,992		$	3.27 - $32.90	$	8.03

Exercised		(196,772	)	$	5.17 - $9.49	$	7.09
Cancelled/Forfeited/Expired		(16,650	)	$	8.49 - $32.28	$	18.42

Outstanding, March 31, 2011		1,099,570		$	3.27 - $32.90	$	8.04

4. SEVERANCE

During the first quarter of 2011, we recorded a severance charge of $0.2 million in operating expenses associated with the second quarter departure of our former Vice President of Research and Development. All cash payments related to this action are expected to be paid during the second quarter of 2011 and no further expense is anticipated.

During the first quarter of 2010, we accelerated our efforts to reduce our operating expenses in order to help position us to achieve stronger profitability levels in the future. As such, we eliminated approximately 48 positions across all functional levels of the organization in an effort to reduce our overall cost structure. The total severance charge associated with these actions was approximately

~~During~~$1.7 million ~~the~~of ~~second~~which ~~quarter~~approximately of$.5 million ~~2010,~~was ~~the~~recorded ~~Compensation~~as ~~Committee~~cost of ~~the~~sales ~~Board~~expense ofand ~~Directors awarded~~$1.2 ~~477,500~~million ~~stock~~was ~~options~~recorded as an operating expense. All cash payments related to ~~certain~~this ~~named~~action ~~executives~~have been made and ~~other~~there ~~key~~are ~~employees~~no further expenses related to these actions.

During the third quarter of 2010, the Board of Directors resolved to approve awards to non-employee directors of 8,000 shares of restricted stock with an effective date of October 1, 2010. No expense for this award was recorded in the third quarter of 2010; however, we will record expense of approximately $0.4 million in the fourth quarter of 2010 related to this action.

We recognized total stock-based compensation expense of $0.2 million for both the three month periods ended September 30, 2010 and September 26, 2009, and approximately $0.7 million for both the nine month periods ended September 30, 2010 and September 26, 2009.

The unamortized stock-based compensation expense from operations related to stock options and restricted stock totaled $1.9 million at September 30, 2010.

Transactions involving stock options under our current and prior plans and otherwise are summarized below:

				Range of Option		Weighted Average
	Number of Shares			Prices		Exercise Price
Outstanding, December 31, 2009		1,684,795		$	3.27 - $159.19	$	27.29
Granted		477,500		$	6.43 - $6.48	$	6.48
Exercised		(24,334	)	$	4.26	$	4.26
Cancelled/Forfeited/Expired		(568,308	)	$	6.09 - $59.35	$	35.39
Outstanding, September 30, 2010		1,569,653		$	3.27 - $103.59	$	9.05

4. SEVERANCE

During the first quarter of 2010, we accelerated our efforts to reduce our operating expenses in order to help position ourselves to achieve stronger profitability levels in the future. As such, we eliminated 48 positions across all functional levels of the organization in an effort to reduce our overall cost structure. The total severance charge associated with these actions was approximately $1.7 million, of which approximately $0.5 million was recorded as cost of sales expense and $1.2 million was recorded as an operating expense. During the second quarter of 2010, we incurred a severance charge of $0.9 million related to the departure of our former Chief Executive Officer. This expense was recorded as an operating expense. In relation to these actions, and due to changes in certain circumstances related to our planned actions, we recorded certain positive adjustments to our severance accruals in both the second quarter and third quarters of 2010 in the amounts of $0.3 million and $0.2 million, respectively. We do not anticipate any further adjustment related to our workforce reduction or for the departure of our former Chief Executive Officer and the majority of the cash payments related to these actions was made during the second quarter of 2010.

During 2009, we had several restructuring plans in order to reduce our headcount and achieve lower operating costs. During the third quarter of 2009, we developed a plan to reduce and restructure our workforce across all levels of the organization in an effort to reduce costs in order to better align our resources to our revenue streams. The total severance charge associated with this plan was approximately $1.4 million of which $0.5 million was recorded as cost of sales expense and $0.9 million was recorded as an operating expense. Additionally, we incurred $0.2 million of severance charges related to the departure of our former chief financial officer that was recorded as an operating cost. During the second quarter of 2009, we decided to outsource almost all of our in-house manufacturing to a third party vendor and, as such, we reduced our production staffing. The total severance expense associated with this action was approximately $0.1 million. During the first quarter of 2009, we implemented a restructuring program pursuant to which we realigned existing resources to new projects, reduced our field service and sales staffing and completed other reduction

activities. The severance costs associated with this program amounted to approximately $0.3 million, of which approximately $0.2 million was recorded in cost of sales and approximately $0.1 million was recorded as operating expenses. All cash payments related to these actions were paid in 2009 and no further expense is expected.

5. INTANGIBLE ASSETS

The following information is provided regarding our intangible assets (in thousands):

					September 30, 2010
			March 31, 2011
									Accumulated				Impairments
											Impairments
	Useful								Amortization				During the
											During the
	Life								and				Reporting
	Useful Life						Accumulated				Reporting
Amortizing Intangible Assets:	(Years)				Gross				Impairments				Period				Net
	(Years)		Gross				Amortization				Period				Net
Post warranty service agreements		6-15			$	37,644			$	32,965			$	—			$	4,679
Amortizing Intangible Assets:
Technology		2-10				13,992				13,131				—				861
Post warranty service agreements	6-15		$	37,757			$	33,407							$	4,350
Customer relationships		5-15				915				685				—				230
Technology	2-10			13,332				12,728							$	604
Tradenames and other		1-10				576				512				—				64
Customer relationships	5-15			732				544							$	188
Total Intangible Assets					$	53,127			$	47,293			$	0			$	5,834
Tradenames and other	0.5-10			305				257							$	48
Total Intangible Assets			$	52,126			$	46,936			$	0			$	5,190

	December 31, 2009
			December 31, 2010
									Accumulated				Impairments
											Impairments
	Useful								Amortization				During the
											During the
	Life								and				Reporting
	Useful Life						Accumulated				Reporting
Amortizing Intangible Assets:	(Years)				Gross				Impairments				Period				Net
	(Years)		Gross				Amortization				Period				Net
Post warranty service agreements		6-15			$	37,779			$	5,438			$	26,960			$	5,381
Amortizing Intangible Assets:
Technology		2-10				14,000				12,488				191				1,321
Post warranty service agreements	6-15		$	37,539			$	33,113							$	4,426
Customer relationships		5-15				927				613				—				314
Technology	2-10			13,986				13,275							$	711
Tradenames and other		1-10				537				443				—				94
Customer relationships	5-15			905				704							$	201
Total Intangible Assets					$	53,243			$	18,982			$	27,151			$	7,110
Tradenames and other	0.5-10			574				521							$	53
Total Intangible Assets			$	53,004			$	47,613			$	0			$	5,391

~~Differences~~Amortization ~~between~~expense ~~reported~~is ~~amortization~~estimated ~~expense~~to ~~and~~be ~~the~~$0.9 million, ~~change~~$0.7 million, in$0.6 million, ~~reported accumulated~~$0.5 million ~~amortization~~and ~~may~~$0.4 million ~~vary~~for ~~because~~the remainder of ~~foreign~~2011, ~~currency~~and ~~translation~~each ~~differences~~of ~~between~~ the ~~balance~~years ~~sheet and~~2012, ~~income~~2013, ~~statement~~2014 and 2015, respectively.

Amortization expense is estimated to be $0.4 million, $1.2 million, $0.7 million, $0.6 million and $0.5 million for the remainder of 2010, and each of the years 2011, 2012, 2013 and 2014, respectively.

Impairments

Long-Lived Assets

We perform impairment reviews of our long-lived assets upon a change in business conditions or upon the occurrence of a triggering event. No impairments have been triggered for the three months ended March 31, 2011 and March 31, 2010.

In mid-December 2009, we learned that a major customer of our LoopCare post-warranty software maintenance services would not renew its direct contract with us for those services following the contract’s expiration date on December 31, 2009. As such, we incurred an impairment charge of approximately $27.0 million related to this occurrence following our review of the carrying value of this long-lived asset.

6. INVENTORIES

Inventories consisted of the following (in thousands):

	September 30, 2010			December 31, 2009
	March 31, 2011			December 31, 2010
Raw materials	$	~~3,452~~525		$	~~3,584~~804
Work in process		~~644~~117			~~830~~179
Finished goods		~~1,946~~614			~~2,352~~390
Total Gross Inventory		6,042			6,766
Total Inventory		1,256			1,373
Reserves for slow moving and obsolete inventory		(4,460	)		(4,647	)
Net Inventory	$	1,582		$	2,119

7. PRODUCT WARRANTY

Activity in the warranty accrual is as follows (in thousands):

	September 30, 2010			December 31, 2009
	March 31, 2011			December 31, 2010
Balance at the beginning of the period	$	~~565~~222		$	~~926~~504
Accruals for warranties issued during the period		646			~~894~~251
Settlements during the period		(~~299~~79	)		(~~1,316~~533	)
Balance at the end of the period	$	~~272~~189		$	~~504~~222

8. PER SHARE INFORMATION

Basic income/ (loss) per common share is computed by dividing net ~~income/(~~loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted income~~/(loss)~~ per common share is computed by dividing net income~~/(loss)~~ by the combination of dilutive common share equivalents, comprised of shares issuable under our share-based compensation plans and the weighted-average number of common shares outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money ~~options~~shares, which is calculated, based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of a share, the amount of compensation cost, if any, for future service that we have not yet recognized, and the amount of estimated tax benefits that would be recorded in additional paid-in capital, if any, when the share is exercised are assumed to be used to repurchase shares in the current period. When we are in a loss position, we do not include any stock options outstanding with an exercise price below the average market price, as their effect would be considered anti-dilutive. The three month periods ended March 31, 2011 and 2010 do not include the effect of dilutive securities because inclusion would be anti-dilutive to the earnings per share calculation. As of March 31, 2011 and March 31, 2010, 166,353 and 1,510,678 equivalent shares, respectively, were anti-dilutive.

When we are in a loss position, we do not include any stock options outstanding with an exercise price below the average market price, as their effect would be considered anti-dilutive. Since we reported net income for the three month period and the nine month period ended September 30, 2010, our per share information for the three month period and nine month period ended September 30, 2010 includes the dilutive effect of 444,390 and 229,029 equivalent shares respectively. Because we incurred losses during the three and nine month periods ended September 26, 2009, we do not include the affect of dilutive securities because inclusion would be anti-dilutive to the earnings per share calculation. As of September 30, 2010 and September 26, 2009, 1,333,700 and 1,680,598 equivalent shares, respectively, were anti-dilutive.

9. REVENUE CONCENTRATION, MAJOR CUSTOMERS

The following table represents our total sales by major product lines as well as the percentage of total revenue represented by sales of each such major product line.

	Three Months Ended								Nine Months Ended
	March 31, 2011				March 31, 2010
	September 30, 2010				September 26, 2009				September 30, 2010				September 26, 2009
System Test Products	$	1,630	17	%	$	2,430	22	%
Test Products	$	3,354	30	%	$	3,937	35	%	$	9,390	28	%	$	10,851	34	%
MCU		1,142	12	%		1,776	16	%
MCU		1,362	12	%		1,079	10	%		4,484	13	%		4,135	13	%
Other		58	1	%		16	0	%
Services		6,340	57	%		6,310	56	%		19,849	59	%		17,300	54	%
Total Products	$	2,830	30	%		4,222	38	%
Total	$	11,056	100	%	$	11,326	100	%	$	33,723	100	%	$	32,286	100	%
Managed Services		1,697	18	%		1,748	16	%
Other Services		4,869	52	%		5,197	47	%
Total Services	$	6,566	70	%		6,945	62	%
Total Revenue	$	9,396	100	%	$	11,167	100	%

As of ~~September~~March 3031, ~~2010~~2011, we had approximately $41.24 million of accounts receivable with ~~three~~one ~~customers~~customer, ~~each of~~ which individually exceeded 10% of our ~~September~~March 3031, ~~2010~~2011 receivable ~~balances~~balance. As of December 31, ~~2009~~2010, we had approximately $53.40 million of accounts receivable with ~~three~~ two customers, each of which individually exceeded 10% of our December 31, ~~2009~~2010 receivable balances.

The following table represents sales to our customers that individually exceeded 10% of our net sales:

	Three Months Ended								Nine Months Ended
	March 31, 2011				March 31, 2010
	September 30, 2010				September 26, 2009				September 30, 2010				September 26, 2009
Customer A	$	1,697	18	%	$	1,752	16	%
Customer A	$	2,460	22	%	$	1,448	13	%	$	7,607	23	%	$	4,850	15	%
Customer B		1,550	17	%		2,828	25	%
Customer B		1,779	16	%		1,913	17	%		5,337	16	%		3,501	11	%
Customer C		1,062	11	%		950	9	%
Customer C		1,477	13	%		373	3	%		3,378	10	%		2,594	8	%
Total	$	4,309	46	%	$	5,530	50	%
``
Total	$	5,716	52	%	$	3,734	33	%	$	16,322	48	%	$	10,945	34	%

Our sales are primarily in the following geographic areas: Domestic (United States); the Americas (excluding the United States); Europe, the Middle East and Africa (“EMEA”); and Asia. The following table represents sales to our customers based on these geographic locations:

	Three Months Ended								Nine Months Ended
	March 31, 2011				March 31, 2010
	September 30, 2010				September 26, 2009				September 30, 2010				September 26, 2009
Region
Region
EMEA	$	2,125	23	%	$	3,455	31	%
Europe/Africa	$	4,131	37	%	$	2,464	22	%	$	10,680	32	%	$	9,537	30	%
Americas		635	7	%		235	2	%
Americas		1,048	9	%		1,117	10	%		1,695	5	%		2,821	9	%
Asia		10	0	%		12	0	%
Asia		12	0	%		86	1	%		1,426	4	%		585	2	%
Total International		2,770	30	%		3,702	33	%
Total International		5,191	47	%		3,667	32	%		13,801	41	%		12,943	40	%
Total Domestic		6,626	70	%		7,465	67	%
Total Domestic		5,865	53	%		7,659	68	%		19,922	59	%		19,343	60	%
Total Revenue	$	9,396	100	%	$	11,167	100	%
Total Revenue	$	11,056	100	%	$	11,326	100	%	$	33,723	100	%	$	32,286	100	%

10. COMPREHENSIVE INCOME

	Three Months Ended						~~Nine Months Ended~~
	September 30, 2010			September 26, 2009			September 30, 2010			September 26, 2009
	March 31, 2011			March 31, 2010
Net Income/(Loss)	$	2,493			($7,082	)	$	2,057			($9,814	)
Net Loss	$	(1,177	)	$	(1,663	)
Foreign currency translation		~~177~~(29	)		73421			(6	)		~~693~~
Comprehensive Income/(Loss)	$	2,670			($7,009	)	$	2,051			($9,121	)
Comprehensive Loss	$	(1,206	)	$	(1,242	)

1211. SUBSEQUENT EVENTS

As we have previously disclosed, on February 22, 2011, we announced that we had entered into an Agreement and Plan of Merger (the “Merger Agreement”) dated February 21, 2011 with Talon Holdings, Inc. a Delaware corporation (“Parent”), and Talon Merger Sub Inc., a Pennsylvania Corporation and a direct wholly-owned subsidiary of Parent (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of the Parent. Parent is owned by investment funds managed by Golden Gate Private Equity, Inc. Subsequent to our announcement of the Merger Agreement, four class action lawsuits were filed against the Company, the Company’s directors, and in some cases, Parent, Merger Sub and Golden Gate Capital in connection with the proposed Merger. On April 1, 2011, we filed a definitive proxy statement describing the proposed merger. On April 27, 2011, we reached an agreement in principle with the plaintiffs providing for the settlement and dismissal of their lawsuits. Pursuant to that agreement, we agreed to make certain supplemental disclosures regarding the proposed merger, and filed a supplement to our definitive proxy statement on April 27, 2011. Although a final settlement amount has yet to be reached, we have accrued $0.4 million as our estimate of what we believe the anticipated outcome may be.

9,373,671 shares or 71.6% of the 13.092,152 shares of our common stock outstanding and entitled to vote at the meeting. Voting in favor of the proposal to adopt the Merger Agreement were 9,094,896 shares, representing 97.0% of the shares that voted, and 69.5% of total shares outstanding and entitled to vote. We anticipate the Merger closing on May 10, 2011 with our subsequent delisting from the NASDAQ exchange.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this report. Additionally, when used in this ~~Form~~form 10-Q unless the context requires otherwise, the terms “we”,” our”, and “us” refer to Tollgrade Communications, Inc.

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

Management’s Discussion and Analysis of Results of Financial Condition and Results of Operations (this “MD&A”) should be read in conjunction with our ~~Annual~~annual ~~Report~~report on Form 10-K for the year ended December 31, ~~2009~~2010 (the “Form 10-K”).

Certain statements contained in this MD&A and elsewhere in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, forward-looking statements can be identified by terminology such as “believe,” “expect,” “intend,” “may,” “will,” “should,” “could,” “potential,” “continue,” “estimate,” “plan,” or “anticipate,” or the negatives thereof, other variations thereon or compatible terminology. These statements involve a number of risks and uncertainties. Actual events or results may differ materially from any forward-looking statement as a result of various factors, including those described in Part II, Item 1A below under “Risk Factors.”

Cable Product Line

On May 27, 2009 we completed the sale of our cable product line for consideration of approximately $3.4 million, subject to adjustment for certain items pursuant to the terms of the sale agreement. The cable product line no longer supported our refocused growth strategy and the divestiture allows us to continue to focus on our core telecommunications markets and customers. Unless otherwise indicated, references to “revenues” and “earnings” throughout this MD&A refer to revenues and earnings from continuing operations and do not include revenue and earnings from the discontinued cable product line. Similarly, discussion of other matters in our Condensed Consolidated Financial Statements refers to continuing operations unless otherwise indicated. The results from the divested product line are reported in discontinued operations.

Overview

Tollgrade Communications, Inc. is a ~~leading~~ provider of centralized test and measurement systems ~~and~~ and service offerings to the telecommunications market. We design, engineer, and support test systems and status monitoring hardware and software products for some of the largest telecommunication companies within the United States and Europe. Our products enable ~~our~~service ~~customers~~providers to ~~remotely~~ remotely diagnose and proactively address problems inwithin their networks. ~~Our~~By ~~services~~coupling ~~and~~our ~~managed~~hardware and ~~services~~software offerings ~~complement~~together, we provide proactive centralized test systems for our ~~product~~customers. ~~solutions~~Our service asand ~~well~~managed asservice ~~provide~~business ~~customer~~includes ~~support~~software maintenance and support for our operating ~~engineering~~systems, ~~services.~~along Inwith ~~addition~~hardware maintenance for our test probes, weand our professional services, which are ~~also~~designed ~~utilizing~~to ensure that all of the components of our ~~core~~customers ~~expertise~~test systems operate properly. inIn ~~service~~addition, ~~assurance~~since to2007, ~~develop~~we ~~our~~have ~~LightHouse~~been ~~product~~developing ~~line~~a sensor and a software operating platform for the utility ~~electric~~industry ~~utility~~that ~~market~~leverages asour ~~this~~core competency and years of experience in scaling test systems ~~product~~in ~~line~~large istelecommunications ~~designed~~networks toand ~~provide~~applying ~~power~~that ~~grid~~similar ~~monitoring~~business ~~capabilities~~model to the utility marketplace.

in some cases, Parent, Merger Sub and Golden Gate Capital in connection with the proposed Merger. On April 1, 2011, we filed a definitive proxy statement describing the proposed merger. On April 27, 2011, we reached an agreement in principle with the plaintiffs providing for the settlement and dismissal of their lawsuits. Pursuant to that agreement, we agreed to make certain supplemental disclosures regarding the proposed merger, and filed a supplement to our definitive proxy statement on April 27, 2011. Although a final settlement amount has yet to be reached, we have accrued $0.4 million as our estimate of what we believe the anticipated outcome may be.

On May 5, 2011, we held a special meeting of shareholders to adopt the Merger Agreement. At the meeting, our shareholders voted in favor of the proposal to adopt the Merger Agreement. Represented at the meeting were 9,373,671 shares or 71.6% of the 13.092,152 shares of our common stock outstanding and entitled to vote at the meeting. Voting in favor of the proposal to adopt the Merger Agreement were 9,094,896 shares, representing 97.0% of the shares that voted, and 69.5% of total shares outstanding and entitled to vote. We anticipate the Merger closing on May 10, 2011 with our subsequent delisting from the NASDAQ exchange.

As a result of the Merger, our first quarter 2011 results were negatively impacted by certain costs that we either paid or accrued in the first quarter of 2011 in conjunction with the merger. These costs included the payment of $0.5 million to Piper Jaffray & Co, our financial advisors in the transaction, for their fairness opinion. The payment to our attorneys of $0.3 million and accrued legal expenses of $0.3 million for their services in preparing the Merger Agreement, the definitive proxy statement and subsequent defense of the lawsuits mentioned above. In addition, we also accrued $0.4 million related to the proposed settlement of the lawsuits. Lastly, our first quarter 2011 results were negatively impacted by the accrued severance expense in the amount of $0.2 million related to our former Vice-President of Research and Development.

Our Customers

Our customers include the top telecom providers and numerous independent telecom and broadband providers around the world. Our primary customers for our telecommunications products and services are large domestic and European telecommunications service providers. We track our ~~telecommunications~~telecommunication sales by two large customer groups, the first of which includes AT&T, Verizon and Qwest (referred to herein as large domestic carriers), and ~~Qwest~~the second of which includes certain large international telephone service providers in Europe, namely British Telecom, Royal KPN N.V., Belgacom S.A., Deutsche Telecom AG (~~collectively~~T-Com) and Telefónica O2 Czech Republic, a.s. (collectively referred to herein as the “European Telcos”). For the first quarter of 2011, sales to the large domestic customers accounted for approximately 26% of our total revenue compared to approximately 34% of total revenue for the first quarter of 2010. Sales in the first quarter of 2011 and 2010 to the European Telcos accounted for approximately 21% and 18% respectively, of total revenue.

Backlog

Our order backlog for firm customer purchase orders, software maintenance contracts and managed services contracts was $19.1 million as of March 31, 2011 and December 31, 2010. The backlog at March 31, 2011 and December 31, 2010 included approximately $12.1 million and $13.4 million, respectively, related to software maintenance contracts. For the remainder of 2011, we expect to recognize $14.7 million of the March 31, 2011 backlog of $19.1 million.

domestic carriers”), and the second of which includes certain large international telephone service providers in Europe, namely British Telecom, Royal KPN N.V., Belgacom S.A., Deutsche Telecom AG (T-Com) and Telefónica O2 Czech Republic, a.s. (collectively referred to herein as the “European Telcos”).

Backlog

Our order backlog for firm customer purchase orders, software maintenance contracts and managed services contracts was $17.9 million as of September 30, 2010 compared to a backlog of $15.6 million as of December 31, 2009. The backlog at September 30, 2010 and December 31, 2009 included approximately $11.7 million and $8.4 million, respectively, related to software maintenance contracts, which is primarily earned and recognized as income on a straight-line basis during the remaining terms of these agreements. During the remainder of 2010, we expect to recognize $4.4 million of the September 30, 2010 backlog.

RESULTS OF OPERATIONS

THREE MONTHS ENDED ~~SEPTEMBER~~MARCH 3031, ~~2010~~2011 COMPARED TO THREE MONTHS ENDED ~~SEPTEMBER~~MARCH 2631, ~~2009~~2010

~~Revenue~~Revenues

	September 30, 2010		September 26, 2009		Change			%
	March 31, 2011		March 31, 2010		Change			%
System Test Products	$	31,~~354~~630	$	32,~~937~~430	$	(~~$583~~800	)		-1533	%
MCU		1,~~362~~142		1,~~079~~776	$	~~283~~(634	)		26-36	%
Total Products		4,716		5,016		($300	)		-6	%
Other		58		16	$	42			263	%
Services		6,340		6,310	$	30			0	%
Total Products		2,830		4,222	$	(1,392	)		-33	%
Total Revenues	$	11,056	$	11,326		($270	)		-2	%
Managed Services		1,697		1,748	$	(51	)		-3	%
Other Services		4,869		5,197	$	(328	)		-6	%
Total Services		6,566		6,945	$	(379	)		-5	%
Total Revenue	$	9,396	$	11,167	$	(1,771	)		-16	%

Our total revenues for the ~~third~~first quarter of ~~2010~~2011 were ~~approximately~~ $119.14 million compared to total revenues of $11.32 million for the ~~third~~first quarter of ~~2009~~2010.

Our product revenue consists primarily of sales of our ~~system~~System ~~test~~Test ~~products~~Products as well as sales of our traditional MCU product line. Product ~~revenue~~revenues ~~was~~were approximately $42.78 million or 4330% of our total ~~third~~first quarter ~~revenue~~2011 revenues compared to $54.02 million or 4438% of our total ~~third~~first quarter revenue for ~~2009.~~ 2010. Overall, our ~~third~~first quarter ~~2010~~2011 product ~~revenue~~revenues decreased by approximately $01.34 million or 2% 33% compared to the same period in the prior year. The decrease in our total product sales is primarily attributable to a $0.76 million ~~reduction~~decline in ~~our~~each ~~LDU/4TEL/Celerity product line and a $0.3 million reduction~~ of our ~~DigiTest~~MCU ~~system~~and ~~test~~DMU ~~products~~product ~~due~~lines toas ~~the~~a result ~~timing~~ of ~~customer~~lower demand. ~~These decreases~~from ~~were~~two ~~partially offset by increases~~ of ~~$0.4 and $0.3 in~~ our ~~Protocol and MCU product sales to certain~~ large domestic ~~carriers, respectively~~customers. ~~Our~~Although ~~services~~we ~~revenue~~expect ~~consists of software~~continued ~~maintenance,~~sales ~~managed~~in ~~services~~the ~~agreements~~foreseeable future, ~~installation~~these ~~oversight~~are ~~and~~mature product ~~management~~lines ~~services. Services~~with ~~revenue~~sales ~~was~~that ~~approximately~~do ~~$6.3 million~~fluctuate ~~or 57% of total third quarter 2010 revenue compared~~based toon ~~$6.3 million~~an orunpredictable ~~56%~~demand, ofbut ~~the~~we ~~total~~believe ~~third~~sales ~~quarter revenue~~ for ~~2009.~~these ~~Overall,~~product ~~our~~lines ~~third~~will ~~quarter 2010~~continue ~~services revenue was approximately equal~~ to ~~the same period in the prior year as increases in~~decline ~~MCU repair revenue of $0.3 million were offset by $0.3 million of decreases in our LoopCare service revenues period~~ over ~~period~~time.

Services revenue was approximately $6.6 million or 70% of total first quarter 2011 revenues compared to $6.9 million or 62% of the total first quarter revenue for 2010. Our services revenue consists of software maintenance for our 4TEL and Celerity LTSC and LoopCare products, project management fees, repair work and managed services. Overall, our first quarter 2011 service revenue decreased by approximately $0.3 million or 5% compared to the same period in the prior year. The decrease was primarily attributable to lower first quarter 2011 revenues associated with our 4TEL/Celerity software maintenance with a large international customer as compared to the first quarter 2010.

Gross Profit

Our gross profit for the ~~third~~first quarter of ~~2010~~2011 was $75.08 million compared to $26.25 million in the ~~third~~first quarter of ~~2009~~2010, ana ~~increase~~decrease of $40.87 million ~~or 216%~~. AsHowever, as a percentage of ~~revenues~~sales, our gross profit margin for the ~~third~~first quarter of ~~2010~~2011 ~~improved~~was ~~to 64~~62% versus 2058% for the ~~third~~first quarter of ~~2009~~ 2010. ~~However,~~This 4% ~~our~~increase ~~third~~in ~~quarter~~our ~~2009~~ gross profit margin ~~included~~percentage ais ~~write-off~~primarily ofattributable ~~inventory~~to ofa reduced headcount ~~$3.1 million,~~in an2011 ~~asset~~as ~~impairment~~compared ofto ~~$0.2 million,~~the same 2010 period and ~~severance~~an ~~charges~~increase in the percentage of ~~$0.5 million.~~revenue ~~These~~comprised ~~three~~of ~~2009~~service ~~third~~revenues ~~quarter~~which ~~charges~~typically ~~amounted~~carry higher gross margins as compared to ~~$3.8 million~~product orrevenues.

approximately 34% of our 2009 third quarter revenues. The primary reasons for our third quarter 2010 gross profit improvement over the same 2009 period were that these same three charges did not re-occur in 2010, our amortization expense was lower by approximately $0.3 million and the remaining improvement in our gross profit and gross profit margin is related to our cost reduction efforts that began in 2009 and continued into the first four months of 2010. These cost reduction efforts included workforce reductions and outsourcing almost 100% of our in-house manufacturing.

Selling and Marketing Expenses

	September 30, 2010		September 26, 2009		Change			%
	March 31, 2011		March 31, 2010		Change			%
Employee Costs	$	~~1,033~~960	$	1,~~044~~502	$	(~~$11~~542	)		-136	%
Travel Expenses		91167		~~245~~207		(~~154~~40	)		-6319	%
Consulting Expenses		27		67		(40	)		-60	%
Consulting		150		137		13			9	%
Other Expenses		92		211		(119	)		-56	%
Other		113		217		(104	)		-48	%
Total	$	1,~~243~~390	$	12,~~567~~063	$	(~~$324~~673	)		-2133	%

Our total selling and marketing expenses ~~were~~was ~~approximately~~ $1.24 million in the ~~third~~first quarter of ~~2010~~ 2011 compared to ~~approximately~~ $12.61 million in the ~~third~~first quarter of ~~2009~~2010, a decrease of ~~approximately~~ $0.37 million, or 2133%. Our total selling and marketing expenses consist primarily of employee costs, which include salaries and related payroll taxes, benefits, and commission expenses as well as related travel expenses ~~and certain~~ , consulting expenses and other ~~miscellaneous~~ expenses. ~~The~~which ~~$0.3 million~~are ~~decrease~~individually inimmaterial. ~~our~~This ~~selling~~decrease ~~and marketing expenses~~ is ~~primarily~~ primarily attributable to ~~savings~~lower inemployee ~~salaries~~costs ~~and~~in ~~payroll~~the ~~taxes,~~first ~~benefits~~quarter ~~and~~of ~~related~~2011 ~~travel, and consulting expenses~~ as a result of our ~~recent~~ 2010 workforce ~~reduction~~reductions. ~~Various~~Travel and consulting expenses fluctuated very little quarter over quarter, while other expense items resulted in a net decrease quarter over quarter, none of which are individually material. As a percentage of ~~total third quarter 2010 revenue~~revenues, selling and marketing expenses decreased to 11 15% asin ~~compared~~the tofirst 14quarter of 2011 from 18% in the ~~third~~first quarter of ~~2009~~2010.

General and Administrative Expenses

	September 30, 2010		September 26, 2009		Change			%
	March 31, 2011		March 31, 2010		Change			%
Employee Costs	$	~~870~~821	$	~~1,159~~913	$	(~~$289~~92	)		-2510	%
Legal & Professional Fees		425		1,322		(897	)		-68	%
Stock Compensation		81		415		(334	)		-80	%
Bad Debt Expense		175		~~1,116~~0		~~(1,115~~75	)		-100	%
General Insurance Expense		79		172		(93	)		-54	%
Legal & Professional Fees		1,890		260		1,630			627	%
Other Expense		438		342		96			28	%
Other		642		630		12			2	%
Total	$	13,~~813~~509	$	42,~~111~~218	$	~~($2~~1,~~298~~291	)		~~-56~~58	%

Our ~~total~~ general and administrative expenses for the ~~third~~first quarter of ~~2010~~2011 were ~~approximately~~ $13.85 million compared to ~~approximately~~ $42.12 million in the ~~third~~first quarter of ~~2009~~2010, aan ~~decrease~~increase of $21.3 million or 5658%. ~~General~~Our general and administrative expenses consist primarily of employee costs, which include salaries ~~and related~~ payroll taxes and ~~benefit~~ related employee benefit costs, stock compensation expenses, travel expenses, legal and professional fees, ~~bad debt expenses, general insurance expenses,~~ and other various expenses. Our ~~third quarter 2010~~ general and administrative expenses ~~decreased primarily as~~ aincreased ~~result~~in ofthe ~~reduced~~first ~~bad~~quarter ~~debt~~2011 ~~expense~~primarily ~~from~~as a ~~write~~result ~~off~~ of ahigher ~~large~~legal ~~international~~and ~~account~~professional ~~receivable~~fees of ~~balance~~approximately ~~that approximated~~ $1.16 million inprimarily ~~the~~as ~~third~~a ~~quarter~~result of ~~2009~~our ~~along~~pending ~~with a $0~~merger.~~9 million reduction~~ inIncluded ~~legal and professional fees. These legal and professional fees were lower~~ in ~~2010~~these merger ~~because~~related wecosts ~~did~~are ~~not incur the approximately~~ $0.45 million related to the ~~contested~~fairness ~~election~~opinion ~~of directors~~provided inby ~~2009~~Piper orJaffray ~~approximately~~and Co., $0.16 million ~~related~~in topaid ~~acquisition targets that were ultimately not pursued, as well as lower board fees,~~ and ~~lower~~accrued ~~accounting~~legal ~~fees resulting from our change in auditors. In addition, our third quarter 2010 employee~~ costs ~~are lower by approximately $0.3 million due~~ to ~~the~~prepare ~~workforce reductions that occurred in~~ the ~~fourth~~merger ~~quarter~~agreement, ofproxy ~~2009~~statement and the ~~first quarter~~defense ~~2010,~~of ~~resulting~~ligation infor the ~~elimination~~lawsuits ofthat 11were ~~full-time~~filed ~~positions~~subsequent ~~over~~to ~~these~~the ~~two~~merger ~~time~~announcement ~~periods.~~as ~~The~~well ~~decline~~as in$0.4 million ~~our~~of ~~insurance~~accrued expenses ofassociated ~~approximately~~with ~~$0.1 million~~settlements ~~during~~of the ~~third quarter~~lawsuits.

The increase in our legal and professional fees is partially offset by lower payroll and payroll related costs in the first quarter of 2011 as a result of our 2010 workforce reductions. The decrease in stock compensation expenses is due primarily to a restricted stock grant of 50,000 common shares to our Chairman of the Board in the first quarter of 2010 that did not transpire in the first quarter of 2011. Various other expense items resulted in a slight increase quarter over quarter, primarily as a result of additional travel expenses related to the proposed merger agreement and overseas contract negotiations. As a percentage of revenues, general and administrative expenses increased to 37% in the first quarter of 2011 compared to 20% in the first quarter of 2010.

of 2010 was due primarily to changes in our directors and officers insurance program as well as negotiating lower premiums in our overall general insurance programs. Various other expense items resulted in a slight increase quarter over quarter, none of which are individually material. As a percentage of total third quarter 2010 revenue, general and administrative expenses decreased to 16% as compared to 36% in the third quarter of 2009.

Research and Development Expenses

	September 30, 2010			September 26, 2009			Change			%
	March 31, 2011			March 31, 2010			Change			%
Employee Costs	$	1,~~285~~416		$	21,~~033~~889		$	(~~$748~~473	)		-3725	%
Professional Fees		12142			~~212~~336			(~~200~~194	)		-9458	%
Depreciation		141			159			(18	)		-11	%
Other		216			135			81			60	%
Cost of sales allocation		(362	)		(448	)		86			-19	%
Total	$	1,774		$	2,360		$	(586	)		-25	%
Other		352			397			(45	)		-11	%
Total	$	1,428		$	2,353			($925	)		-39	%

Our research and development expenses for the ~~third~~first quarter of ~~2010~~2011 were ~~approximately~~ $1.4 8 million compared to ~~approximately~~ $2.4 million in the ~~third~~first quarter of ~~2009~~2010, a decrease of $0.9 6 million or 3925%. Our research and development ~~expenses~~expense consist primarily of employees costs, which include salaries, payroll taxes and related employee benefit costs, professional fees, ~~depreciation expenses~~ and other expenses. In addition, because some of our contractual agreements require us to provide engineering development or repair services to our customers, a portion of our engineering costs are allocated to cost of sales. Our ~~third quarter 2010~~ employee related costs ~~and professional fees~~ have declined by approximately $0.~~7 million and $0.2~~5 million, ~~respectively,~~in ~~primarily as a result of our recent workforce reductions and less use of outside contractors as compared to~~ the ~~same~~first ~~prior period. Depreciation expenses have also declined slightly~~ quarter ~~over~~of ~~quarter~~2011 as a result of ~~certain~~our ~~assets~~2010 ~~becoming~~workforce ~~fully depreciated faster than new assets are placed into service~~reductions. ~~The~~Professional ~~allocation~~fees ofhave ~~research and development charges to cost of sales has~~ decreased by ~~approximately~~ $0.12 million asdue ato ~~result of our~~overall ~~reduced~~cost ~~workforce~~reduction ~~and a shift in the portion of engineering time spent on existing products and services as compared to research projects period over period~~efforts. Various other expense items resulted in a slight ~~decrease~~increase of $0.1 million quarter over quarter, none of which are individually material. As a percentage of ~~total third quarter 2010 revenue~~revenues, research and development expense ~~decreased~~for tothe 13first quarter of 2011 was 19% as compared to 21% for the first ~~third~~ quarter of ~~2009~~2010.

Severance Expenses

~~During~~In the first quarter of 2011, we recorded approximately $0.2 million of severance related to the termination of our former Vice President of Research and Development. During the first quarter of 2010, we accelerated our efforts to reduce our operating expenses in order to help position ourselves to achieve stronger profitability ~~levels in the future~~. As such, we eliminated 48 positions across all functional levels of the organization in an effort to reduce our overall cost structure. The total severance charge associated with these actions was approximately $1.7 million, of which ~~approximately~~ $0.5 million was recorded as part of cost of sales ~~expense~~ and $1.2 million was recorded as an operating expense. ~~During the second quarter of 2010,~~ we incurred a severance charge of $0.9 million related to the departure of our former Chief Executive Officer. This expense was recorded as an operating expense. In relation to these actions due to changes in certain circumstances related to our planned actions, we recorded certain positive adjustments to our severance accrual in the third quarter of 2010 in the amount of $0.2 million. We do not anticipate any further adjustment related to our workforce reduction or for the departure of our former Chief Executive Officer and the majority of the cash payments related to these actions were made during the second quarter of 2010.

~~During~~Other ~~the third quarter of 2009, we developed a plan to reduce and restructure our workforce~~(Expense)/Income across all levels of the organization in an effort to reduce costs in order to better align our resources to our revenue streams. The total severance charge associated with this plan was approximately $1.4 million, of which $0.5 million was recorded as cost of sales expense and $0.9 million was recorded as an operating expense. Additionally, we

16Other income for the first quarter of 2011 was $0.1 million compared to $0.4 million of expense for the first quarter of 2010. This change of $0.5 million is due primarily to temporary foreign currency translation adjustments of our foreign entities.

incurred $0.2 million of severance charges related to the departure of our former chief financial officer, which was recorded as an operating cost. All cash payments related to this action were paid in 2009 and no further expense is expected.

Other Income/(Expense)

Other income for the third quarter of 2010 was approximately $0.7 million as compared to less than $0.1 million of other income for the third quarter of 2009. This increase of $0.6 million was due primarily to temporary foreign currency translation adjustments on intercompany loans with our foreign subsidiaries as a result of the increasing value of the Euro and Pound Sterling against the U.S. dollar. In prior years, our intercompany loans with our foreign subsidiaries were considered permanent in nature because no formal loan agreements were in place, thus the foreign exchange translation adjustments on these loans when converted to U.S. dollars were recorded directly to our balance sheet. In December 2009, these intercompany loans were formalized into loan agreements with established maturity dates. In accordance with GAAP, these loans were no longer considered permanent, but became temporary in nature, and thus the foreign currency translation adjustments on these loans from Euros and Pounds to U.S. dollars are now recorded directly to the income statement. In addition, our interest income on our excess cash balances was less than $0.1 million in the third quarters of 2010 and 2009.

Income Taxes

We recorded an income tax expense of ~~approximately~~ $0.91 million during the ~~third~~first quarter of ~~2010~~ 2011 compared to an income tax benefit of $0.12 million in the ~~third~~first quarter of ~~2009~~2010. The increase in tax expense in the first ~~third~~ quarter of ~~2010~~2011 is primarily due to ~~profits~~higher taxable earnings in ~~our~~the foreign operating jurisdictions, ~~primarily~~as incompared ~~our~~to ~~United~~the ~~Kingdom~~first ~~subsidiary~~quarter 2010.

~~Although~~We ~~we now have consolidated book income, we~~ continue to ~~generate~~record ~~tax~~a ~~losses~~valuation ~~resulting~~allowance ~~from timing~~against ~~differences~~U.S. infederal, ~~the~~state ~~United~~and ~~States~~certain ~~and~~foreign net operating losses infrom ~~the~~continuing ~~United~~operations ~~States~~incurred ~~and~~ in ~~certain~~ ~~foreign jurisdictions. As a result, we continue to carry a valuation allowance against~~ the ~~federal,~~ ~~state~~first ~~and~~quarter ~~certain~~of ~~foreign~~2011 ~~net operating losses~~ as the tax benefit generated from those losses iswas deemed to be likely unrealizable in future periods.

NINE MONTHS ENDED SEPTEMBER 30, 2010 COMPARED TO NINE MONTHS ENDED SEPTEMBER 26, 2009

Revenue

	September 30, 2010		September 26, 2009		Change			%
System Test Products	$	9,390	$	10,851		($1,461	)		-13	%
MCU		4,484		4,135	$	349			8	%
Total Products		13,874		14,986		($1,112	)		-7	%
Services		19,849		17,300	$	2,549			15	%
Total Revenues	$	33,723	$	32,286	$	1,437			4	%

Our total revenues for the nine months ended September 30, 2010 were $33.7 million compared to total revenues of $32.3 million for the nine months ended September 26, 2009, an increase of $1.4 million, or 4%.

Our product revenue consists primarily of sales of our system test products as well as sales of our traditional MCU product line. Our product revenue was approximately $13.9 million, or 41% of our total revenues for the first nine months of 2010, compared to approximately $15.0 million, or 46% of total revenues for the first nine months of 2009. Overall, our 2010 nine month product revenues decreased by approximately $1.1 million, or

7%, compared to the same prior year period. The decrease in our total product sales is primarily attributable to a $1.1 million reduction in our LDU/4TEL/Celerity product line, a $0.4 million reduction of our DigiTest system test products, and a $0.4 million reduction in LoopCare and other products due to the timing of customer demand. These decreases were partially offset by increases of $0.5 and $0.3 in our Protocol and MCU product sales to certain large domestic carriers respectively.

Offsetting the declines in our product revenues was a $2.5 million, or 15%, increase in our service revenues over the nine months ended September 30, 2010 compared to the nine months ended September 26, 2009. Our services revenue consists of software maintenance, managed services agreements, installation oversight and product management services. Services revenue was approximately $19.8 million, or 59% of revenues for the nine months ended 2010 compared to $17.3 million, or 54%, of revenues over the same 2009 period. The increase is primarily attributable to our multi-year managed services agreement with Ericsson that we completed during the second quarter of 2009. Revenues under the Ericsson agreement were approximately $5.3 million for the nine months ended 2010 compared to $3.3 million for same 2009 period. In addition, revenue from our new OEM product line which we began to offer in late 2009 amounted to approximately $0.3 million of new revenue in 2010. Finally, net repair revenue increased by approximately $0.2 million during the first nine months of 2010 as compared to the same 2009 period.

Gross Profit

Our gross profit for the nine month period ended 2010 was approximately $20.6 million, compared to $12.7 million during the same nine month period ended 2009, an increase of $7.9 million, or 62%. As a percentage of sales, our gross profit margin for the nine month period ended 2010 was 61% as compared to 39% for the same nine months of 2009. However, our first nine months of 2009 gross profit margin included a write-off of inventory of $3.1 million, an asset impairment of $0.2 million, and severance charges of $0.8 million. These nine month 2009 charges amounted to $4.1 million, or approximately 13%, of our 2009 nine month revenues. The primary reasons for our nine month 2010 gross profit improvement over the same 2009 period was that these same three charges did not re-occur in 2010, our amortization expense was lower by approximately $0.8 million and the remaining improvement in our gross profit and gross profit margin is related to our cost reduction efforts that began in late 2009 and continued into the first four months of 2010. These cost reduction efforts included workforce reductions and outsourcing almost 100% of our in-house manufacturing.

Selling and Marketing Expenses

	September 30, 2010		September 26, 2009		Change			%
Employee Costs	$	3,505	$	3,346	$	159			5	%
Travel Expenses		419		658		(239	)		-36	%
Consulting Expenses		261		304		(43	)		-14	%
Other Expenses		394		542		(148	)		-27	%
Total	$	4,579	$	4,850		($271	)		-6	%

Our total selling and marketing expenses for the nine months ended 2010 were approximately $4.6 million compared to approximately $4.9 million over the same nine months ended 2009, a decrease of approximately $0.3 million or 6%. Our selling and marketing expenses consist primarily of employee costs, which include salaries and related payroll taxes, benefits, and commission expenses as well as related travel expenses and certain consulting expenses and other miscellaneous expenses. The $0.3 million decrease in our selling and marketing expenses is primarily attributable to savings in travels costs due in part by our workforce reduction and through better planning of customer visits, lower consulting expense and lower costs in other expenses, none of which are individually material. These decreases were partially offset by higher employee related costs due primarily to increased commission and bonus accruals. As a percentage of total nine month 2010 revenue, selling and marketing expenses decreased to 14% as compared to 15% in the same 2009 period.

General and Administrative Expenses

	September 30, 2010			September 26, 2009		Change			%
Employee Costs	$	3,025		$	3,458		($433	)		-13	%
Legal & Professional Fees		1,482			3,313		(1,831	)		-55	%
General Insurance Expense		259			512		(253	)		-49	%
Bad Debt Expense		(91	)		1,182		(1,273	)		-108	%
Other Expense		1,310			1,060		250			24	%
Total	$	5,985		$	9,525		($3,540	)		-37	%

Our general and administrative expenses for the nine months ended 2010 were approximately $6.0 million compared to approximately $9.5 million in the nine months ended 2009, a decrease of $3.5 million or 37%. General and administrative expenses consist primarily of employee costs, which include salaries and related payroll taxes and benefit related costs, stock compensation expenses, legal and professional fees, general insurance expenses, bad debt expenses, and other various expenses. Our nine month 2010 general and administrative expenses decreased primarily as a result of a reduction in bad debt expense as we wrote off a large international account receivable balance that approximated $1.1 million in the third quarter of 2009 along with lower legal and professional fees of approximately $1.8 million.

These legal and professional fees were lower in 2010 because we did not incur the approximately $1.3 million in fees related to the contested election of directors in 2009 and potential acquisition targets that were ultimately not pursued, as well as lower board fees and accounting fees from our change in auditors. In addition, our nine month 2010 employee costs are lower by approximately $0.4 million due to the workforce reductions that occurred in the fourth quarter of 2009 and the first quarter 2010 that resulted in the elimination of 11 full-time positions over these two time periods. The decline in our insurance expenses of approximately $0.3 million during the first nine months of 2010 was due primarily to changes in our directors and officers insurance program as well as negotiating lower premiums in our overall general insurance programs. Various other expense items resulted in a $0.2 million increase over the nine months ended 2010 compared to the same 2009 time period, none of which are individually material. As a percentage of total nine month 2010 revenue, general and administrative expenses decreased to 18% as compared to 30% over the nine months ended 2009.

Research and Development Expenses

	September 30, 2010			September 26, 2009			Change			%
Employee Costs	$	4,700		$	6,068			($1,368	)		-23	%
Professional Fees		474			492			(18	)		-4	%
Depreciation		430			507			(77	)		-15	%
Cost of sales allocation		(1,068	)		(1,311	)		243			-19	%
Other		932			1,039			(107	)		-10	%
Total	$	5,468		$	6,795			($1,327	)		-20	%

Our research and development expenses for the nine months ended 2010 were approximately $5.5 million compared to approximately $6.8 million for the first nine months of 2009, a decrease of approximately $1.3 million, or 20%. Our research and development expenses consist primarily of payroll and related benefit costs, professional fees, depreciation expenses and other expenses. In addition, because some of our contractual agreements require us to provide engineering development or repair services to our customers, a portion of our engineering costs are allocated to cost of sales. The primary reason for the decrease in our research and development expenses during the nine months ended 2010 is the reduction in employee related costs of approximately $1.4 million as a result of our workforce reductions that began in late 2009 and were completed over the first four months of 2010. Depreciation expenses have also declined by approximately $0.1 million

over the nine months ended 2010 compared to the same 2009 period as a result of certain assets becoming fully depreciated faster than new assets are placed in service. The allocation of research and development charges to cost of sales has decreased by approximately $0.2 million as a result of our reduced workforce and a shift in the portion of engineering time spent on existing products and services as compared to research projects period over period. Various other expense items resulted in a decrease of approximately $0.1 million over the nine months ended 2010 compared to the same 2009 period, none of which are individually material. As a percentage of total nine month 2010 revenue, research and development expenses decreased to 16% as compared to 21% for the same 2009 period.

Severance Expenses

During the first quarter of 2010, we accelerated our efforts to reduce our operating expenses in order to help position ourselves to achieve stronger profitability levels in the future. As such, we eliminated 48 positions across all functional levels of the organization in an effort to reduce our overall cost structure. The total severance charge associated with these actions was approximately $1.7 million of which approximately $0.5 million was recorded as cost of sales expense and $1.2 million was recorded as an operating expense. During the second quarter of 2010, we incurred a severance charge of $0.9 million related to the departure of our former Chief Executive Officer. This expense was recorded as an operating expense. In relation to these actions due to changes in certain circumstances related to our planned actions, we recorded certain positive adjustments to our severance accruals in both the second quarter and third quarters of 2010 in the amounts of $0.3 million and $0.2 million, respectively. We do not anticipate any further adjustment related to our workforce reduction or for the departure of our former Chief Executive officer and the majority of the cash payments related to these actions was made during the second quarter of 2010.

During 2009, we had several restructuring plans in order to reduce our headcount and achieve lower operating costs. During the third quarter of 2009, we developed an initial plan to reduce and restructure our workforce across all levels of the organization in an effort to reduce costs in order to better align our resources to our revenue streams. The total severance charge associated with this plan was approximately $1.4 million of which $0.5 million was recorded as cost of sales expense and $0.9 million was recorded as an operating expense. Additionally, we incurred $0.2 million of severance charges related to the departure of our former chief financial officer that was recorded as an operating cost. During the second quarter of 2009, we decided to outsource almost all of our in-house manufacturing to a third party vendor and, as such, we reduced our production staffing. The total severance expense associated with this action was approximately $0.1 million. During the first quarter of 2009, we implemented a restructuring program pursuant to which we realigned existing resources to new projects, reduced our field service and sales staffing and completed other reduction activities. The severance costs associated with this program amounted to approximately $0.3 million of which approximately $0.2 million was recorded in cost of sales and approximately $0.1 million was recorded as operating expenses. All cash payments related to these actions were paid in 2009 and no further expense is expected.

Other Income/(Expense)

Other expense for the nine months ended 2010 was less than $0.1 million compared to other income of approximately $0.6 million for the same 2009 period. This change of approximately $0.6 million is due primarily to the collection of an insurance settlement in the prior year in the amount of approximately $0.2 million and higher interest income in 2009 of approximately $0.2 million. Additionally, we incurred approximately $0.1 million of non-cash temporary foreign currency translation adjustments on intercompany loans in the 2010 period that we did not incur in the same 2009 period. In prior years, our intercompany loans with our foreign subsidiaries were considered permanent in nature because no formal loan agreements were in place, thus the foreign exchange translation adjustments on these loans when converted to U.S. dollars were recorded directly to our balance sheet. In December 2009, these intercompany loans were formalized into loan agreements with established maturity dates. In accordance with GAAP, these loans were no longer considered

permanent, but became temporary in nature, and thus the foreign currency translation adjustments on these loans from Euros and Pounds to U.S. dollars are now recorded directly to the income statement. In addition, our interest income on our excess cash balances was approximately $0.1 million in the nine months ended 2010 as compared to approximately $0.2 million in the nine months ended 2009.

Income Taxes

We recorded an income tax expense of approximately $0.6 million and $0.2 million during the nine months ended 2010 and 2009, respectively. The increase in tax expense in the nine months ended 2010 is primarily due to higher profits in our foreign operating jurisdictions, primarily in our United Kingdom subsidiary.

Although we now have consolidated book income, we continue to generate tax losses resulting from timing differences in the United States and net operating losses in the United States and in certain foreign jurisdictions. As a result, we continue to carry a valuation allowance against the federal, state and certain foreign net operating losses as the tax benefit generated from those losses is deemed to be likely unrealizable in future periods.

LIQUIDITY AND CAPITAL RESOURCES

We have historically met our working capital and capital spending requirements, including the funding for expansion of operations, product developments and acquisitions, through net cash flows provided by operating activities. Our principle ~~sources~~source of liquidity ~~are~~is our operating cash flows and cash on our balance sheet. Our cash, ~~and~~ cash equivalents ~~are~~and short-term investments are unrestricted and available for corporate purposes, including acquisitions, research and development and other general working capital requirements. In addition, there are ~~no material restrictions on our ability to transfer~~ and remit funds among our international affiliated companies. In October 2010, our international subsidiaries repaid approximately $4.8 million in intercompany loans, originated in 2007, to one of our domestic subsidiaries.

~~Our cash and cash equivalents and short-term investments increased to $69.6 million at September~~16 30, 2010 from $66.0 million at December 31, 2009. The $3.6 million increase in cash and cash equivalents and short term investments from December 31, 2009 is primarily attributable to an increase in cash generated from operations. We believe we have sufficient cash balances to meet our cash flow requirements and growth objectives over the next twelve months.

We had working capital of $74.2 million at September 30, 2010, an increase of $5.0 million from $69.2 million of working capital as of December 31, 2009. The increase in working capital was due primarily to operating profits and an increase in trade accounts receivables offset by a reduction of $0.6 million in accounts payable due to the timing of vendor payments.

Net cash provided by operating activities for the nine months ended September 30, 2010 was approximately $3.6 million compared to net cash provided by operating activities of $2.1 million for the same period in the prior year. The increase in net cash provided by operating activities of $1.5 million for the first nine months of 2010 is primarily attributable to operating profits, a decrease in inventory due to a coordinated effort to manage inventory on a just in time basis, and an increase in accounts payable as a result of the volume and timing of vendor payments. The net cash provided by operations of $2.1 million for the nine months period ending September 26, 2009 is primarily attributable to lower levels of inventories, accounts receivable, and accrued expenses.

Net cash used in investing activities was approximately $0.1 million for the nine months ended September 30, 2010, which was primarily related to capital expenditures of approximately $0.2 million to support our operations partially offset from approximately $0.1 million of collections from a note receivable related to the sale of our cable product line in 2009. Net cash provided by investing activities of $4.4 million for the nine

~~month~~no ~~ended~~material ~~September 26,~~restrictions ~~2009~~on ~~was~~our ~~primarily related~~ability to ~~proceeds~~transfer ~~from~~and ~~the~~remit ~~sale~~funds ofamong our ~~cable~~international affiliated ~~product~~companies. ~~line~~Our ofcash ~~approximately $3.0 million~~ and ~~the redemption~~cash ofequivalents aand short -term ~~investment~~investments indecreased ~~the~~to ~~amount~~$70.9 million ofat ~~approximately~~March 31, 2011 from $272.2 million at December 31, 2010. ~~These~~The ~~increases~~ $1.3 million decrease in cash and cash ~~were~~equivalents ~~offset~~and byshort ~~the~~term ~~use~~investments offrom December 31, 2010 is largely attributable to cash payments of ~~approximately~~ $0.38 million related to legal and professional fees associated with the proposed ~~purchase~~merger, of$0.6 million related to final payments pursuant to our 2010 incentive plan, $1.1 ~~certain~~million ~~assets~~related ~~from~~to ~~Ericsson~~capital inexpenditures ~~the~~for ~~second~~our ~~quarter~~new ofCranberry, ~~2009~~Pennsylvania headquarters, and an increase in trade accounts receivables of $0.58 million, ofpartially ~~capital~~offset ~~expenditures~~by proceeds from the exercise of stock options of $1.4 million. We believe we have sufficient cash balances to ~~support~~meet our cash ~~operations~~flow requirements and growth objectives over the next twelve months.

Net cash ~~provided~~used in ~~financing~~operating activities ~~was approximately $34,000~~ for the ~~nine~~three ~~month~~months ~~period~~ ended ~~September~~ March 3031, ~~2010~~2011 aswas ~~the~~$1.7 million compared ~~result~~to ofnet cash ~~received~~used ~~from~~in ~~the~~operating ~~exercise~~activities of ~~stock~~$2.0 million ~~grants~~for the same period in the ~~amount~~prior ofyear. ~~$103,000~~The ~~partially~~decrease ~~offset~~in bynet ~~our~~cash ~~purchase~~used ofin ~~approximately~~operating ~~10,600~~activities ~~shares~~is ofprimarily ~~our~~attributable ~~common~~to ~~stock~~$0.5 ~~under~~million ~~our~~of ~~stock~~additional ~~repurchase~~net ~~program~~income ~~for~~over ~~approximately~~the ~~$69,000~~prior period as well as other working capital fluctuations.

Net cash used in investing activities was approximately $1.1 million for the three months ended March 31, 2011, which was primarily related to capital expenditures for our new Cranberry, Pennsylvania headquarters location. Net cash used in investing activities of $0.2 million for the three months ended March 31, 2010 was primarily related to capital expenditures in support of operations.

Net cash received in financing activities was approximately $1.5 million for the three months ended March 31, 2011 as the result of the exercise of approximately 197,000 shares of our common stock. Net cash used in financing activities was approximately $0.1 million for the three months ended March 31, 2010 as a result of purchasing 10,600 shares of our common stock under our stock repurchase program.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

We lease office space and equipment under agreements which are accounted for as operating leases. The ~~office~~ lease for our ~~Cheswick~~new Cranberry, Pennsylvania headquarters facility commenced on February, 28, 2011 and expires on March 311, 2018. Our lease on our former Cheswick facility expired on March 31, 2011. The lease for our Piscataway, New Jersey location expires on April 30, 2012. We also have office leases in Bracknell, United Kingdom and Wuppertal, Germany, which expire on December 24, 2012 and January 31, ~~2011,~~ ~~respectively~~2012, ~~and we lease office space in Kontich, Belgium pursuant to a lease commitment which continues monthly until terminated by either party~~respectively. We are also involved in various month-to-month leases for research and development and office equipment at all locations.

InMinimum ~~October 2010,~~annual wefuture ~~signed~~commitments adue ~~seven~~by ~~year~~period ~~lease commitment for a new headquarters facility in Cranberry Pennsylvania~~ as ~~our~~of ~~existing Cheswick facility lease expires on~~ March 31, 2011. ~~The~~are ~~new lease~~(in ~~for 24,402 square feet of office and lab space commences on April 1, 2011 with annual lease~~thousands): ~~payments of approximately $0.4 million.~~

Minimum annual future commitments due by period are (in thousands):


									More
			Less than 1				3-5		than 5
	Total		year		1-3 years		years		years
Operating Lease Obligations	$	3,658	$	831	$	1,199	$	814	$	814
Severance Obligation		273		273
Uncertain Tax Obligations		904				904
Pension Obligations		863								863


Total	$	5,698	$	1,104	$	2,103	$	814	$	1,677

									More
			Less than 1		1-3		3-5		than 5
	Total		year		years		years		years
Operating Lease Obligations		4,013	$	194	$	1,469	$	1,038	$	1,312
Severance Obligation		92		92		0		0		0
Uncertain Tax Obligations		845		0		845		0		0
Pension Obligations		1,034		0		0		0		1,034
Total	$	5,984	$	286	$	2,314	$	1,038	$	2,346

The lease expense for the three month periods ended March 31, 2011 and March 31, 2010 was $0.2 million for the respective periods.

~~Our lease expense for both the three and nine month periods ended September 30, 2010 and~~17 ~~September 26, 2009 was $0.2 million and $0.6 million, respectively.~~

In addition, we are, from time to time, party to various legal claims and disputes, either asserted or unasserted, which arise in the ordinary course of business. While the final resolution of these matters cannot be predicted with certainty, we do not believe that the outcome of any of these claims will have a material adverse effect on our consolidated financial position, or annual results of operations or cash flow.

Application of Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Therefore, the determination of estimates requires the exercise of judgment based on various assumptions and other factors such as historical experience, economic conditions, and in some cases, actuarial techniques. Actual results may differ from those estimates. A discussion of market risks affecting us can be found in “Quantitative and Qualitative Disclosures about Market Risk” in this Quarterly Report on Form 10-Q.

22As of March 31, 2011, we have adopted accounting guidance for revenue arrangements with multiple deliverables that are outside the scope of software revenue recognition guidance. This adoption has not had a material impact on our financial position, results of operations or cash flows.

~~Table~~As of ~~Contents~~March 31, 2011, we have also adopted accounting guidance for revenue arrangements that include both tangible products and software elements. This adoption has not had a material impact on our financial position, results of operations or cash flows.

~~revenues~~A ~~and~~summary ~~expenses~~of ~~during~~our ~~the~~significant ~~reporting~~accounting ~~period.~~policies ~~Therefore,~~and ~~the~~application ~~determination~~ of ~~estimates requires~~these ~~the~~policies ~~exercise~~are ofincluded ~~judgment~~in the ~~based~~Notes onto ~~various~~Consolidated ~~assumptions~~Financial Statements and ~~other~~in ~~factors~~MD&A ~~such~~included asin ~~historical experience,~~our ~~economic~~Annual ~~conditions,~~Report ~~and~~on inForm 10-K ~~some~~for ~~cases,~~the ~~actuarial~~year ~~techniques~~ended December 31, 2010. ~~Actual~~Management ~~results~~believes ~~may differ~~that ~~from~~the ~~those~~application ~~estimates.~~of Athese policies ~~discussion~~on ofa ~~market~~consistent ~~risks~~basis ~~affecting~~enables us ~~can~~to beprovide ~~found~~useful inand reliable financial information ~~“Quantitative~~about our operating results and ~~Qualitative~~financial ~~Disclosures~~condition. ~~about~~There ~~Market~~were ~~Risk”~~no inchanges ~~this~~to ~~Quarterly~~our ~~Report~~critical accounting onpolicies ~~Form~~during ~~10-Q~~the first quarter of 2011.

A summary of our significant accounting policies and application of these policies are included in the Notes to Consolidated Financial Statements and in MD&A included in the Form 10-K. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition. There were no changes to our critical accounting policies during the third quarter of 2010.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our current investment policy limits our investments in financial instruments to cash and cash equivalents, individual municipal bonds and corporate and government bonds. The use of financial derivatives and preferred and common stocks is strictly prohibited. We believe that our risk is minimized through proper diversification along with the requirements that the securities must be of investment grade with an average rating of “A” or better by Standard & Poor’s. We hold our investment securities to maturity and believe that earnings and cash flows are not materially affected by changes in interest rates, due to the nature and short-term investment horizon for which these securities are invested.

In addition, we are exposed to foreign currency translation fluctuations with our international operations. We do not have any foreign exchange derivative contracts to hedge against foreign currency exposures. Therefore, we are exposed to the related effects when the foreign currency exchange rates fluctuate. If the U.S. dollar strengthens against the Euro and/or the British pound sterling and or the Czech Republic’s Koruna, the translation rate for these foreign currencies will decrease, which will have a negative impact on our operating income. Foreign currency translation fluctuations have no impact on cash flows as long as we continue to reinvest any profits back into the respective foreign operations.

~~Item 4. CONTROLS AND PROCEDURES~~ 18

Our Chief Executive Officer and the Chief Financial Officer and Treasurer (our principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 are effective to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer and Treasurer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended September 30, 2010 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

Item 4. CONTROLS AND PROCEDURES

The Chief Executive Officer and the Chief Financial Officer and Treasurer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of the end of the period covered by this report, that the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer and Treasurer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the fiscal quarter ended March 31, 2011 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

	•		Steven Tencza vs. Edward H. Kennedy, et al. (Case No. GD-11-003755 (Derivative) and Case No. GD-11-006284 (Class Action)) and Vladimir Gusinsky Revocable Trust vs. Edward H. Kennedy, et al. (Case No. GD-11-003908 (Derivative) and Case No. GD-11-006285 (Class Action)), which were filed on February 24, 2011 and on March 1, 2011, respectively, in the Court of Common Pleas of Allegheny County, Pennsylvania;

	•		Equity Benefit Partners vs. Edward H. Kennedy, et al. (Case No. 11-10364), filed in the Court of Common Pleas of Butler County, Pennsylvania on March 18, 2011; and

	•		Margaret W. Crouthamel vs. Edward H. Kennedy, et al., filed in the U.S. District Court for the Western District of Pennsylvania (Case No. 2:11-cv-00403-RCM) on March 28, 2011.

On April 1, 2011, we filed a definitive proxy statement describing the proposed merger. On April 5, 2011, the Tencza and Vladimir Gusinsky Revocable Trust cases were consolidated at In re Tollgrade Communications, Inc. Derivative and Class Action Litigation, Consolidated Case No. GD-11-003755. On April 19, 2011, the Vladimir Gusinsky Revocable Trust case was severed and voluntarily dismissed by the plaintiff with the court’s approval. On April 27, 2011, we and the plaintiffs in Tencza and Equity Benefit Partners reached an agreement in principle providing for the settlement and dismissal of their lawsuits. Pursuant to that agreement, we agreed to make certain supplemental disclosures regarding the proposed merger and filed a supplement (the “supplement”) to our definitive proxy statement on April 27, 2011.

Although a final settlement amount has yet to be reached, we have accrued $0.4 million as our estimate of what we believe the anticipated outcome may be.

Item 1A. RISK FACTORS

In addition to the other information set forth in this Form 10-Q, we wish to caution each reader of this Form 10-Q to carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in ~~the~~our Annual Report on Form 10-K for the year ended December 31, ~~which~~2010 (our “2010 Form 10-K”), which could materially affect our business, financial condition or future results. There are no material changes in our risk factors from those disclosed in ~~the~~our 2010 Form 10-K.

Item 6. EXHIBITS

(a)

Exhibits:

The following exhibits are being filed with this report:

Exhibit
Number		Description
10.1		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 Current Report on Form 8-K, filed with the SEC on September 29, 2010.
2.1		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, filed as Exhibit 2.1 to the Company’s report on Form 8-K filed with the SEC on February 25, 2011.
10.1		Second Amendment to Agreement, dated as of February 20, 2011, by and between Tollgrade Communications, Inc., a Pennsylvania corporation, and Michael D. Bornak, filed as Exhibit 10.1 to the Company’s report on Form 8-K filed with the SEC on February 25, 2011.
10.2		First Amendment to Agreement, dated as of February 20, 2011, by and between Tollgrade Communications, Inc., a Pennsylvania corporation, and Edward H. Kennedy, filed as Exhibit 10.2 to the Company’s report on Form 8-K filed with the SEC on February 25, 2011.
10.3		Summary of 2011 Commission Program for Robert H. King, filed as Exhibit 10.26 to the Company’s Annual Report on Form 10-K filed with the SEC on March 10, 2011 (the “2010 10-K”).
10.4		Amendment dated February 20, 2011 to Agreement in effect between the Company and Gregory M. Nulty, filed as Exhibit 10.34 to the Company’s 2010 10-K.
10.5		Amendment dated February 20, 2011 to Agreement in effect between the Company and Jennifer M. Reinke, filed as Exhibit 10.35 to the Company’s 2010-10-K.
31.1		Certification of Chief Executive Officer, filed herewith.
31.2		Certification of Chief Financial Officer, filed herewith.
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18.U.S.C. Section 350, filed herewith.

™LoopCare is a trademark of Tollgrade Communications, Inc. ~~®Tollgrade~~™LTSC is a ~~registered~~ trademark of Tollgrade Communications, Inc. ®~~DigiTest~~Tollgrade is a registered trademark of Tollgrade Communications, Inc. ®MCU is a registered trademark of Tollgrade Communications, Inc. ®4TEL is a trademark of Tollgrade Communications, Inc. ®Celerity is a trademark of Tollgrade Communications, Inc. All other trademarks are the property of their respective owners.

2420

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Tollgrade Communications, Inc. (Registrant)
		Tollgrade Communications, Inc.
Dated: October 28, 2010
		(Registrant)
	/s/ Edward H. Kennedy
Dated: May 10, 2011
	Edward H. Kennedy
		/s/ Edward H. Kennedy
	Chief Executive Officer and President
		Edward H. Kennedy
Dated: October 28, 2010
		Chief Executive Officer and President
	/s/ Michael D. Bornak
Dated: May 10, 2011
	Michael D. Bornak
		/s/ Michael D. Bornak
	Chief Financial Officer and Treasurer
		Michael D. Bornak
		Chief Financial Officer and Treasurer

2521

EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)

Exhibit
Number		Description
10.1		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 Current Report on Form 8-K, filed with the SEC on September 29, 2010.
2.1		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, filed as Exhibit 2.1 to the Company’s report on Form 8-K filed with the SEC on February 25, 2011.
10.1		Second Amendment to Agreement, dated as of February 20, 2011, by and between Tollgrade Communications, Inc., a Pennsylvania corporation, and Michael D. Bornak, filed as Exhibit 10.1 to the Company’s report on Form 8-K filed with the SEC on February 25, 2011.
10.2		First Amendment to Agreement, dated as of February 20, 2011, by and between Tollgrade Communications, Inc., a Pennsylvania corporation, and Edward H. Kennedy, filed as Exhibit 10.2 to the Company’s report on Form 8-K filed with the SEC on February 25, 2011.
10.3		Summary of 2011 Commission Program for Robert H. King, filed as Exhibit 10.26 to the Company’s Annual Report on Form 10-K filed with the SEC on March 10, 2011 (the “2010 10-K”).
10.4		Amendment dated February 20, 2011 to Agreement in effect between the Company and Gregory M. Nulty, filed as Exhibit 10.34 to the Company’s 2010 10-K.
10.5		Amendment dated February 20, 2011 to Agreement in effect between the Company and Jennifer M. Reinke, filed as Exhibit 10.35 to the Company’s 2010-10-K.
31.1		Certification of Chief Executive Officer, filed herewith.
31.2		Certification of Chief Financial Officer, filed herewith.
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18.U.S.C. Section 350, filed herewith.

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