10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2009

Commission file number 000-27312

TOLLGRADE COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

PENNSYLVANIA (State or other jurisdiction of incorporation or organization)	25-1537134 (I.R.S. Employer Identification No.)
493 Nixon Road, Cheswick, Pennsylvania (Address of principal executive offices)	15024 (Zip Code)

Registrant’s telephone number, including area code: 412-820-1400

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $0.20 per share	The NASDAQ Stock Market LLC
(Title of Class)	(Exchange on which registered)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 No o

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes o No þ

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. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate market value of the voting and non-voting Common Stock of the registrant held by non-affiliates of the registrant, calculated based on the closing price as of June 26, 2009 on the NASDAQ Global Select Market, was approximately $73 million.

As of February 28, 2010, the registrant had outstanding 12,637,431 shares of its Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

	Part of Form 10-K into which
Document	Document is incorporated
Portions of the Proxy Statement to be distributed in connection with the 2010 Annual Meeting of Shareholders	III

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TABLE OF CONTENTS

Part I
Item 1. Business	4
Item 1A. Risk Factors	12
Item 1B. Unresolved Staff Comments	22
Item 2. Properties	22
Item 3. Legal Proceedings	22
Item 4. Reserved	22
Part II
Item 5. Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities	22
Item 6. Selected Financial Data	25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	38
Item 8. Financial Statements and Supplementary Data	38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	63
Item 9A. Controls and Procedures	63
Item 9B. Other Information	63
Part III
Item 10. Directors, Executive Officers and Corporate Governance	64
Item 11. Executive Compensation	64
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	64
Item 13. Certain Relationships and Related Transactions and Director Independence	65
Item 14. Principal Accountant Fees and Services	65
Part IV
Item 15. Exhibits and Financial Statement Schedules	65
SIGNATURES	68
EX-10.10
EX-10.12
EX-10.37
EX-10.38
EX-23.1
EX-31.1
EX-31.2
EX-32

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PART I

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

The statements contained in this Annual Report on Form 10-K of Tollgrade Communications, Inc. (“Tollgrade,” the “Company,” “us,” or “we”), including, but not limited to the statements contained in Item 1, “Business,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” along with statements contained in other reports that we have filed with the Securities and Exchange Commission (the “SEC”), external documents and oral presentations, which are not historical facts are considered to be “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. These statements, which may be expressed in a variety of ways, including the use of forward-looking 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, relate to, among other things, the effect of the current economic recession on our customers and our ability to reposition the Company with a greater focus on our service assurance testing offerings to the telecommunications market, the effect of unfavorable exchange rate fluctuations, possible delays in or the inability to extend, complete, negotiate and execute purchase, service and maintenance agreements with new or existing customers, changes in exchange rates of foreign currencies in which we transact business relative to the U.S. dollar; the ability of the Company to realize the benefits of its strategic revenue and cost initiatives due to unforeseen delays, changes in its markets or other factors, and the risk that these initiatives will not promote revenue growth or restore profitability in the timeframe anticipated by the Company, new product initiatives will not realize revenues or be market accepted such as Stratum™, our new test management operating support system, and our LightHouse™ products targeted at the electric utility market, the ability to complete sales, project delays or cancellations, political instability, inability to obtain proper acceptances or other unforeseen obstacles or delays, projected cash flows which are used in the valuation of intangible assets, our ability to utilize current deferred and refundable tax assets, service opportunities offered to customers, the potential loss of certain customers, the timing of orders from customers, including the timing of international sales, the effect of consolidations in the markets to which Tollgrade sells, the effects of the economic slowdown in the telecommunications industry specifically and the U.S. market and the jurisdictions where we generally transact business, the possibility of future provisions for slow moving inventory, the effect on earnings and cash flows or changes in interest rates, and changes in technology that have impacted our customers’ product needs and spending. We do not undertake any obligation to publicly update any forward-looking statements.

These forward-looking statements, and any forward-looking statements contained in other public disclosures of the Company which make reference to the cautionary factors contained in this Form 10-K, are based on assumptions that involve risks and uncertainties and are subject to change based on the considerations described below. We discuss many of these risks and uncertainties in greater detail in Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors.” These and other risks and uncertainties may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements.

The following discussion should be read in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our financial statements and related notes contained in this Annual Report on Form 10-K.

Item 1. Business.

Tollgrade designs, engineers, markets and supports test system and status monitoring hardware and software products for the telecommunications industry in the United States and international markets. Our products enable telecommunications service providers to remotely diagnose problems in Digital Subscriber Lines (“DSL”) and Plain Old Telephone Service (“POTS”) lines in Public Switched Telephone Network (“PSTN”), and broadband and Internet Protocol (“IP”) networks. By coupling our hardware and software offerings together, we provide proactive, centralized test solutions for our customers.

Our primary product offerings include the DigiTest^® and LDU^™ measurement hardware and LoopCare™ and 4TEL^® centralized test software. These products enable local exchange carriers to conduct a full range of measurement and fault diagnosis for efficient dispatch of field staff to maintain and repair POTS and/or DSL services, along with the ability to pre-qualify and provide broadband DSL services offerings. We also sell and support proprietary test access products, such as the MCU^®, which extends line test capabilities to remote sites that are connected by fiber from the central office.

Our services and managed services business includes software maintenance and support for our operating systems, along with hardware maintenance for our test probes, and our professional services, which are designed to ensure that all of the components of our customers test systems operate properly. In addition, in 2009, we expanded our service capabilities to include managed services, offering those services to both our traditional telecommunications service provider customers and our telecommunications network

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equipment provider customers. In April 2009, we secured a managed services project with Ericsson, Inc. (“Ericsson”), a large global network equipment provider, to provide customer support and engineering services. We also provide managed services capabilities as part of a number of our software maintenance contracts to our telecommunications customers.

Since 2001, we have made several acquisitions allowing us to consolidate our positions in the telecommunications line test markets. These acquisitions included the LoopCare product line from Lucent Technologies, Inc. in 2001, our N(x)Test™ product line and other assets associated with the Line Test Business of Emerson Network Power Energy Systems, North America, Inc. in 2006, and the assets of the Broadband Test Division (“BTD”) of Teradyne, Inc., including the 4TEL, Celerity^® and LDU products in 2007. Most recently, in April 2009, we acquired certain assets from Ericsson in connection with entering into our managed services agreement. Through these acquisitions, we significantly expanded our product and service offerings along with our customer base, particularly our international customer base through the Teradyne and Emerson product line acquisitions.

During 2009, we sold our cable product line (now shown as discontinued operations), consistent with our focus on our core telecommunications markets and customers and our refocused growth strategy.

We were incorporated in Pennsylvania in 1986, and began operations in 1988. Our principal offices are located at 493 Nixon Road, Cheswick, Pennsylvania 15024 and our telephone number is (412) 820-1400.

We make available free of charge on our Internet website (www.tollgrade.com) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or otherwise furnish it to, the SEC.

You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains our reports, proxy, information statements and other information that we file with the SEC (www.sec.gov). Copies of our filings are available free of charge to any shareholder of record upon written request to the Secretary, Tollgrade Communications, Inc., 493 Nixon Road, Cheswick, Pennsylvania 15024.

Products and Services

Telecommunications Test and Measurement Products

Our proprietary telecommunications test and measurement products, which include our Systems Test and MCU products, enable telephone companies to qualify and troubleshoot broadband DSL and IP services and remotely diagnose problems in POTS lines. Most DSL lines today provide broadband Internet access for residential and business customers, fed from a central or remote office Digital Subscriber Line Access Multiplexer (DSLAM) or Multi-Service Access Node (MSAN). Our systems can be used to qualify loops for DSL service as well as ongoing maintenance and repair of the access lines. As telecommunications service providers move to all IP networks and services (voice, video and data), we have introduced products over time to enable IP services testing. At the end of 2009, we introduced additional products to test and monitor voice over IP (VoIP), video over IP (IPTV), and mobile voice services through third party original equipment manufacturer (“OEM”) agreements.

An important aspect of efficiently maintaining a telecommunications network is the ability to remotely test, diagnose and locate any service-affecting problems within that network. Our Systems Test Products are made up of a centralized test operating system integrated into the customers’ repair handling database systems, and test hardware located at telephone companies’ central and remote offices. These systems enable a full range of fault diagnostics in the access network, the portion of the telephone network that connects end users to the central office or remote cabinet. In addition, line test systems provide the capability to remotely qualify, deploy and maintain DSL services which are carried over copper lines. These test systems reduce the time needed to identify and resolve problems, eliminating or reducing the costs of dispatching a technician to the problem site.

Most line test systems, however, were designed only for use over copper lines; as a result, traditional test systems could not access local loops in which fiber optic technology had been introduced. Our MCU product line, which is used primarily by large domestic carriers, solved this problem by extending line test capabilities from the central office to the fiber-fed remote Digital Loop Carrier (“DLC”) lines by mimicking a digital bypass pair, which is essentially a telephone circuit that connects central test and measurement devices to the copper circuits close to the customer.

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Systems Test Products

Our Systems Test Products include the DigiTest product family, which includes our LoopCare software and DigiTest ICE™, DigiTest EDGE^® and DigiTest HUB™ hardware. Our Test Products perform physical and logical measurements to verify the connection performance of lines and circuits and reports those measurements to our LoopCare operating support systems (“OSS”). LoopCare, in turn, analyzes that measurement data and creates an easy-to-understand fault description. At the same time, LoopCare can automatically dispatch a technician to a work center in order to fix the problem. LoopCare and the DigiTest hardware are also used to pre-qualify, verify installation, and remotely isolate troubles for various DSL services, including testing the logical layers to verify modem synchronization “in” to the DSLAM or “out” to the customer. The DigiTest product family can also serve as a replacement for aging Loop Test System (“LTS”) equipment deployed in current domestic networks.

DigiTest ICE, our latest IP Service Assurance Test Probe, is aimed at testing Triple Play voice, video and data services over emerging fiber to the curb or cabinet broadband access networks. Because these remote sites have a lower line count, they require cost optimized test probes and greater IP test capabilities to fulfill the requirements of triple play testing. DigiTest ICE provides both metallic and multi-layered testing to help service providers install and maintain triple play services. With DigiTest ICE, the customer will be able to quickly isolate VoIP, IPTV and high speed Internet access issues, verify their network performance, and synch with broadband equipment to validate connectivity and throughput. Coupled with our centralized software platforms, DigiTest ICE provides a comprehensive broadband test and dispatch solution.

Our Systems Test Products also include 4TEL and Celerity software products working with LDU hardware test probes. These products perform similar line test functions and test measurements as our other Systems Test Products, but have been optimized for operation in the international markets, and have extensive deployment in Europe, covering over 100 million access lines. The 4TEL and LDU products have also been deployed on a more targeted basis in North America, as well as in international markets outside of Europe.

During 2009, we began to reposition ourselves with a greater focus on our service assurance product offerings. We are building upon the strength of our Systems Test Products, which are at the center of our service assurance offerings, but with a greater emphasis on expanding our service assurance software solutions. Our Systems Test Product software offerings include LoopCare, 4TEL, Celerity, and LTSC™ OSS. Each of our OSS has an established installed base of customers. In September 2009, we introduced our new test management OSS, Stratum™. Stratum’s initial features are based on both existing customer requests for enhanced features and our view of the trends in the marketplace. We plan to leverage our incumbent position with our installed base of customers and extend testing coverage to next generation network architectures with Stratum. Stratum includes several new software test and probe capabilities that we believe will enhance the benefits of our solutions for existing and new customers. Based on International Telecommunication Union (ITU) standards, Stratum has software to drive metallic tests on embedded subscriber line interface circuits (SLIC) in remote DSLAMS for next generation networks. Stratum incorporates interfaces to capture management information base (MIB) status and alarms from deployed access network elements from multiple network equipment vendors, and provides backwards compatibility with our LoopCare and 4TEL systems. Stratum aggregates the data from the different sources and provides an integrated analysis of the data in fault location, including a more accurate identification and dispatch recommendation than the individual results alone.

We have OEM software licensing and technology licensing agreements in place for offerings in our telecommunications product portfolio. More recently, we signed an OEM agreement with Mariner Partners, Inc. in December 2009 to customize a version of their xVu™ IPTV quality of experience product line which will be incorporated into Stratum.

In October 2009, we signed an agreement with Accanto Systems, SRL to provide mobile and VoIP protocol analyzers under the Tollgrade brand name. The agreement enables us to sell the Accanto protocol analyzer probes, and OSS platforms with exclusivity in certain territories. The protocol probes monitor signaling protocols and network traffic, allowing rapid resolution of difficult network and equipment problems.

We purchased a card for our DigiTest EDGE product and an access device for the DigiTest product line through OEM agreements. We are also a party to a number of third party software license agreements that allow us to incorporate third party software products and features into our LoopCare, 4TEL and Celerity software. We have licensing arrangements with Aware, Inc. for certain technology related to our DigiTest products. We have also entered into a license agreement with Green Hills Software, Inc. for certain technology related to our DigiTest ICE product.

We market and sell our Systems Test Products primarily through our direct sales force as well as through certain reseller and distributor agreements. Sales of the DigiTest Product line (including related software sales) accounted for approximately 31%, 37% and 46% of our total revenues for the years ended December 31, 2009, 2008 and 2007, respectively.

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MCU

Our MCU products plug into DLC systems, the large network transmission systems used by telephone companies to link the copper and fiber-optic portions of the local loop. MCU products allow our customers to extend their line testing capabilities to all of their POTS lines served by a DLC system regardless of whether the system is fed by a copper or fiber optic link. DLC systems, which are located at telephone companies’ central offices and at remote sites within local user areas, effectively multiplex the services of a single fiber-optic line into multiple copper lines. In many instances, several DLC systems are located at a single remote site to create multiple local loops that serve several thousand different end-user homes and businesses. Generally, for every DLC remote site, customers will deploy at least two MCU line-testing products.

We market and sell our MCU products directly to customers as well as through certain OEM agreements. We have certain royalty-based license agreements in place to enable us to maintain capability with specific DLC systems. We paid royalties under these agreements in the amounts of $0.2 million, $0.4 million and $0.6 million during the years ended December 31, 2009, 2008 and 2007, respectively.

Sales of MCU products and related hardware accounted for approximately 13%, 18% and 24% of our revenue for the years ended December 31, 2009, 2008 and 2007, respectively.

Services and Managed Services

Our service offerings include three primary areas, including software maintenance and support for our OSS offerings and hardware maintenance for the test probes, professional services, and managed services. Our software and hardware support services are designed to ensure that all of the components of our customers’ test systems operate properly. The primary customers for our software and hardware support services are the large domestic and international service providers. We also offer professional services, such as installation, commissioning, and training to these same customers. Most of our support services are provided through yearly or multi-year service agreements, and can cover both software and hardware maintenance for our products.

Including software maintenance and support, services revenue accounted for approximately 56%, 45% and 30% of our total revenues for the years ended December 31, 2009, 2008 and 2007, respectively. Historically, our services business was comprised of the more traditional POTS-based testability services, and the revenue stream was largely project-based and as such, difficult to predict. During the last few years, our services business has moved toward more contract-based software maintenance services, the revenue from which is more predictable. We expect our service business to continue to comprise a large percentage of our revenue in the future.

On April 15, 2009, we entered into a multi-year managed services agreement with Ericsson, pursuant to which we will provide customer support and engineering services. We entered into this four year agreement as part of our continued strategic focus to grow our services business. In 2009, revenues from this contract were approximately $5.1 million or approximately 11% of our total revenues. Managed services are an area of potential growth for us. We are focused on expanding our managed services business with both our telecommunications customers as well as larger network equipment and managed service providers.

Electric Utility Monitoring Products

In 2008, we launched a new product development effort, our LightHouse product line, which is designed to provide power grid monitoring capabilities to the electric utility market. Research and investment, which began in 2007 and continued into 2009, enabled the general availability of the first release of the product line during the first quarter of 2009. The test system solution currently consists of line mounted sensors, aggregators, and centralized software providing an end to end solution for power providers to efficiently monitor their overhead distribution circuits in real time. The system is designed to improve the overall efficiency of energy delivery, improve customer satisfaction and improve the financial performance of the electric power utilities.

The market for power grid monitoring has been slower to evolve than we originally projected and to date, our efforts in the monitoring segment of the market have not produced the results we anticipated. As a result, we reviewed the strategic alternatives for our LightHouse product activities in late 2009 and early 2010. After this review, we determined that the best course of action was to continue our efforts and focus on an expanded trial we have with a major US utility company.

Operating Segment

We have determined that our business has one operating segment, test assurance. All product and service sales relate to the business of testing infrastructure and networks for the telecommunications industry. Our products have similar production processes, and are sold through comparable distribution channels and means to similar types and classes of customers already in, or entering into, the

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telecommunications businesses. Operating results are regularly reviewed by our chief operating decision maker regarding decisions about the allocation of resources and to assess performance.

Research and Development

Our research and development activities are focused on improving our existing telecommunications product lines, investing in growth opportunities in the Telecommunications Service Assurance market, and leveraging our technology strengths in test and measurement into the utility industry.

We have made improvements to certain of our existing line test product lines, including enhanced measurement techniques that deliver more accurate service repair dispatches for our customers. Additionally, we have augmented these product lines with customer-specified features, enhancing the usability, scalability, security, and resiliency of our current product lines. We enhanced the functionality of our products to be able to interface with third party equipment, thereby enabling migration with the evolving next generation networks. We continue to stay current with the latest standards for Broadband Forum and ITU standard bodies.

Our Service Assurance product activities provide our customers an expanded reach of test technologies, utilizing our existing line test technology and augmenting the network analysis with next generation test technologies. This provides our customers more comprehensive results and analysis with which to resolve trouble points in the network. In addition, we continue to enhance our portfolio of test technologies working with semiconductor companies and equipment providers in order implement the emerging ITU Glt standards.

Leveraging our traditional strength in system test and our core competency in complex measurements and analytics, we have entered the utility Smart Grid market with a focus on measurements and faults in the distribution network. Our research and development activities in this market to date have focused on emerging standards, interoperability with complementary communication systems, and refining customer market requirements.

As of December 31, 2009, we had an engineering staff of 55 employees, representing 33% of our total employee workforce. As of December 31, 2008 and 2007, we had an engineering support staff of 62 and 80 employees which comprised 32% and 39% of our total workforce, respectively. Our engineering staff is primarily located in three locations, Cheswick, Pennsylvania; Piscataway, New Jersey; and Bracknell, United Kingdom. During the years ended December 31, 2009, 2008, and 2007, research and development expenses charged to operations were $9.4 million, $10.8 million and $11.0 million, respectively. In addition, because some of our contractual agreements require us to provide engineering development or repair services to our customers, a portion of our total engineering costs has been allocated to cost of sales. The amount allocated to cost of sales for the years ended December 31, 2009, 2008, and 2007 are $1.5 million, $1.4 million and $1.1 million respectively. In 2010, we expect that we will continue to invest in organic growth opportunities to help support our customers’ ongoing needs and to help them solve their business problems.

Sales and Marketing

In our telecommunications business, our primary sales and marketing strategy is a direct approach to tier one and tier two service provider customers. We utilize our direct sales, marketing and service resources in North America and Europe to develop sales opportunities with our current customer base, as well as new customers. In territories outside North America and Europe, our primary route to market is through a network of value added reseller partners and distributors who provide in-country capabilities to complement our capabilities. We have sales and service offices in Cheswick, Pennsylvania and Piscataway, New Jersey in the United States and Bracknell, United Kingdom; Antwerp, Belgium and Wuppertal, Germany in Europe.

As of December 31, 2009, we had a sales and marketing staff of 27 employees. As of December 31, 2008 and 2007, we had a marketing and sales staff of 28 and 32 people, representing 16% and 16% of our total workforce, respectively.

Competition

The market for telecommunications testing equipment is highly competitive. Primary competitive factors in our market include price, product features, performance, reliability, service and support, breadth of product line, technical documentation, prompt delivery and availability of alternative technologies.

The competitors for our traditional POTS telecommunications products and our broadband technologies and applications solution offerings include JDS Uniphase, EXFO Electro-Optical Engineering Inc., Spirent Communications PLC, Huawei Technologies Co., Ltd., Fluke Networks and Nortel. Historically, we have positioned ourselves against competitors’ offerings by leveraging our patented technologies, partnering with network equipment providers, and investing in next generation research and development. We also

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leverage our incumbent position with existing customers and core competencies to test broadband next generation networks to position ourselves against our competitors on the basis of lower deployment costs and long-term operational cost efficiencies.

We also face competition as a growing number of network equipment providers offer testing technology embedded into their products. Where testing was once only available in the form of multi-chip, circuit board-based designs like those found in our remote test system hardware products, integrated testing technology is now available in low-cost chipsets embedded into the products of these network equipment providers. Referred to as SELT and DELT (Single Ended Line Test and Double Ended Line Test), the testing technology available in this form has limited functionality and only provides partial views of faults in the network. A new SLIC chipset is expected to be offered by the network equipment providers in 2010 and 2011 to provide MELT (Metallic Line Test) that will provide a subset of our test capabilities available in our remote test system products. In response to the industry and competitive trends, our Stratum platform includes software drivers for the MELT tests. We will continue to face competition and downward pricing pressure as a result of the availability of these less expensive, less robust alternatives possibly resulting in decreased sales of our system products to certain of our customers.

Another area of competition is from software solution providers and the internal Information Technology (“IT”) departments of our own carrier customers. In the past, we offered solutions consisting of hardware probes, coupled with a centralized software platform that analyzed the data pulled from the probes and determined the appropriate dispatch statement or issue identification statement. As the capabilities of new infrastructure equipment increases, test and monitoring software platforms are increasingly taking advantage of the available data from the infrastructure equipment. The new software platforms offer customers a lower upfront cost, but offer less robust capabilities as compared to solutions built with hardware and software combinations. Several network equipment providers (Alcatel-Lucent, Huawei, AdTran) have included test software platforms as part of the element management systems. At the same time, many of our larger customers have captive development capabilities in their own IT organizations. These IT teams can develop software systems that compete with our offerings. Because of our intimate knowledge of many carrier customers, we believe we have a strategic advantage over these internal groups based on our industry knowledge and the efficiency of our development resources in comparison to internal customer resources.

As with the telecommunications products, the extension of our IP service assurance and mobile and VoIP products to address IP and mobile test applications expands our list of traditional competitors to now include Empirix Inc., JDS Uniphase, Tektronix Canada Inc., EXFO (as successor to Brix Networks, Inc.), Agilent Technologies Inc, and IneoQuest.

Our Customers

Our customers include the top telecommunications providers and numerous independent telecommunications 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 sales by two large groups, the first of which includes AT&T, Verizon, and Qwest (referred to herein as the “large 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 Telefonica O2 Czech Republic, a.s. (collectively referred to herein as the “European Telcos”).

For the year ended December 31, 2009, sales to the large domestic carriers accounted for approximately 39% of our total revenue, compared to approximately 39% and 42% of our total revenue for the same 2008 and 2007 period, respectively. We had 2009 sales to our largest customer, AT&T, which was comprised of approximately 23% of our total revenue for 2009, compared to 27% and 31% for the same 2008 and 2007 periods, respectively. For the year ended December 31, 2009, sales to the European Telcos accounted for approximately 19% of our total revenue, compared to approximately 27% and 15% of our total revenue for the same 2008 and 2007 period, respectively.

In addition, in April 2009, we entered into a multi-year managed services agreement with Ericsson to provide customer support and engineering services. We entered into this agreement as part of our continued strategic focus to grow our services business. In 2009, revenues from this contract were approximately $5.1 million or 11% of our total revenue.

Because of our continued dependency on certain large domestic and international carriers, as well as on Ericsson, the potential loss of one or more of these customers, or the reduction of orders for our products by one or more of these customers, could materially and adversely affect our results.

Manufacturing and Quality Control

Throughout 2009, we began to outsource our in-house manufacturing and production capabilities to Express Manufacturing Inc. (“Express Manufacturing”), a global provider of subcontracting services. Express Manufacturing fulfills our manufacturing requirements in Santa Ana, California including the direct shipment of products to our end customers. Express Manufacturing has an

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additional offshore site at which our requirements may also be fulfilled. We believe that the outsourcing of our manufacturing enables us to conserve our working capital, adjust better to fluctuations in demand and ensure a more timely delivery to our customers.

We are ISO 9001:2008 registered with the British Standards Institution, Inc. ISO 9000 is a harmonized set of standards that define quality assurance management. Written by the International Organization for Standardization (“ISO”), ISO 9000 is recognized throughout the United States, Canada, the European Union and Japan. We continue to develop and maintain internal documentation and processes to support the production of quality products to ensure customer satisfaction and have been ISO compliant since 1996.

Proprietary Rights

We have registered trademarks in the names Tollgrade^®, MCU^®, DigiTest^®, EDGE^®, Telaccord^®, MITS^®, Clearview^®, MICRO-BANK^®, the names and logos for 4TEL^®, Celerity^® and NETFLARE^®. We have common law trademarks in the names LoopCare™, MLT™, ICE™, Clear™, the Clear logo, Early Warning™, ReportCard™, CircuitView™, Network Assurance Simplified™, Minutes Mean Millions™, N(x)Test™, N(x)DSL™, LTSC™, and HyFi™, and in the LightHouse name and logo (as applicable to our new power grid monitoring products), and our corporate logo. Team Tollgrade^SM is a common law service mark of the Company.

We have three United States patents on MCU products with expiration dates ranging from 2010 to 2014. We have forty-nine patents in the United States, eight patents in Belgium, eleven patents in Canada, eight patents in Europe, four patents in France, eight patents in Germany, eight patents in the Netherlands, eight patents in the United Kingdom and three patents in Canada on other telecommunications technology with expiration dates ranging from 2014 to 2026. In addition, we have seven United States, five European, one German, one United Kingdom and two international, patent applications pending on our products, some of which relate to our new Stratum and LightHouse products.

We will apply for additional patents from time to time related to our research and development activities. We protect our trademarks, patents, inventions, trade secrets, and other proprietary rights by contract, trademark, copyright and patent registration, and internal security.

Although we believe that these patents, when aggregated, are an important element of our business, we do not believe that our business, as a whole, is materially dependent on any one patent.

Backlog

Our order backlog for firm customer purchase orders and signed software maintenance contracts was $15.6 million at December 31, 2009, compared to backlog of $16.3 million at December 31, 2008. The backlog at December 31, 2009 and December 31, 2008 includes approximately $8.4 million and $12.1 million, respectively, related to software maintenance contracts. In 2010, we expect to realize revenues related to the entire backlog at December 31, 2009.

In our reported backlog, we have adopted a policy to include a maximum of twelve months revenue from multi-year software maintenance agreements. Software maintenance revenue is deemed to be earned and recognized as income on a straight-line basis over the terms of the underlying agreements.

Periodic fluctuations in customer orders and backlog result from a variety of factors, including but not limited to the timing of significant orders and shipments. Although these fluctuations could impact short-term results, they are not necessarily indicative of long-term trends in sales of our products.

Employees

As of December 31, 2009, we had 167 full-time employees, 141 of whom were located in the United States and 26 of whom were located in Europe. As of December 31, 2008 and 2007, we had 179 and 205 full time employees, of which 150 and 178 where located in the United States and 29 and 27 were located in Europe, respectively. As of February 28, 2010, we had 162 employees of which 136 were located in the United States and 26 were located in Europe. None of our employees are represented by a collective bargaining agreement, and we believe that our relations with our employees are good.

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Executive Officers of the Company

The executive officers of the Company as of February 28, 2010 and their biographical information are set forth below.

Joseph A. Ferrara	Chief Executive Officer, President and Board Member of Tollgrade since November 2007; serving as Chairman of the Board of Directors since May 2009; Senior Vice President, Sales and Marketing of Tollgrade from August 2007 until November 2007; prior thereto General Manager Data Networks Division of Ericsson from January 2006 until July 2007 following Ericsson’s acquisition of Marconi Corporation plc’s (“Marconi”) product divisions; Chief Executive Officer of Marconi’s North American operations from June 2005 until January 2006; Vice President of Business Operations of Marconi’s Data Networks Division from February until June 2005 and July 2000 until April 2004; and Vice President of Marketing of Marconi’s Data Networks Division from April 2004 until February 2005. Age 43.
Michael D. Bornak	Chief Financial Officer of the Company since November 2009; served as the Company’s interim Chief Financial Officer from September 2009 to November 2009; prior thereto served as Chief Financial Officer of Solar Power Industries, Inc. from June 2008 until July 2009; Chief Financial Officer for MHF Logistical Solutions, Inc. from February 2005 to June 2008; Vice President of Finance and Chief Financial Officer of Portec Rail Products, Inc. from January 1998 to February 2005. Mr. Bornak is also a Certified Public Accountant. Age 47.
David L. Blakeney	Vice President, Research and Development of the Company since October 2008; prior thereto consultant to the Company in the same capacity from March 2008 until October 2008; Vice President, Engineering, for Altrix Logic from December 2006 until October 2008; prior thereto, Vice President of Engineering for the Data Networks Division of Ericsson from April 1999 to October 2006. Age 48.
Jennifer M. Reinke	General Counsel of the Company since November 2009 and Secretary of the Company since December 2009; Assistant General Counsel of the Company from February 2009 to November 2009; Corporate Attorney for the Company from March 2003 to February 2009; served as the Company’s Assistant Secretary from March 2003 to December 2009; prior thereto, Associate Attorney with Reed Smith LLP, from August 1998 to March 2003. Age 37.
Robert H. King	Vice President, Global Sales and Marketing of the Company since February 2009; Executive Director, Business Development of the Company from December 2008 until February 2009; prior thereto President and General Manager of the Broadband Products Group at Sunrise Telecom Incorporated (“Sunrise”) from April 2006 until June 2008; Vice President, Sales at Sunrise from January 2000 until April 2006. Age 48.
Joseph G. O’Brien	Vice President, Human Resources of the Company since October 1997; Director of Employee Development of the Company from April 1997 until October 1997; prior thereto, Coordinator, Elderberry Junction, Goodwill Industries, a charitable organization, from May 1995 until April 1997. Age 50.
Kenneth J. Shebek	Vice President, Operations of the Company since October 2008; prior thereto, Vice President of Supply and Logistics for the Data Networks Division of Ericsson from January, 2006 until October 2008; Vice President of Supply Chain for Marconi and its Vice President of North American Operations from January 2003 to December 2005. Age 47.

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Item 1A. Risk Factors

We wish to caution each reader of this Form 10-K to consider the following factors and other factors discussed herein and in other past reports, including but not limited to prior year Form 10-K and quarterly Form 10-Q reports filed with the SEC. Our business and results of operations could be materially affected by any of the following risks. The factors discussed herein are not exhaustive. Therefore, the factors contained herein should be read together with other reports and documents that we file with the SEC from time to time, which may supplement, modify, supersede or update the factors listed in this document.

Revenue from product sales may be subject to further declines due to the mature nature of many of our product lines and from customers transitioning their access network service assurance solutions.

Our legacy products are primarily oriented towards POTS lines. As many customers implement next generation network improvements, such as fiber to the premises (“FTTP”), our continuing ability to sell our legacy technology or to maintain historic pricing levels for these products will likely be adversely affected. In particular, sales of our MCU products, which have historically represented a meaningful portion of our product sales, are declining. MCU sales largely depend upon the rate of deployment of new, and the retrofitting of existing, DLC systems in the United States. Installation and replacement of DLC systems are, in turn, driven by a number of factors, including the availability of capital resources and the demand for new or better POTS. Next generation network improvements such as FTTP do not require the use of our MCU products as does the present hybrid POTS network. If our major customers fail to continue to build out their DSL networks and other projects requiring DLC deployments, or if we otherwise satisfy the domestic telecommunications market’s demand for MCUs, our MCU sales will continue to decline and our future results would be materially and adversely affected.

Certain of our larger customers are in the process of upgrading their access networks, as well as, their service assurance solutions for these networks. This has and may continue to adversely impact revenues from our testing products. Further, these customers may decide not to adopt our technologies for their service assurance needs, which would have a significant adverse affect on revenues for those products.

Our product sales have experienced continual declines over the past five years, with sales from continuing operations of $19.9 million for 2009, $27.0 million in 2008 and $36.1 million for 2007. Our MCU product line, which historically has represented a larger portion of our sales, has declined by 36% and 29% as a percentage of continuing operation product sales, over the 2009 and 2008 periods, respectively. In addition, we also have experienced year over year declines in our DigiTest, LoopCare and LDU product lines. If we are unable to continue to derive sales of these products to our existing customers due to their lower demand, capital constraints and a move towards other technologies, this could have a materially adverse impact on our future financial results.

Our ability to maintain or increase revenues will be dependent on our ability to expand our customer base, increase unit sales volumes of our existing products and to successfully, develop, introduce and sell new products.

Our service business may be negatively affected by a trend of reduced capital spending and by delays in our ability, or by our inability, to secure and extend long-term maintenance contracts with our existing or new customers, and by customer initiatives to consolidate services purchases with a single supplier.

Our Services business, which includes software maintenance and professional services, as well as our managed services offerings, is sensitive to the decline in our large carrier customers’ capital investment in their traditional voice services. This decline may lead to a decreasing demand for our professional services. In addition, if we are unsuccessful in renewing our software maintenance agreements, or if we experience delays in the extension or renewal of certain of the more significant software maintenance agreements, our revenues may be negatively affected. In particular, in December 2009, we were advised that Verizon, a major customer for our LoopCare post-warranty software maintenance services, would not renew its contract for those services after the expiration of that contract on December 31, 2009, and would instead seek to purchase post-warranty maintenance services for our LoopCare products through a larger supplier, requiring us to negotiate a new contract with that supplier. In addition, another significant maintenance contract that was scheduled for expiration on December 31, 2009 was extended through March 2010 pending negotiation of that contract renewal. If the negotiations for these or any other significant maintenance contract that becomes subject to renewal are not successful, the agreements may not be reached at all or may be reached on terms that are not as favorable to us as the former or extended arrangements, and as a result our revenues may be adversely affected. In addition, to the extent more of our customers seek to consolidate services purchases through a large vendor, and in so doing seek to purchase maintenance for our software products through a third-party vendor, we will likely experience significant downward pricing pressure for these services.

We are also experiencing intense pricing pressure from many of our other larger software maintenance customers, as they continue to attempt to reduce their own internal costs to substantiate the value of our long term service contracts. We believe that our services and our software systems provide significant value to our customers; however, each time a contract is scheduled for renewal, we must

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show our customers the value of the entire system and the costs saved by maintaining and even extending the system capabilities. To date, apart from the customer noted above, we have been able to renegotiate or have had contract extensions to most of our major contracts as they become subject to renewal. We have, however, had to reduce our pricing in some instances. Accordingly, our ability to maintain historical levels from traditional sources or increase levels of Services revenues cannot be assured, and in fact, such levels may decrease.

The expiration of the Verizon contract in December 2009, as well as the pricing pressure on many of our other services contracts and our increasing difficulty in securing extensions on major customer contracts, triggered our evaluation of the carrying value and the remaining useful lives of our intangible asset associated with our LoopCare post-warranty software maintenance agreements. Based on this evaluation, we recorded a significant impairment charge of $27.0 million in the fourth quarter of 2009, and reduced the remaining finite useful life of this asset from approximately forty six years to fifteen years. Further declines in our post-warranty maintenance services may result in future impairment charges as well as having a materially adverse impact on our financial results and cash flow.

Our future growth depends to a large extent upon our success in developing and selling new products and service offerings. We have focused our growth efforts and are managing our investments. If we are unable to drive sales of new products and services to counter the expected declines in our legacy product lines, this could have a materially adverse impact on our future financial results.

We are actively selling and developing new product and service offerings. Our long term growth is dependent upon the success of these products and additional new products to be developed in the future. In the telecommunications market, our new products include hardware solutions, including enhanced LDU and DigiTest ICE offerings, a new software platform, Stratum, our managed services offering, and OEM product offerings. In the power utility market, we offer a new solution consisting of hardware sensors, aggregation nodes, and a centralized software platform. We continue to believe that there is a significant market opportunity for these products. However, there can be no assurance that these product offerings will be commercially successful in the near term or at all.

We continue to pursue product development initiatives to supplement our new offerings described above. There can be no assurance that we will be successful in marketing and selling our new product and services offerings or that the new offerings will result in the benefits and opportunities that we expect. The development of new solutions is an uncertain and potentially expensive process and requires that we accurately anticipate technological and market trends so that we can deliver products in a timely manner. We may not be successful in delivering the required product features to achieve success, or if we do so, we may not be able to commercialize the product in a timely manner or achieve market acceptance. If we fail to set appropriate prices for our products, our profitability could be adversely affected.

In addition, the potential market growth rate may not be as significant as we expect or could develop in unforeseen directions. For example, the commercial availability of competing products may affect the extent or timing of market acceptance of our solutions. Furthermore, we may not be successful in forming the strategic alliances contemplated by our new strategy. We may not identify the right partners or our partners could fail to perform their obligations and the commercial relationship may fail to develop as expected. As a result of these and other factors, we may not be able to implement our strategy and our ability to exploit our incumbent position in the manner contemplated by our strategic planning and we would be materially and adversely affected.

Our restructuring efforts and cost reduction plans may be ineffective or may limit our ability to compete.

During 2009, we restructured our business operations through three different restructuring initiatives. During the first quarter of 2009, we announced a restructuring initiative, which included the realignment of existing resources to new projects, reductions in our field services and sales staffing, as well as other reduction activities, and on July 6, 2009, we announced a restructuring initiative which included reductions in our production staffing. In October of 2009, we eliminated twenty-eight positions across all levels of the organization. Previously, during 2008, we implemented a series of initiatives designed to increase efficiency and reduce costs and to focus our core business on our test and measurement expertise. These initiatives included reductions of staff, alignment of investments and a completion of the integration plans from prior acquisitions. Although we have experienced some cost savings from these restructuring and cost reduction programs and initiatives and we believe that these actions will continue to reduce costs, they may not be sufficient to achieve the required operational efficiencies that will enable us to respond more quickly to changes in the market or result in the improvements in our business that we anticipate or be sufficient to offset a decline in our revenue. In such event, we may be forced to take additional cost-reducing initiatives, which may negatively impact quarterly earnings and profitability as we account for severance and other related costs. In addition, there is the risk that such measures could have long-term effects on our business by reducing our pool of talent, decreasing or slowing improvements in our products, making it more difficult for us to respond to customers, limiting our ability to increase production quickly if and when the demand for our products increases and limiting our ability to hire and retain key personnel. These circumstances could cause our earnings to be lower than they otherwise might be.

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Failure to achieve the maximum revenues under our managed services contract could have an adverse effect on our revenues and results of operations.

During the second quarter of 2009, we entered into a multi-year, managed services contract with Ericsson, a leading global network equipment provider, pursuant to which we provide customer support and engineering services capabilities. In connection with the agreement, we hired twenty-one employees. The inability to successfully integrate and/or retain the hired employees and to integrate the tools and resources acquired as part of the agreement into our services business would have an adverse impact on our ability to realize the potential revenue opportunities under the agreement. In addition, under the terms of the managed services contract, we may not achieve the full revenue potential of the contract in the event that (i) we fail to meet certain specified service level requirements in the contract, and subsequently, service level credits reducing payments to us are applied, (ii) the network equipment provider terminates the contract for our failure to perform in accordance with its terms; and (iii) fees payable to us are reduced due to revenues from the network equipment provider’s customer agreements declining more rapidly than anticipated. Additionally, our overall profitability may be negatively impacted in the event we are required to incur unanticipated expenses to satisfy obligations assumed under the managed services agreement.

A continuing downturn in the global economy may adversely affect our revenues, results of operations and financial condition.

Demand for our products and services are increasingly dependent upon the rate of growth in the global economy. If current economic conditions continue, customer demand for our products and services could be even more adversely affected than experienced to date, which in turn could adversely affect our revenues, results of operations and financial condition. Many factors could continue to adversely affect regional or global economic growth. Some of these factors include:

• Poor availability of credit,

• Continued recession in the United States economy and other countries that we serve,

• Fluctuation in the value of the U.S. dollar relative to foreign currencies in jurisdictions where we transact business,

• Significant act of terrorism which disrupts global trade or consumer confidence,

• Geopolitical tensions including war and civil unrest, and

• Reduced levels of economic activity or disruption of domestic or international transportation.

The recent challenging economic conditions also may impair the ability of our customers to pay for products and services they have purchased or otherwise constrict our customers’ spending on our products and services. As a result, revenues may decline and reserves for doubtful accounts and write-offs of accounts receivable may increase. We had to take such action in the third quarter of 2009 as we wrote off a significant receivable from an international customer that we have been unable to collect, and have been forced to bring court action in a foreign jurisdiction in an attempt to enforce payment. Although we believe that the merits of the claim are in our favor, there can be no assurance of success in any litigation, and we may incur additional expenses in connection with the litigation and other collection efforts that we would be unable to recover. In addition, certain of our contracts are paid, in part or whole, in foreign currencies. A decrease in the exchange rate of the U.S. dollar relative to these currencies could further reduce our revenues, and such impact could be material.

We maintain an investment portfolio, consisting of cash, cash equivalents and investments in individual municipal bonds, and corporate and government bonds. These investments are subject to general credit, liquidity, market, and interest rate risks. If the global credit market continues to deteriorate, our investment portfolio may be impacted and potentially creating an other-than-temporary decline in fair value, which would result in an impairment charge adversely impacting our financial results.

We are dependent upon our ability to attract, retain and motivate our key personnel.

Our success depends on our ability to attract, retain and motivate our key management personnel, including the Company’s CEO, CFO, senior management team members, and key engineers, necessary to implement our business plan and to grow our business. Despite the adverse economic conditions of the past several years, competition for certain specific technical and management skill sets is intense. If we are unable to identify and hire the personnel that we need to succeed, or if one or more of our key employees were to cease to be associated with the Company, our future results could be adversely affected. Furthermore, since 2007 we have experienced a number of changes in our senior management positions, both as part of the restructuring initiatives and otherwise. Although we believe we have taken appropriate measures to address the impact of these changes, such changes could impact our business, and/or negatively affect operating results.

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We depend upon a few major customers for a majority of our revenues, and the loss of any of these customers, or the substantial reduction in the products or services that they purchase from us, would significantly reduce our revenues and net income.

We currently depend upon a few major customers for a significant portion of our revenues and we expect to continue to derive a significant portion of our revenues from a limited number of customers in the future. The loss of any of these customers or a substantial reduction in the products or services that they purchase from us or our inability to renew services agreements with customers and to do so upon terms at least as favorable to our current agreements would significantly reduce our revenues and net income. Furthermore, diversions in the capital spending of certain of these customers to new network elements have and could continue to lead to their reduced demand for our products, which could in turn have a material adverse affect on our business and results of operation. The capital spending of our large domestic carrier customers, as well as many of our other customers and potential customers, are dictated by a number of factors, most of which are beyond our control, including:

• Conditions of the telecommunications market and the weakening economy in general;

• Subscriber line loss and related reduced demand for wireline telecommunications services;

• Changes or shifts in the technology utilized in the networks;

• Labor disputes between our customers and their collective bargaining units;

• Failure of our customers to meet established purchase forecasts and growth projections;

• Competition among the large domestic carriers, competitive exchange carriers and wireless telecommunications and cable providers; and

• Reorganizations, including management changes, at one or more of our customers or potential customers.

If the financial condition of one or more of our major customers should deteriorate, or if they have difficulty acquiring investment capital or reduce their capital expenditures due to any of these or other factors, a substantial decrease in our revenues would likely result.

Our operating results may vary from quarter to quarter, causing our stock price to fluctuate.

Our operating results have in the past been subject to quarter to quarter fluctuations, and we expect that these fluctuations may continue in future periods. Demand for our products is driven by many factors, including the availability of funding for our products in customers’ capital budgets. Some of our customers place large orders near the end of a quarter or fiscal year, in part to spend remaining available capital budget funds. Seasonal fluctuations in customer demand for our products driven by budgetary and other reasons can create corresponding fluctuations in period-to-period revenues, and we therefore cannot assure you that our results in one period are necessarily indicative of our revenues in any future period. In addition, the number and timing of large individual sales and the ability to obtain acceptances of those sales, where applicable, has been difficult for us to predict, and large individual sales have, in some cases, occurred in quarters subsequent to those we anticipated, or have not occurred at all. The loss or deferral of one or more significant sales in a quarter could harm our operating results. It is possible that in some quarters our operating results will be below the expectations of investors. In such events, or in the event adverse conditions prevail, the market price of our common stock may decline significantly.

We have completed, and may pursue additional acquisitions, which could result in the disruption of our current business, difficulties related to the integration of acquired businesses, and substantial expenditures.

We have completed, and we may pursue additional acquisitions of companies, product lines and technologies as part of our strategic efforts to realign our resources around growth opportunities in current, adjacent and new markets, to enhance our existing products, to introduce new products and to fulfill changing customer requirements. The consideration for any such acquisition may be cash or stock, or a combination thereof, and the payment of such consideration may result in a reduction in our cash balance and/or the issuance of additional shares which may dilute the interest of our existing shareholders. Acquisitions involve numerous risks, including the disruption of our business, exposure to assumed or unknown liabilities of the acquired target, and the failure to integrate successfully the operations and products of acquired businesses. International acquisitions provide specific challenges due to the unique topology of international telecommunications networks, as well as requirements of doing business in particular countries. Further, our ability to sell certain products internationally depends upon our ability to maintain certain key manufacturing relationships and we may not be able to continue those relationships. Goodwill and acquired intangible assets arising from acquisitions may result in significant impairment charges against our operating results in one or more future periods. Furthermore, we may never achieve the anticipated results or benefits of an acquisition, such as increased market share or the successful development and sales of a new product. The effects of any of these risks could materially harm our business and reduce our future results of operations and cause our stock price to decline.

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The failure of acquired assets to meet expectations, or a decline in our fair value determined by market prices of our stock, could indicate impairment of our intangible assets and result in impairment charges.

Accounting guidance for the impairment or disposal of long-lived assets addresses financial accounting and reporting for the impairment or disposal of long-lived assets and requires that these assets be measured for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. During 2009, 2008 and 2007, based on our assessment that triggering events had occurred, we performed the required recoverability tests and determined that certain long-lived assets were impaired. The occurrence of further triggering events could result in additional impairments.

The sale of our products is dependent upon our ability to satisfy the proprietary requirements of our customers.

We depend upon a relatively narrow range of products for the majority of our revenue. Our success in marketing our products is dependent upon their continued acceptance by our customers. In some cases, our customers require that our products meet their own proprietary requirements. If we are unable to satisfy such requirements, or forecast and adapt to changes in such requirements, our business could be materially harmed. In addition, we have recently introduced new products, including the DigiTest ICE and the first version of the LightHouse products in 2008, and our Stratum software platform in 2009. As of the end of 2009, we had very limited sales of our LightHouse product line and our trial with a major utility is still ongoing and is expected to continue into mid-2010. We have not yet seen the customer acceptance of our Stratum platform that we had expected. In addition, there can be no assurance that our trial with a major utility will be successful or, even if successful, will result in the orders for our Lighthouse product line that we anticipate. The rate of acceptance of these new products could be further delayed by, or may not be achieved at all as a result of, among other factors, extended testing or acceptance periods or requests for custom or modified engineering of such products to conform to customer requirements.

The sale of our products is dependent on our ability to respond to rapid technological change and may be adversely affected by the development, and acceptance by our customers, of new technologies which may compete with or reduce the demand for our products.

Changes in network architecture experienced by our customers in the telephony market have and may continue to negatively affect our ability to sell products in these markets. Although we are addressing these changes with modifications to our existing products, if customers do not accept this new product technology, our revenues could be adversely affected. Further, we are experiencing competition from the internal Information Technology (“IT”) departments of our own carrier customers. In the past, we offered solutions consisting of hardware probes, coupled with a centralized software platform that analyzed the data pulled from the probes and determined the appropriate dispatch statement or issue identification statement. As the capabilities of new infrastructure equipment increases, test and monitoring software platforms are increasingly taking advantage of the available data from the infrastructure equipment. At the same time, many of our larger customers have captive development capabilities in their own IT organizations. These IT teams can develop competing software systems to our offerings, which could adversely affect our ability to sell our products to those customers, which could negatively impact overall revenues from such products.

Furthermore, the development of new technologies which compete with or reduce the demand for our products, and the adoption of such technologies by our customers, could adversely affect sales of our products. For example, as our products generally serve the wireline marketplace, to the extent wireline customers migrate to wireless technologies, there may be reduced demand for our products. In addition, we face new competition as testing functions that were once only available with purpose-built test systems are now available as integrated components of network elements. To the extent our customers adopt such new technology in place of our telecommunications products, the sales of our telecommunications products may be adversely affected. Such competition may also increase pricing pressure for our telecommunications products and adversely affect the revenues from such products.

We depend on a single contract manufacturer to produce more than 80% of our hardware customer product requirements. Changes to this relationship may result in delays or disruptions that could harm our business.

We depend on one independent contract manufacturer to manufacture, test and ship our products. We rely on purchase orders with our contract manufacturer to fulfill our product demands. Our contract manufacturer is not obligated to supply products to us for any specific period, quantity or price. It is time consuming and costly to qualify and implement a contract manufacturer relationship. Therefore, if our contract manufacturer suffers an interruption in its business, or experiences delays, disruptions or quality control problems in its manufacturing operations, or we have to change or add additional contract manufacturers, our ability to ship products to our customers would be delayed and our business, operating results and financial condition would be adversely affected.

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We depend on single source component parts for certain product designs, and our reliance on third parties to manufacture certain aspects of our products involves risks, including delays in product shipments and reduced control over product quality.

Generally, our products use industry standard components. In addition, some parts, such as ASICS, are custom-made to our specifications. While there are multiple sources for most of the component parts of our products, some components are sourced from single sources or from a limited number of outside suppliers. We typically do not have a written agreement with any of these component manufacturers to guarantee the supply of the key components used in our products, and we do not require our contract manufacturer to have written agreements with these component manufacturers. We regularly monitor the supply of the component parts and the availability of alternative sources. We provide forecasts to our contract manufacturer so that it can source the key components in advance of their anticipated use, with the objective of maintaining an adequate supply for use in the manufacture of our products. Our reliance upon third party contractors involve several risks, including reduced control over manufacturing costs, delivery times, reliability and quality of components. If we were to encounter a shortage of key manufacturing components from limited sources of supply, or experience manufacturing delays caused by reduced manufacturing capacity, inability of our contract manufacturers to procure raw materials, the loss of key assembly subcontractors, or other factors, we could experience lost revenues, increased costs, delays in, cancellations or rescheduling of orders or shipments, any of which would materially harm our business.

If we fail to accurately predict our manufacturing requirements, we could incur additional costs or experience manufacturing delays that could harm our business.

We provide demand forecasts to our contract manufacturer. If we overestimate our requirements, our contract manufacturer may assess charges or we may have liabilities for excess inventory, each of which could negatively affect our gross margins. Conversely, because lead times for required materials and components vary significantly and depend on factors such as the specific supplier, contract terms and the demand for each component at a given time, if we underestimate our requirements, our contract manufacturer may have inadequate materials and components required to produce our products, which could interrupt manufacturing of our products and result in delays in shipments and deferral or loss of revenues.

Our future sales in international markets are subject to numerous risks and uncertainties.

Our business is becoming more dependent upon international markets. Our future sales in international markets are subject to numerous risks and uncertainties, including local economic and labor conditions, political instability including terrorism and other acts of war or hostility, unexpected changes in the regulatory environment, trade protection measures, tax laws, our ability to market current or develop new products suitable for international markets, difficulties with deployments and acceptances of products, obtaining and maintaining successful distribution and resale channels, changes in tariffs and foreign currency exchange rates, and longer payment cycles. These specific risks, or an overall reduction in the demand for or the sales of our products in international markets, could adversely affect future results.

We face intense competition, which could result in our losing market share or experiencing a decline in our gross margins.

The markets for some of our products are very competitive. Some of our competitors have greater technological, financial, manufacturing, sales and marketing, and personnel resources than we have. As a result, these competitors may have an advantage in responding more rapidly or effectively to changes in industry standards or technologies. We are facing competition with our IP-based testing solutions, and many competitive technologies, encompassing both hardware and software, are available in these markets. Moreover, better financed competitors may be better able to withstand the pricing pressures that increased competition may bring. If our introduction of improved products or services is not timely or well received, or if our competitors reduce their prices for products that are comparable to ours, demand for our products and services could be adversely affected. Competition from certain network element providers offering chip-based testing functionality may also intensify the pricing pressure for our telecommunications products and adversely affect future revenues from such products. We also face increasing pressure from certain of our large domestic carrier customers on software maintenance agreements, as they continue to divert spending from legacy networks to next generation network elements.

We may also compete directly with our customers. Generally, we sell our products either directly or indirectly through OEM channels and other means to end-user telecommunications service providers. It is possible that our customers, as the result of bankruptcy or other rationales for dismantling network equipment, could attempt to resell our products. The successful development of such a secondary market for our products by a third party could negatively affect demand for our products, reducing our future revenues.

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Our future results are dependent on our ability to establish, maintain and expand our distribution channels and our existing third-party distributors.

We market and sell certain of our products, including our DigiTest and LDU products, through domestic and international OEM relationships. Our future results are dependent on our ability to establish, maintain and expand third party relationships with OEM as well as other marketing and sales distribution channels. If, however, the third parties with whom we have entered into such OEM and other arrangements should fail to meet their contractual obligations, cease doing, or reduce the amount of their business with us or otherwise fail to meet their own performance objectives, customer demand for our products could be adversely affected, which would have an adverse effect on our revenues.

The sales cycle for our system products is long, and the delay or failure to complete one or more large transactions in a quarter could cause our operating results to fall below our expectations.

The sales cycle for our system products is highly customer specific and can vary from a few weeks to many months. The system requirements of customers is highly dependent on many factors, including but not limited to their projections of business growth, capital budgets and anticipated cost savings from implementation of the system. Our delay or failure to complete one or more large transactions in a quarter could harm our operating results. Our systems involve significant capital commitments by customers. Potential customers generally commit significant resources to an evaluation of available enterprise software and system testing solutions and require us to expend substantial time, effort and money educating them about the value of our solutions. System sales often require an extensive sales effort throughout a customer’s organization because decisions to acquire software licenses and associated system hardware involve the evaluation of the products by a significant number of customer personnel in various functional and geographic areas, each often having specific and conflicting requirements. A variety of factors, including actions by competitors and other factors over which we have little or no control, may cause potential customers to favor a particular supplier or to delay or forego a purchase.

Many of our products must comply with significant governmental and industry-based regulations, certifications, standards and protocols, some of which evolve as new technologies are deployed. Compliance with such regulations, certifications, standards and protocols may prove costly and time-consuming for us, and we cannot provide assurance that its products will continue to meet these standards in the future. In addition, regulatory compliance may present barriers to entry in particular markets or reduce the profitability of our product offerings. Such regulations, certifications, standards and protocols may also adversely affect the industries in which we compete, limit the number of potential customers for our products and services or otherwise have a material adverse effect on its business, financial condition and results of operations. Failure to comply, or delays in compliance, with such regulations, standards and protocols or delays in receipt of such certifications could delay the introduction of new products or cause our existing products to become obsolete.

The continued adoption of industry-wide standards in the telecommunications market could have a material adverse effect on our profitability.

We are actively engaged in research to improve and expand our product offerings, including research and development to reduce product costs while providing enhancements; however, with the rise of industry-wide standards, among other factors, a number of our products have faced increased pricing pressure, driving lower margins. If sales of our network assurance and testing solutions do not increase, decrease rapidly, or are not accepted in the marketplace, or if our research and development activities do not produce marketable products that are both competitive and accepted by our customers, our overall revenues and profitability will be adversely affected.

The presence of available open source software could adversely affect our ability to maximize revenue from software products.

An emerging risk to our software development efforts is the presence of available open source software, which can allow our competitors and/or our customers to piece together a non-proprietary software solution relatively quickly. To the extent they are successful in developing software that meets their feature and benefit needs, revenue from our proprietary software could be adversely affected. Further, to the extent we incorporate open source into our software products, our ability to maximize revenue from our software products could be adversely impacted.

Our customers are subject to an evolving governmental regulatory environment that could significantly reduce the demand for our products or increase our costs of doing business.

Our domestic customers have historically been subject to a number of governmental regulations, many of which have been repealed or amended as a result of the passage of The Telecommunications Act of 1996. Deregulatory efforts have affected and likely will continue to affect our customers in several ways, including the introduction of competitive forces into the local telephone markets and

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the imposition (or removal) of controls on the pricing of services. These and other regulatory changes may limit the scope of our customers’ deployments of future services and budgets for capital expenditures, which could significantly reduce the demand for our products.

Moreover, as the FCC adopts new and amends existing regulations, and as the courts analyze the FCC’s authority to do so, our customers cannot accurately predict the rules which will regulate their conduct in their respective markets. Changes in the telecommunications regulatory environment could, among other results, increase our costs of doing business, require our customers to share assets with competitors or prevent the Company or our customers from engaging in business activities they may wish to conduct, which could adversely affect our future results.

Similarly, our international customers are subject to a number of governmental regulations. Regulatory changes affect our customers in several ways, including the introduction of competitive forces, controls (or removal of controls), and new rules and limits. These and other regulatory changes may limit our customers, their service offerings, of spending, which could significantly reduce the demand for our products.

Our limited ability to protect our proprietary information and technology may adversely affect our ability to compete, and our products could infringe upon the intellectual property rights of others, resulting in claims against us the results of which could be costly.

Many of our products consist entirely or partly of proprietary technology owned by us. Although we seek to protect our technology through a combination of copyrights, trade secret laws, contractual obligations and patents, these protections may not be sufficient to prevent the wrongful appropriation of our intellectual property, nor will they prevent our competitors from independently developing technologies that are substantially equivalent or superior to our proprietary technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States. In order to defend our proprietary rights in the technology utilized in our products from third party infringement, we may be required to institute legal proceedings. If we are unable to successfully assert and defend our proprietary rights in the technology utilized in our products, our future results could be adversely affected.

Although we attempt to avoid infringing known proprietary rights of third parties in our product development efforts, we may become subject to legal proceedings and claims for alleged infringement from time to time in the ordinary course of business. Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources, require us to reengineer or cease sales of our products or require us to enter into royalty or license agreements which are not advantageous to us. In addition, parties making claims may be able to obtain an injunction, which could prevent us from selling our products in the United States or abroad.

In addition, the loss of patent protection for any of our products might allow competition, which, if successful, could cause our revenues from affected products to be materially adversely affected. In particular, our three patents for our MCU products will expire between 2010 and 2014.

The success of some of our products is dependent on our ability to maintain licenses to technology from the manufacturers of systems with which our products must be compatible.

Some of our products require that we license technology from manufacturers of systems with which our products must be compatible. The success of our proprietary MCU products, in particular, rely upon our ability to acquire and maintain licensing arrangements with the various manufacturers of DLC systems for the Proprietary Design Integrated Circuits (“PDICs”) unique to each. Although most of our PDIC licensing agreements have perpetual renewal terms, all of them can be terminated by either party. If we are unable to obtain the PDICs necessary for our MCU products to be compatible with a particular DLC system, we may be unable to satisfy the needs of our customers. Furthermore, future PDIC license agreements may contain terms comparable to, or materially different than, the terms of existing agreements, as dictated by competitive or other conditions. The loss of these PDIC license agreements, or our inability to maintain an adequate supply of PDICs on acceptable terms, could have a material adverse effect on our business.

If we are unable to satisfy our customers’ specific product quality, certification or network requirements, our business could be disrupted and our financial condition could be harmed.

Our customers demand that our products meet stringent quality, performance and reliability standards. We have, from time to time, experienced problems in satisfying such standards. Defects or failures have in the past, and may in the future occur relating to our product quality, performance and reliability. From time to time, our customers also require us to implement specific changes to our products to allow these products to operate within their specific network configurations. If we are unable to remedy these failures or

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defects or if we cannot affect such required product modifications, we could experience lost revenues, increased costs, including inventory write-offs, warranty expense and costs associated with customer support, delays in or cancellations or rescheduling of orders or shipments and product returns or discounts, any of which would harm our business.

If our accounting controls and procedures are circumvented or otherwise fail to achieve their intended purposes, our business could be seriously harmed.

We evaluate our disclosure controls and procedures as of the end of each fiscal quarter, and are annually reviewing and evaluating our internal controls over financial reporting in order to comply with SEC rules relating to internal control over financial reporting adopted pursuant to the Sarbanes-Oxley Act of 2002. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

If we ship products that contain defects, the market acceptance of our products and our reputation will be harmed and our customers could seek to recover their damages from us.

Our products, are complex, and despite extensive testing, may contain defects or undetected errors or failures that may become apparent only after our products have been shipped to our customers and installed in their network or after product features or new versions are released. Any such defect, error or failure could result in failure of market acceptance of our products or damage to our reputation or relations with our customers, resulting in substantial costs for us and for our customers as well as the cancellation of orders, warranty costs and product returns. In addition, any defects, errors, misuse of our products or other potential problems within or out of our control that may arise from the use of our products could result in financial or other damages to our customers. Our customers could seek to have us pay for these losses. Although we maintain product liability insurance, it may not be adequate.

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

Failure to comply with environmental regulations in the jurisdictions in which we do business could result in penalties and damage to our reputation. In effect in the European Union are the directive on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (the “RoHS Directive”) and the directive on Waste Electrical and Electronic Equipment (the “WEEE Directive”). Both the RoHS Directive and the WEEE Directive impact the form and manner in which electronic equipment is imported, sold and handled in the European Union. Other jurisdictions, such as China, have followed the European Union’s lead in enacting legislation with respect to hazardous substances and waste removal. Although we have concluded that our test and measurement products fall outside the scope of the RoHS Directive, we have voluntarily undertaken to cause our next generation products to comply with its requirements. Ensuring compliance with the RoHS Directive, the WEEE Directive and similar legislation in other jurisdictions, and integrating compliance activities with our suppliers and customers could result in additional costs and disruption to operations and logistics and thus, could have a negative impact on our business, operations and financial condition. In addition, based on our conclusion that our test and measurement products do not fall within the scope of these Directives, we have determined not to take these compliance measures with respect to certain of our older, legacy products. Should our conclusions with respect to the applicability of the RoHS Directive to these products be challenged and fail to prevail, we may be subject to monetary and non-monetary penalties, and could suffer harm to our reputation or further decline in the sales of our legacy products.

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.

Our products are subject to United States import and export controls. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their networks or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import laws and regulations, shifts in approach to the enforcement or scope of existing laws and regulations, or change in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to import, export or sell our products to existing or potential customers with international operations. Any limitation on our ability to import, export or sell our products would likely adversely affect our business, operating results and financial condition.

Consolidations in, or a continued slowdown in, the telecommunications industry could harm our business.

We have derived a substantial amount of our revenues from sales of products and related services to the telecommunications industry. In recent quarters, capital spending in the telecommunications industry has decreased and may continue to decrease in the future as a result of the challenging general economic conditions prevailing in domestic and international markets. In particular, large carrier

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customers have been adversely affected by subscriber line losses as well as by competition from cable and wireless carriers and other carriers entering the local telephone service market. Certain emerging carriers also continue to be hampered by financial instability caused in large part by a lack of access to capital. In the event of continued or further significant decreases in capital spending of the telecommunications industry, our business would be adversely affected. Furthermore, as a result of industry consolidation, there may be fewer potential customers requiring our software in the future. Larger, consolidated telecommunications companies may also use their purchasing power to create pressure on the prices and the margins we could realize. We cannot be certain that consolidations in, or a slowdown in the growth of, the telecommunication industry will not harm our business.

Our expenses are relatively fixed in the short term, and we may be unable to adjust spending to compensate for unexpected revenue shortfalls.

We base our expense levels in part on forecasts of future orders and sales, which are extremely difficult to predict. A substantial portion of our operating expenses is related to personnel expense, facilities and public company costs. The level of spending for such expenses cannot be adjusted quickly and is, therefore, relatively fixed in the short term. Accordingly, our operating results will be harmed if revenues fall below our expectations in a particular quarter.

We rely on software that we license from third-party developers to perform key functions in our products.

We rely on software that we license from third parties, including software that is integrated with internally developed software and used in our products to perform key functions. We could lose the right to use this software or it could be made available to us only on commercially unreasonable terms. Although we believe that, in most cases, alternative software is available from other third-party suppliers or internal developments, the loss of or inability to maintain any of these software licenses or the inability of the third parties to enhance in a timely and cost-effective manner their products in response to changing customer needs, industry standards or technological developments could delay or reduce our product shipments until equivalent software could be developed internally or identified, licensed and integrated, which would harm our business.

Our common stock price may be extremely volatile.

Our common stock price has been and is likely to continue to be highly volatile. The market price may vary in response to many factors, some of which are outside our control, including:

• General market and economic conditions;

• Changes in the telecommunications industry;

• Actual or anticipated variations in operating results;

• Announcements of technological innovations, new products or new services by us or by our competitors or customers;

• Lack of research coverage by sell-side market analysts;

• Announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, capital commitments or other strategic announcements;

• Announcements by our customers regarding end market conditions and the status of existing and future infrastructure network deployments;

• Additions or departures of key personnel; and

• Future equity or debt offerings or our announcements of these offerings.

In addition, in recent years, the stock market in general, and The NASDAQ Global Select Market and the securities of technology companies in particular, have experienced extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations have in the past and may in the future materially and adversely affect our stock price, regardless of our operating results. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been initiated against such company. Such litigation could result in substantial costs and a diversion of our management’s attention and resources that could harm our business regardless of the outcome of such litigation.

We may be subject from time to time to legal proceedings, and any adverse determinations in these proceedings could materially harm our business.

We may from time to time be involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation matters are inherently unpredictable, and we cannot predict the outcome of any such matters. If we ultimately lose or settle a case, we may be liable for monetary damages and other costs of litigation. Even if we are entirely successful in a lawsuit, we may incur significant legal expenses and our management may expend significant time in the defense. An adverse resolution of a lawsuit or legal proceeding could negatively impact our financial position and results of operations.

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Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our headquarters and principal administrative, engineering, manufacturing, warehouse and maintenance operations are located in Cheswick, Pennsylvania. We occupy an 111,600 square foot facility, which is under a lease that has been extended to March 2011, with the possibility to extend to March 2012. We had acquired certain land parcels that surround this facility for possible expansion that we began to sell during 2007; however, we completed the sale of the remaining parcels during 2008.

We are also a party to a lease agreement for 11,429 square feet of space in Piscataway, New Jersey, which lease commenced on March 1, 2007 and expires April 30, 2012. The Piscataway facility provides workspace for the administrative, engineering and services personnel.

We lease office space in three locations in Europe, the largest of which is in Bracknell, United Kingdom. At that location, we lease 7,500 square feet of space, primarily for engineers who support our European customer base and customer support personnel. This lease expires on December 24, 2012. We also lease 3,240 square feet of space in Kontich, Belgium, under a lease agreement with an initial term that ends on April 1, 2012, which is used primarily by customer support and administrative personnel; however, we expect to terminate this lease in early 2010 and are currently working with the landlord to exit this facility. Lastly, we lease 2,422 square feet of space in Wuppertal, Germany, under a lease which expires on January 31, 2011. This facility is used primarily by sales and customer support personnel.

Item 3. Legal Proceedings.

There are currently no outstanding or pending material legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.

Item 4. Reserved.

PART II

Item 5. Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is traded on the NASDAQ Global Select Market under the symbol “TLGD”. The following table sets forth, by quarter, the high and low sales prices for our common stock for the years ended December 31, 2009 and December 31, 2008.

	2009				2008
	High		Low		High		Low
First Quarter	$	7.14	$	4.73	$	8.13	$	5.08
Second Quarter	$	5.95	$	5.04	$	6.07	$	4.24
Third Quarter	$	6.93	$	4.98	$	7.00	$	4.25
Fourth Quarter	$	6.83	$	5.49	$	5.56	$	3.00

On February 28, 2010, there were 157 holders of record and 12,637,431 million shares outstanding of the Company’s common stock.

We have never paid any dividends on our common stock and do not expect to pay dividends in the foreseeable future.

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During the quarter ended December 31, 2009, the Company repurchased the following shares of its common stock:

							(d) Maximum Number
							(or Approximate
					(c) Total number of		Dollar Value) of
					shares purchased as part		Shares that May Yet
	(a) Total Number of		(b) Average Price Paid		of publicly announced		Be Purchased Under
Period	Shares Purchased (1)		per Share		plans or programs		the Plans or Programs
November 2009		45,850	$	6.07		45,850	$	12,519,000
December 2009		33,193	$	6.01		33,193	$	12,318,000

(1) On October 28, 2008, the Board of Directors approved a share repurchase program, pursuant to which the Company could repurchase common stock with an aggregate share value of up to $15 million with no expiration date. Such purchases could be made through open market transactions and privately negotiated transactions at the Company’s discretion, subject to market conditions and other factors. The repurchase program does not obligate the Company to acquire any particular amount of common stock and, at the Board’s discretion, may be suspended, discontinued or modified at any time. As of December 31, 2009 and 2008, the Company had acquired 79,043 and 496,918 shares pursuant to this program at a total cost of approximately $0.5 million and $2.2 million, respectively. The shares that were repurchased are being held for later resale or to be utilized under certain employee benefit programs and are not considered cancelled or retired shares.

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STOCK PERFORMANCE GRAPH

Set forth below is a performance graph comparing the cumulative total returns (assuming reinvestment of dividends) for the five fiscal years ended December 31, 2009 of $100 invested on December 31, 2004 in Tollgrade’s common stock, the Standard & Poor’s 500 Composite Index and the NASDAQ Telecomm (IXUT).

The performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any of our other filings under the Securities Act of 1933, as amended or the Exchange Act.

	December		December		December		December		December		December
	31,		31,		31,		31,		31,		31,
	2004		2005		2006		2007		2008		2009
Tollgrade		100		89		86		66		39		50
NASDAQ Telecomm (IXUT)		100		93		119		129		74		109
S&P 500		100		103		117		121		75		92

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Item 6. Selected Financial Data.

The following selected consolidated financial data of the Company has been derived from our audited consolidated financial statements. The following selected consolidated financial data may not be representative of our future financial performance and should be read in conjunction with the consolidated financial statements, the notes to the consolidated financial statements, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this report.

     (IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF EMPLOYEES)

FOR THE YEARS ENDED DECEMBER 31:	2009			2008			2007			2006			2005
Revenues:
Products	$	19,936		$	26,997		$	36,143		$	35,270		$	35,608
Services		25,005			22,055			15,689			11,736			11,860
Total revenue		44,941			49,052			51,832			47,006			47,468
Cost of sales:
Products		11,812			14,181			15,874			14,653			14,130
Services		7,143			6,146			4,103			3,473			2,707
Amortization of intangible assets		2,576			3,085			2,199			2,597			2,225
Inventory write-down		3,070			759			—			4,101			424
Impairment of long-lived assets		27,151			201			1,090			—			—
Severance		778			—			—			—			—
Total cost of sales		52,530			24,372			23,266			24,824			19,486
Gross margin		(7,589	)		24,680			28,566			22,182			27,982
Operating expenses:
Selling and marketing		6,809			6,835			7,807			7,794			6,650
General and administrative		12,141			9,455			9,702			7,702			7,224
Research and development		9,411			10,789			10,987			9,088			8,830
Restructuring/severance		1,180			827			922			566			775
Impairment of long-lived assets and goodwill		293			—			20,036			—			—
Total operating expenses		29,834			27,906			49,454			25,150			23,479
(Loss) income from operations		(37,423	)		(3,226	)		(20,888	)		(2,968	)		4,503
Other income, net		567			1,337			2,770			2,741			1,359
(Loss) income before income taxes		(36,856	)		(1,889	)		(18,118	)		(227	)		5,862
(Benefit) provision for income taxes		(874	)		1,137			1,220			(1,213	)		1,301
(Loss) income from continuing operations		(35,982	)		(3,026	)		(19,338	)		986			4,561
(Loss) from discontinued operations		(223	)		(4,089	)		(6,815	)		(2,820	)		(1,043	)
Net (Loss) income	$	(36,205	)	$	(7,115	)	$	(26,153	)	$	(1,834	)	$	3,518
Weighted average shares of common stock equivalents:
Basic		12,683			13,102			13,219			13,239			13,168
Diluted		12,683			13,102			13,219			13,239			13,217
EARNINGS PER SHARE INFORMATION:
Net (loss) income per common share:
Basic	$	(2.85	)	$	(0.54	)	$	(1.98	)	$	(0.14	)	$	0.27
Diluted	$	(2.85	)	$	(0.54	)	$	(1.98	)	$	(0.14	)	$	0.27
EARNINGS PER SHARE INFORMATION:
Net (loss) income per common share from continuing operations:
Basic	$	(2.83	)	$	(0.23	)	$	(1.46	)	$	0.07		$	0.35
Diluted	$	(2.83	)	$	(0.23	)	$	(1.46	)	$	0.07		$	0.35

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FOR THE YEARS ENDED DECEMBER 31:	2009			2008			2007			2006			2005
EARNINGS PER SHARE INFORMATION:
Net (loss) income per common share from discontinued operations:
Basic	$	(0.02	)	$	(0.31	)	$	(0.52	)	$	(0.21	)	$	(0.08	)
Diluted	$	(0.02	)	$	(0.31	)	$	(0.52	)	$	(0.21	)	$	(0.08	)

	2009		2008		2007		2006		2005
BALANCE SHEET DATA:
Working capital	$	69,195	$	75,475	$	77,080	$	83,186	$	80,806
Total assets		87,687		124,347		140,143		162,352		163,329
Pension obligation		983		889		908		—		—
Shareholders’ equity		77,743		112,454		123,000		149,444		150,261

	2009		2008		2007		2006		2005
OTHER DATA: (unaudited)
Number of full-time employees at year-end		167		179		205		161		177

Item 7. Item 7. Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the other sections of this annual report on Form 10-K, including “Item 1: Business,” “Item 6: Selected Financial Data” and “Item 8: Financial Statements.” Unless otherwise specified, any reference to a “year” is to a year ended December 31. Additionally, when used in this Form 10-K, unless the context requires otherwise, the terms “we’, “our”, “us” and “the Company” refer to Tollgrade Communications, Inc. and its subsidiaries. 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 that 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 Item 1A above 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 this divesture 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 and elsewhere in this Form 10-K 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 Consolidated Financial Statements refers to continuing operations unless otherwise indicated. The results from this divested product line are reported in discontinued operations. This divestiture eliminated an unprofitable product line and is expected to result in significant improvements to our future statements of operations and cash flows as we focus on our core markets and customers.

Overview

Tollgrade Communications, Inc. is a leading provider of centralized test and measurement systems and service offerings to the telecommunications market. Our products enable service providers to remotely diagnose and proactively address problems in their networks. Our services and managed services include offerings that complement our product solutions as well as provide customer support and engineering services.

Industry and Market Trends

Our traditional product lines and the markets in which we compete faced continued pressure throughout 2009. This pressure came through a variety of sources, including shifting customer spending and the economic slowdown, which has impacted capital expense spending and competitive market conditions.

Our traditional customer base continues to minimize spending on legacy areas of their networks. This trend has resulted in reduced demand for a number of our copper-based products throughout 2009. Since the end of 2008, the general economic environment has challenged many companies, including our customers. Service provider spending continues to be focused on next generation networks and services, with VoIP, IPTV, and mobile data at the forefront. Spending in test and measurement is equally focused in

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these areas with reduced spending on legacy networks. In the downturn, our customers, the service providers, have delayed capital expense decisions while they wait for the economy to recover and their own businesses to stabilize. Competitively, our solutions have historically consisted of hardware and software combinations. Over the past years, competitors have introduced low-cost hardware solutions, software-only solutions, as well as integrated test capabilities within infrastructure products. We have also seen consolidation in the test and measurement market with the Ixia purchase of Catapult Communications and JDS Uniphase Corporation’s announced purchase of the telecommunications test and measurement division of Agilent Technologies, Inc. These transactions increase the competitive pressure in the market as they sell a broader portfolio of products.

There is also a trend in the telecommunications market to outsource functions to companies that specialize in different areas to attain cost reductions and, in some cases, improve service. Our customers have approached this in two ways. First, a small number have outsourced their entire network operations to large managed services providers. Second, certain of the larger service providers are beginning to consolidate vendor relationships to a select group of vendors and feed smaller suppliers through the larger vendor relationships. This trend affected us in December 2009 when Verizon, a major customer, decided not to renew its direct contract with us for post-warranty maintenance service, but instead, consolidated several vendor relationships through a single large global network equipment manufacturer. In addition, we have certain other customers that now purchase their maintenance through contracts with larger, third-party suppliers. This practice can create additional pricing pressure as the intermediary vendor looks to make a profit by managing the complexity for the service provider.

Our Responses to These Industry Trends

In response to these conditions and trends, we have taken decisive action to reinforce our position with our customers while also exploring new markets for growth. We have focused on improving our already strong customer relationships while aggressively containing costs. We continue to provide excellent customer support and enhanced capabilities to our customers and are focused on retaining and extending our software support and maintenance contracts. While the service providers actively manage their own capital expense budgets, we have reduced our cost structure to ensure that the impacts to our financial results are minimized. We continue to focus on managing and growing our cash and short term investment balance to enable future investment options.

We have also redirected our spending activities toward new growth initiatives versus maintenance efforts. Some of these growth areas include new hardware, software and services offerings for the telecommunications service assurance market. Our new offerings recently launched and under development include a software platform, Stratum™, that can be sold stand-alone or as part of a service assurance system solution, hardware products that integrate into our service assurance solutions, and OEM products that will be sold and supported under the Tollgrade brand name.

In the power utility market, we see a convergence of thought toward a “smart” network architecture that can help limit the negative impacts of expanding power production while offering additional control and capabilities to customers and utilities to manage their networks, homes and businesses. This “smart grid” architecture is rapidly evolving through the efforts of forward-looking utilities coupled with companies offering innovative new products to enable the utility infrastructure revolution that seems to be required. More than $3.4 billion of stimulus funding was awarded by the U.S. Department of Energy to more than 100 recipients for investment in Smart Grid projects with over $8.1 billion of public and private investment projected. Our focus in this market is on our current customer trial activity with a large US power utility.

Lastly, we have created a new area of opportunity through our managed services contract with Ericsson. We now have the expertise to provide a new suite of managed services not only to our service provider customers, but also to additional network equipment manufacturers, thus expanding our target market. We believe this new platform will provide new growth opportunities and enable us to effectively respond to our customers’ trend in an area that builds upon our expertise and experience in test and measurement.

In the short term, we are leveraging strategic OEM relationships. Our OEM arrangements allow us to expand our system solutions into adjacent market segments with the Tollgrade name, while reducing our investment and time to market. In 2009, we entered into an OEM arrangement with Mariner Partners, Inc., whereby we will market and sell a customized version of their xVU offering, a real-time quality of experience test solution for IPTV services, which will be integrated into our Stratum platform. We also signed an OEM agreement with Accanto Systems, whereby we will be able to market and sell their suite of products under our brand name on an exclusive basis in certain territories.

For 2010, our primary focus has turned to strengthening our business and delivering improved results. In building our plan for 2010, we had three guiding principles:

• First and foremost, ensure profitability;

• Second, minimize resources and spending on legacy products to allow for focused investments; and

• Third, align the business around growth initiatives and focus our resources on near term opportunities.

Our near term growth opportunities include the new customer projects, managed services, LightHouse, Stratum and software application projects, our OEM offerings and exploring strategic acquisitions.

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Results of Operations for the Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008

Revenue

	2009		2008		Change			%
System Test Products	$	14,118	$	18,061	$	(3,943	)		-22	%
MCU		5,694		8,936		(3,242	)		-36	%
Other		124		—		124			100	%
Total Products		19,936		26,997		(7,061	)		-26	%
Services		25,005		22,055		2,950			13	%
Total Revenues	$	44,941	$	49,052	$	(4,111	)		-8	%

Our total revenues for the year ended December 31, 2009 were $44.9 million, a decrease of $4.1 million, or 8%, compared to our total revenues of $49.1 million for the year ended December 31, 2008. For the full year 2009, our total product revenues amounted to $19.9 million compared to $27.0 million for the same 2008 period, a decrease of $7.1 million or 26%. However, our full year 2009 service revenues increased to $25.0 million, a $3.0 million or a 13% increase over the same prior period.

The decline in our 2009 product line revenue of $7.1 million is primarily due to a decline in most of our legacy test product lines and our MCU products. Our Systems Test products include the product families of DigiTest, LDU and N(x)Test and associated software applications and license fees. Revenues for System Test products in 2009, were $14.1 million, a decrease of approximately $3.9 million, or 22% from the same prior year period. Our Systems Test product line revenues decreased in 2009 primarily as a result of the conclusion of certain international projects involving DigiTest products in 2008. The Systems Test product line revenue accounted for 31% of 2009 total revenues compared to 37% of 2008 total revenues. In addition, sales of our MCU product line in 2009 were $5.7 million, compared to $8.9 million in the previous year, which represents a decrease of approximately $3.2 million, or 36%. Although our MCU product line still provided a meaningful contribution to revenue in 2009, this is a very mature product line whose future sales are hard to predict due to the large domestic carriers’ limiting capital spending in their traditional POTS networks, and the evolution of the transmission network toward end-to-end fiber. Our MCU product line accounted for approximately 13% of our 2009 total revenues compared to 18% of our 2008 total revenues. Lastly, our other revenue for 2009 is comprised of approximately $0.1 million in revenue from OEM and LightHouse sales as we had no sales in either of these product lines in 2008. Our product revenues accounted for 44% of our total revenues for 2009 compared to 55% of our total revenues for 2008.

Our services revenue consists primarily of software maintenance for 4TEL and Celerity LTSC, and LoopCare, project management fees, repair work and managed services. In 2009, our full year service revenue was approximately $25.0 million compared to $22.1 million in the same 2008 period. The increase in 2009 is primarily due to our new managed services contract with Ericsson that closed in April of 2009 and added $5.1 million of new revenues which was offset by lower service revenues related to Loopcare. Services revenues accounted for approximately 56% of our total revenues for 2009 compared to 45% of 2008 total revenues.

Gross Margin

Our 2009 gross margin was a negative $(7.6) million compared to $24.7 million for the same 2008 period, a decrease of approximately $32.3 million. Our 2009 gross margin decrease of $32.3 million is primarily related to long–lived asset impairments of $27.2 million, which included the fourth quarter write-down of our LoopCare intangible asset that amount to approximately $27.0 million, a third quarter 2009 inventory write-down of approximately $3.1 million that primarily related to slow-moving and obsolete legacy product inventory, and severance costs that amounted to approximately $0.8 million.

Selling and Marketing Expenses

	2009		2008		Change			%
Employee Costs	$	4,780	$	4,583	$	197			4	%
Travel Expenses		694		799		(105	)		-13	%
Professional Fees		419		677		(258	)		-38	%
Other		916		776		140			18	%
Total	$	6,809	$	6,835		(26	)		0	%

Our selling and marketing expenses consist primarily of employee costs, which include salaries, benefits and commission expenses, consulting fees and travel expenses of direct sales and marketing personnel and other expenses which individually are not material. Our selling and marketing expenses of $6.8 million for 2009 and 2008 were flat year over year. The increase in employee costs in

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2009 is primarily due to the addition of sales and business development employees in the fourth quarter of 2009 to bolster our sales efforts in certain markets and in recently announced product offerings. The 2009 decrease in travel costs and professional fees of approximately $0.1 million and $0.3 million is primarily related to our overall cost reduction efforts that occurred throughout 2009.

General and Administrative Expenses

	2009		2008		Change		%
Employee Costs	$	3,922	$	3,912	$	10		0	%
Professional Fees		3,880		3,132		748		24	%
Bad Debt		1,121		—		1,121		100	%
Stock Compensation		855		299		556		186	%
Other		2,363		2,112		251		12	%
Total	$	12,141	$	9,455		2,686		28	%

Our general and administrative expenses consist primarily of employee costs, professional services, bad debt expenses, stock compensation expenses and other expenses which individually are not material. For the full year ended December 31, 2009, our general and administrative expenses were $12.1 million, or a $2.7 million increase over the same 2008 period. The $2.7 million increase is primarily attributable to a $1.1 million bad debt expense recorded in the third quarter of 2009 related to one of our large international contracts whose collectability was deemed to be uncertain, additional legal expenses and professional service fees of approximately $0.7 million in connection with the contested election of directors and fees related to potential acquisition candidates that were not pursued beyond the due diligence stage, and $0.6 million in additional stock compensation expenses due primarily to restricted stock awards granted our non-employee directors in the fourth quarter of 2009 pursuant to the non-employee director compensation program adopted by the Board in October 2009. These non-employee director awards offset substantial reductions in director cash compensation and meeting fees going forward.

Research and Development Expenses

	2009		2008		Change			%
Employee Costs	$	7,977	$	8,435	$	(458	)		-5	%
Professional Services		722		1,205		(483	)		-40	%
Depreciation		622		865		(243	)		-28	%
Other		90		284		(194	)		-68	%
Total	$	9,411	$	10,789		(1,378	)		-13	%

Our research and development expenses consist primarily of employee costs, professional service expenses, depreciation expense and other costs associated with the development of new product initiatives, such as our LightHouse and Stratum initiatives, along with maintaining and upgrading our current product lines which individually are not material. Our research and development expenses for the full year ended December 31, 2009 were $9.4 million, or a $1.4 million decrease, over the same 2008 period. The decrease in our research and development expenses for 2009 is primarily related to reductions in the work force, reduced consulting and professional fees and lower depreciation expenses due to reduced capital spending.

Severance Expense

Severance expense primarily consists of wages, benefits and outplacement costs at a time when an employee is terminated. In 2009, we had three instances where we reduced and re-aligned our work force to reduce costs and to further streamline and improve our business. During the third quarter of 2009, we developed a plan to significantly reduce and restructure our workforce across all levels of the organization in an effort to reduce costs and to better align our human resources to match ongoing revenue streams. The total severance associated with this action was $1.4 million of which $0.5 million was recorded to cost of sales while $0.9 million was recorded as an operating expense. In addition, in the third quarter of 2009, we also incurred a $0.2 million charge related to the departure of our former chief financial officer. During the first and second quarters of 2009, we implemented certain initiatives aimed at increasing efficiency and decreasing costs, which included reductions in our professional services, operations and marketing staff. Severance expense associated with these actions was $0.3 million. Cash payments related to the aforementioned actions were $1.5 million in 2009. As of December 31, 2009, we had $0.4 million accrued on our balance sheet related to this action, which was paid in early 2010.

During the first quarter of 2008, we reduced our engineering and senior management staff, made changes to our field service and sales staffing, and realigned existing resources to new projects. The severance costs associated with this program amounted to approximately $0.4 million. In addition, we incurred severance costs in the fourth quarter related to the separation of two senior executives and one other executive that amounted to approximately $0.4 million. All cash payments related to this action have been paid in 2008 and no further expense is expected.

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Long-Lived Asset Impairments

We perform impairment reviews on our long-lived assets upon a change in business conditions or upon the occurrence of a triggering event. In mid-December 2009, we learned that Verizon, 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, but would instead consolidate its purchase of maintenance services (including LoopCare and 4TEL post-warranty services) through a single large supplier. We are currently in discussions with the supplier for the continuing provision of the LoopCare post-warranty maintenance services to Verizon. However, based on this “triggering event” we evaluated the carrying value of the intangible asset related to our LoopCare post-warranty intangible asset using an undiscounted cash flow model, and determined the asset to be impaired. We then performed a valuation on this asset to determine its fair value. Through this valuation process, we determined that the fair value of this asset approximated $2.3 million compared to its current carrying value of $29.3 million and, as such, took an impairment charge of approximately $27.0 million in the fourth quarter of 2009. In addition, through this valuation process, we determined that a fifteen year life, instead of life of approximately forty-six years, on this asset is more indicative of current market and technological conditions, as well as the anticipated future ability to extend existing maintenance agreements. Earlier in the year, we also recorded a $0.4 million charge for impairments in various other long-lived assets.

In 2008 we determined that certain long-lived assets, primarily related to assets acquired as part of our Emerson acquisition, were impaired and an impairment loss of $0.2 million was recorded to reflect these assets at their fair market value.

Other Income, (net)

Other income, which consists primarily of interest income, was $0.6 million for 2009, compared to $1.3 million for 2008. The $0.7 million decrease in other income is due primarily to lower interest yields on our investment balances due to the overall decline in economic market conditions.

(Benefit)/Provisions for Income Taxes

For the year ended December 31, 2009, we recorded a total income tax benefit of approximately $0.9 million. The primary reason for this income tax benefit was the $1.1 million benefit associated with the impairment of our LoopCare intangible asset, whereby we reduced a deferred tax liability on our balance sheet. This benefit was offset by income tax expenses primarily related to foreign income tax obligations generated by profitable operations in certain foreign jurisdictions. This compares to the same 2008 period whereby we recorded $1.1 million of income tax expenses primarily related to foreign tax obligations generated by our profitable foreign jurisdictions, as well as adjustments to reserves for uncertain tax positions in all jurisdictions. Additionally, we continued to record a valuation allowance against U.S. federal, certain foreign and certain state net operating losses incurred in 2009 as the tax benefit was deemed more than likely not to be realizable in future periods.

Loss from Continuing Operations and Loss Per Share from Continuing Operations:

For the year ended December 31, 2009, our net loss from continuing operations was approximately $36.0 million compared to a net loss of $3.0 million from continuing operations for the year ended December 31, 2008 for the reasons stated above. Our basic and diluted loss from continuing operations per common share was $(2.83) for 2009 versus a loss of $(0.23) for 2008. Diluted weighted average shares of common stock and equivalents outstanding were 12.7 million and 13.1 million in 2009 and 2008, respectively.

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Results of Operations for the Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007

Revenue

	2008		2007		Change			%
System Test Products	$	18,061	$	23,480	$	(5,419	)		-23	%
MCU		8,936		12,663		(3,727	)		-29	%
Total Products		26,997		36,143		(9,146	)		-25	%
Services		22,055		15,689		6,366			41	%
Total Revenue	$	49,052	$	51,832	$	(2,780	)		-5	%

Our total revenues for the year ended December 31, 2008 were $49.1 million, a decrease of $2.8 million, or 5%, compared to our total revenues of $51.8 million for the year ended December 31, 2007. For the full year 2008, our total product revenues amounted to $27.0 million compared to $36.1 million for the same 2007 period, a decrease of $9.1 million or 25%; however, our full year 2008 service revenue increased by $6.3 million to $22.1 million from $15.7 million in the same 2007 period.

The decline in our 2008 product line revenues of $9.1 million is primarily due to the decrease in our legacy test product lines as well as our MCU product lines. Our Systems Test product revenues for 2008, which include the product families of DigiTest, LDU and N(x)Test and associated software applications and license fees, were $18.1 million, a decrease of approximately $5.4 million, or 23% from the prior year. Our Systems Test product line revenue decreased in 2008 primarily as a result of significant revenue from certain international projects involving DigiTest products at the end of 2007. This decline was offset, in part, by increased sales of LDU products and software applications in both international and domestic markets and our first domestic sale of the DigiTest ICE product in 2008. The Systems Test product line revenue accounted for 37% of 2008 revenue compared to 46% of 2007 revenue. During 2008, we continued to experience lower sales to independent carriers than those experienced in 2007 due to changes in network deployment architecture. Sales of our MCU product line in 2008 were $8.9 million, compared to $12.7 million in the previous year, which represents a decrease of approximately $3.8 million, or 29%. While the MCU is a mature product, it continued to provide meaningful contribution to revenue in 2008. The decline in MCU revenue was primarily due to the non-recurrence of a large project in one of our major domestic carriers, as well as lower capital spending by our customers in traditional POTS networks. The MCU product line accounted for approximately 18% of 2008 revenue compared to 24% of our 2007 revenue.

Our services revenue consists of installation oversight and product management services provided to customers and fees from software maintenance agreements. Services revenue was approximately $22.1 million in 2008 compared to $15.7 million in 2007. The increase in 2008 is largely due to the inclusion of a full year’s revenue contribution from contracts acquired from the 2007 BTD acquisition. Services revenue accounted for approximately 45% of 2008 revenue, compared to 30% of 2007 revenue.

Gross Margin

Our 2008 gross margin for 2008 was $24.7 million compared to $28.6 million for 2007, a decrease of approximately $3.9 million, or 14%, from the previous year. Gross profit as a percentage of revenue decreased to 50% for 2008 from 55% for 2007. The decrease in gross profit was due primarily to the approximate 5% decline in revenue and a change in the product sales mix. Additionally, gross profit for 2008 included charges related to impairments of certain intangible assets as well as inventory obsolescence charges associated with our move to two new contract manufacturers from a former contract manufacturer. Both of these charges totaled approximately $1.0 million.

Selling and Marketing Expenses

	2008		2007		Change			%
Employee Costs	$	4,583	$	4,887	$	(304	)		-6	%
Travel Expenses		799		936		(137	)		-15	%
Professional Fees		677		1,019		(342	)		-34	%
Other		776		965		(189	)		-20	%
Total	$	6,835	$	7,807		(972	)		-12	%

Our selling and marketing expenses consist primarily of employee costs, which include salaries, benefits, and commission expenses, travel expenses of direct sales and marketing personnel, and professional fees and other expenses which individually are not material. Our overall, selling and marketing expenses for 2008 were $6.8 million, or 14% of revenue, compared to $7.8 million, or 15% of revenue for 2007. The decrease in selling and marketing expenses is primarily due to reductions in the work force which occurred in

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early 2008 and declines in travel related expenses, consulting fees and stock compensation expenses, which is included in “other” expenses.

General and Administrative Expenses

	2008		2007		Change			%
Employee Costs	$	3,912	$	3,901	$	11			0	%
Professional Fees		3,132		2,367		765			32	%
Stock Compensation		299		494		(195	)		-39	%
Other		2,112		2,940		(828	)		-28	%
Total	$	9,455	$	9,702		(247	)		-3	%

Our general and administrative expenses consist primarily of employee costs, which include salaries and benefits for finance, administrative and general management personnel, professional fees which consist primarily of accounting, legal and insurance expenses, stock compensation expenses and other expenses which individually are not material. For the year ended December 31, 2008, our general and administrative expenses for 2008 were $9.5 million, or approximately 19% of total revenue compared to $9.7 million, or 19% of total revenue for 2007. The decrease of $0.2 million in our 2008 general and administrative expenses is primarily attributable to the reversal of stock compensation expense in 2008 related to forfeiture of performance-based restricted shares that were granted to certain members of management in 2007 partially offset by the increase in professional fees of $0.8 million.

Research and Development Expenses

	2008		2007		Change			%
Employee Costs	$	8,435	$	8,430	$	5			0	%
Professional Services		1,205		1,277		(72	)		-6	%
Depreciation		865		830		35			4	%
Other		284		450		(166	)		-37	%
Total	$	10,789	$	10,987		(198	)		-2	%

Our research and development expenses consist primarily of employee costs, professional services, depreciation expense and other costs associated with the development of new product initiatives, such as our LightHouse product line along with maintaining and upgrading our existing product lines, which individually are not material. Our research and development expenses were comparable for 2008 and 2007 as our expenses in this area were $10.8 million and $11.0 million, respectively.

Severance Expense

During 2008, we reduced our engineering and senior management staff, made changes to our field service and sales staffing, and realigned existing resources to new projects. The severance costs associated with this program amounted to approximately $0.8 million. All cash payments related to this action have been paid in 2008 and no further expense is expected.

During the fourth quarter of 2007, our former chief executive officer and president and two other senior executives terminated employment with us. The costs associated with these separations amounted to approximately $0.8 million. An additional cost of $0.1 million was recorded for employee severance costs in relation to other restructuring activity. All cash payments related to this action have been paid in 2007 and no further expense is expected.

Long-Lived Asset Impairments

Due to a decline in the trading price of our shares during the fourth quarter of 2007 along with lower projected revenues for 2008, we reviewed our goodwill carrying balance at the end of 2007 and found the entire remaining carrying balance to be impaired and thus recorded a non-cash charge of approximately $20.0 million in the fourth quarter of 2007. In addition, certain other indefinite lived assets were reviewed and also found to be impaired, thus we incurred additional an impairment charge of approximately $1.1 million in the fourth quarter of 2007.

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Other Income, (net)

Other income, which consists primarily of interest income, was $1.3 million for 2008 as compared to $2.8 million for 2007. The $1.5 million decrease in other incomes is primarily a result of lower interest yields on our investment balances due to the overall decline in economic conditions in 2008.

Provisions for Income Taxes

For the years ended December 31, 2008 and 2007, our income taxes provision was approximately $1.1 million and $1.2 million, respectively. During 2008 and 2007, the provision for income taxes was primarily related to foreign income tax obligations generated by profitable operations in certain of our foreign jurisdictions, as well as adjustments to reserves for uncertain tax positions in all jurisdictions. Additionally, we continued to record a valuation allowance against U.S. federal, certain foreign and certain state net operating losses incurred in 2008 and 2007 as the tax benefit was deemed more likely than not to be unrealizable in future periods.

Loss from Continuing Operations and Loss Per Share from Continuing Operations

For the year ended December 31, 2008, our loss from continuing operations was approximately $3.0 million compared to a net loss of $19.3 million from continuing operations the year ended December 31, 2007 for the reasons stated above. Our basic and diluted loss from continuing operations per common share was $(0.23) for 2008 versus a loss of $(1.46) for 2007. Diluted weighted average shares of common stock and equivalents outstanding were 13.1 million and 13.2 million in 2008 and 2007, respectively.

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 source of liquidity is our operating cash flows and cash on our balance sheet. Our cash, cash equivalents 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. Our cash and cash equivalents and short-term investments increased to $66.0 million at December 31, 2009 from $60.4 million at December 31, 2008. The increase in cash and cash equivalents and short term investments from December 31, 2008 is largely attributable to positive cash flow from operations and proceeds received from the divesture of our cable product line which were offset by capital expenditures and the repurchase of our common shares under our Board-approved stock repurchase plan. We believe we have sufficient cash balances to meet our cash flow requirements and growth objectives over the next twelve months.

Excluding discontinued operations, we had working capital of $69.2 million as of December 31, 2009, a decrease of $3.1 million, or 4%, from the $72.3 million of working capital as of December 31, 2008. Overall, we generated cash from operating activities of $3.7 million in 2009 compared to $4.6 million in 2008. The $0.9 million decrease in cash flow from operating activates is primarily attributable to the overall reduction in net working capital. In 2008, we generated cash from operating activities of $4.6 million compared to $10.4 million in 2007. The decrease in cash flow is attributable to payments in 2008 related to certain inventory components, warranty items and royalty obligations that had grown in 2007.

Excluding discontinued operations, cash provided by investing activities in 2009 was approximately $4.5 million and included approximately $3.2 million in proceeds and note repayments received from the divestiture of our cable product line, redemptions of short term investments in the amount of $2.4 million offset by $0.3 million in acquired assets along with capital expenditures of $0.8 million. This compares to the same 2008 period in which we had cash used for investing activities of approximately $2.0 million, whereby we purchased net short-term investments of $1.8 million and incurred capital expenditures of approximately $0.5 million. Capital expenditures, including capitalized software, were $0.8 million, $0.5 million and $2.3 million in the years ended December 31, 2009, 2008 and 2007, respectively. Planned capital expenditures for 2010 are in the range of $0.7 million to $1.2 million.

We were party to a three-year $25.0 million unsecured revolving credit facility, which expired in December 2009. We believe that our cash balances are sufficient to meet our obligations in the near future and, on that basis, decided not to renew the credit facility when it expired.

The decline in global economic conditions that began in 2008 had an adverse effect on the performance due to lower yields on our investment portfolio. Interest income for the year ended December 31, 2009 was $0.3 million compared to $1.5 million and $2.8 million for the years ended December 31, 2008 and 2007, respectively.

On October 28, 2008, our Board of Directors approved a share repurchase program, pursuant to which the Company could repurchase common stock with an aggregate share value of up to $15 million with no expiration date. Such purchases could be made through

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open market transactions and privately negotiated transactions at the discretion of executive management, subject to market conditions and other factors. The repurchase program does not obligate us to acquire any particular amount of common stock and, at the Board’s discretion, may be suspended, discontinued or modified at any time. During the fourth quarter of the years ended December 31, 2009 and 2008, we have acquired 79,043 and 496,918 shares pursuant to this program at a total cost of $0.5 million and $2.2 million, respectively.

The impact of inflation on both the Company’s financial position and the results of operations have been minimal and did not adversely affect our 2009, 2008 and 2007 results nor is it expected to adversely affect our 2010 results.

Off-Balance Sheet Arrangements

As a matter of policy, we do not engage in transactions or arrangements with unconsolidated or other special purpose entities.

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, Pennsylvania facility was extended on September 14, 2009 until March 31, 2011. The lease for our Piscataway, New Jersey office expires on April 30, 2012. We also have office leases in Bracknell, United Kingdom; Kontich, Belgium; and Wuppertal, Germany, which expire on December 24, 2012, April 1, 2012, and January 31, 2011, respectively. In the fourth quarter of 2009, we notified the landlord of our Kontich, Belgium office that we planned on terminating our lease in early 2010 in accordance with the provisions of the lease agreement. We are also involved in various month-to-month leases for research and development and office equipment at all three European locations. In addition, all three of the European office leases include provisions for possible adjustments in annual future rental commitments relating to excess taxes, excess maintenance costs that may occur and increases in rent based on the consumer price index and based on increases in our annual lease commitments. None of these commitments are material.

Included in the commitment schedule below are certain purchase obligations primarily arising from non-cancelable, non-returnable agreements with materials vendors. Additionally, we have arrangements with certain manufacturing subcontractors under which we are contingently obligated to purchase $0.1 million of raw material parts in the event they would not be consumed by the manufacturing process in the normal course of business. This liability has been recorded in the consolidated balance sheet as we have a legal obligation to purchase this inventory as of December 31, 2009. The recording of this obligation in the financial statements did not result in a charge to the Consolidated Statements of Operations as we fully expect to utilize this inventory during the normal course of business.

     Minimum annual future commitments as of December 31, 2009 are (in thousands):

Payments due by period

									More than 5
	Total		Less than 1 year		1-3 years		3-5 years		years
Operating Lease Obligations	$	2,023	$	968	$	1,005	$	50	$	—
Purchase Obligations		295		183		62		50		—
Uncertain Tax Obligations		738		—		738		—		—
Pension Obligations		1,003		20		—		—		983
Total	$	4,059	$	1,171	$	1,805	$	100	$	983

     Our lease expense was $1.0 million in 2009, $1.2 million in 2008 and $1.3 million in 2007.

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 the Company’s consolidated financial position, or annual results of operations or cash flow.

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Critical Accounting Policies

Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The application of certain of these accounting principles is more critical than others in gaining an understanding of the basis upon which our financial statements have been prepared. We consider the following accounting policies to involve critical accounting estimates.

Revenue Recognition

We market and sell test system hardware and related software to the telecommunications industry. We follow the revenue recognition accounting guidance for recognizing hardware and software sales. This guidance requires, among other things, that revenue should be recognized only when title has transferred and risk of loss has passed to a customer with the capability to pay, and that there are no significant remaining obligations related to the sale. The bulk of our hardware sales are made to the former large domestic carriers and European telecommunication and other large customers. Delivery terms of hardware sales are predominantly FOB origin. Revenue is recognized for these customers upon shipment against a valid purchase order. Where title and risk of loss do not pass to the customer until the product reaches the customer’s delivery site, revenue is deferred unless we can objectively determine delivery occurred before the end of the applicable reporting period. We reduce collection risk by requiring letters of credit or other payment guarantees for significant sales to new customers, certain international customers and customers in weak financial condition.

For perpetual software license fee and maintenance revenue, we follow the accounting guidance for software revenue recognition, which requires that software license fee revenue be recorded only when evidence of a sales arrangement exists, the software has been delivered, and a customer with the capacity to pay has accepted the software, leaving no significant obligations on our part to perform. We require a customer purchase order or other written agreement to document the terms of a software order and written, unqualified acceptance from the customer prior to revenue recognition. In certain limited cases, however, agreements provide for automatic customer acceptance after the passage of time from a pre-determined event and we have relied on these provisions for an indication of the timing of revenue recognition. In certain cases for orders of custom software, or orders that require significant software customization, we employ contract accounting using the percentage-of-completion method, whereby revenue is recognized based on costs incurred to date compared to total estimated contract cost in accordance with the accounting guidance for construction-type and certain production-type contracts. The revenue for orders with multiple deliverables such as hardware, software and/or installation or other services may be separated into stand-alone fair values if not already documented in the purchase order or agreement and where list prices or other objective evidence of fair value exists to support such allocation, in accordance with the accounting for revenue arrangements with multiple deliverables. Revenue will not be recognized for any single element until all elements considered essential to the functionality of the delivered elements under the contract are delivered and accepted.

The recognition of revenue requires certain judgment by management. If any undelivered elements, which can include hardware, software or services, are essential to the functionality of the system as defined in the contract, revenue will not be recorded until all of the items considered essential are delivered as one unit of accounting. Although infrequent, in some situations contingencies will be noted by the customer on the written acceptance. In these situations, management will use judgment to determine the importance of such contingencies for recognizing revenue related to the sale. Our general practice is to defer revenue recognition unless these contingencies are inconsequential.

Our software customers usually enter into separate agreements for software maintenance upon expiration of the stated software warranty period. Maintenance agreements include software upgrades and bug fixes as they become available; however, newly developed features must be purchased separately. Post-warranty maintenance for new features is either included under the current maintenance agreement without additional charge, and is considered in the maintenance agreement fees, or is separately charged upon expiration of the warranty. Depending upon the timing of the new feature purchase and the length of the maintenance agreement, we must evaluate whether or not a portion of a perpetual right to use fee should be treated as post-contract support to be deferred and recognized over the remaining life of the maintenance agreement.

Software maintenance revenue is recognized on a straight-line basis over the period the respective arrangements are in effect. Revenue recognition, especially for software products, involves critical judgments and decisions that can result in material effects to reported net income.

Intangible Assets and Goodwill

At December 31, 2009, we had net intangible assets of $7.1 million resulting from the acquisitions of the LoopCare product line in September 2001, the test business of Emerson in February 2006 and the Broadband Test Division of Teradyne, Inc. in August 2007. In connection with these acquisitions, we utilized the accounting guidance associated with business combinations, and goodwill and other intangible assets. This guidance requires that the purchase method of accounting be used for all business combinations and that goodwill, as well as any indefinite-lived intangible assets, not be amortized for financial reporting purposes. Finite-lived intangible assets are amortized on a straight-line basis or an accelerated method, whichever better reflects the pattern in which the economic benefits of the asset are consumed or otherwise used. Software-related intangible assets are amortized based on the greater of the

- 35 -

amount computed using the ratio that current gross revenues bear to the total of current and anticipated future gross revenues for that product or the straight-line method over the remaining estimated economic life.

We review our finite-lived intangible assets or fixed assets and their related useful lives whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable, including: a change in the competitive landscape; any internal decisions to pursue new or different technology strategies; a loss of a significant customer; or a significant change in the market place including changes in the prices paid for our products or changes in the size of the market for our products. An impairment results if the carrying value of the asset exceeds the sum of the future undiscounted cash flows expected to result from the use and disposition of the asset or the period of economic benefit has changed. If impairment were indicated, the amount of the impairment would be determined by comparing the carrying value of the asset group to the fair value of the asset group. Fair value is generally determined by calculating the present value of the estimated future cash flows using an appropriate discount rate. The projection of the future cash flows and the selection of a discount rate require significant management judgment. The key assumptions that management must estimate include sales volume, prices, inflation, product costs, capital expenditures and sales and marketing costs. For developed technology, we also must estimate the likelihood of both pursuing a particular strategy and the level of expected market adoption.

In 2009, we had a significant impairment to one of our intangible assets related to the LoopCare product line that was acquired from Lucent in 2001. At the time of the acquisition, the intangible asset was valued at $32 million, with an indefinite life. In 2005, we determined that facts and circumstances which had supported the assignment of an indefinite life to this asset had changed, and we then determined the intangible asset to have a finite useful life of fifty years. In the fourth quarter 2009, facts and circumstances relating to the Company’s LoopCare post-warranty maintenance service agreements again led us to evaluate the life assigned to this intangible asset, as well as its valuation. Specifically, in mid-December of 2009, we learned that Verizon, a major customer of our LoopCare post warranty software maintenance services, was not going to renew its direct contract with Tollgrade that was due to expire on December 31, 2009. Verizon consolidated several vendor relationships through a single large global network equipment manufacturer, including both our LoopCare and 4TEL maintenance contracts. The loss of the direct contract with Verizon was a “triggering event” for us to evaluate the fair market value of the LoopCare intangible asset. Through our overall evaluation process, which included a valuation, we determined that not only the useful life estimate, but the value of the asset itself, was no longer supported. We ultimately determined that the LoopCare intangible asset had a fair value of $2.3 million coupled with a remaining life of fifteen years, versus its remaining carrying value of $29.3 million dollars and a forty-six year remaining life. We feel this current fair value and useful life is more indicative of current market and technological conditions and the life of the existing maintenance agreements.

In 2008 we determined that certain long-lived assets, primarily related to assets acquired as part of our Emerson acquisition, were impaired and an impairment loss of $0.2 million was recorded to reflect these assets at their fair market value.

Due to a decline in the trading price of our shares during the fourth quarter of 2007 along with lower projected revenues for 2008, we reviewed our goodwill carrying balance at the end of 2007 and found the entire remaining carrying balance to be impaired and thus recorded a non-cash charge of approximately $20 million in the fourth quarter of 2007. In addition, certain other indefinite lived assets were reviewed and also found to be impaired, thus we incurred additional an impairment charge of approximately $1.1 million in the fourth quarter of 2007.

Inventory Valuation

We utilize a standard cost system that approximates first-in, first-out costing of our products. Standards are monitored regularly and changes are made on individual parts if warranted; otherwise standard costs, which include material, labor and overhead, are updated annually, generally in the fourth quarter. Excess capacity is not included in the standard cost of inventory. This standard cost update was performed in 2009 and 2008; however, as we transitioned virtually 100% of our in-house manufacturing to a third party sub-contractor as of December 31, 2009, our inventory cost in 2010 will be primarily valued at the purchase price that we will pay the contractor to manufacture our products. We evaluate our inventories on a monthly basis for slow moving, excess and obsolete stock on hand. The carrying value of such inventory that is determined not to be realizable is reduced, in whole or in part, by a charge to cost of sales and reduction of the inventory value in the financial statements. The evaluation process relies in large part on a review of inventory items that have not been sold, purchased or used in production within a one-year period. Management also reviews, where appropriate, inventory products that do not meet this threshold but which may be unrealizable due to discontinuance of products, evolving technologies, loss of certain customers or other known factors. As a result of this comprehensive review process, an adjustment to the reserve for slow moving and obsolete inventory is normally made monthly. Inventory identified as obsolete is also discarded from time to time when circumstances warrant. As part of our review process, in 2009 and 2008, we wrote-down approximately $3.1 million and $0.8 million, respectively, primarily related to slow moving and obsolete inventory.

Inventory valuation is considered a critical accounting estimate since it relies in large part on management judgments as to future events and differing judgments could materially affect reported net income.

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Allowance for Doubtful Accounts

The allowance for doubtful accounts is based on our assessment of the collectability of customer accounts. We regularly review the allowance by considering factors such as historical experience, credit quality, age of the accounts receivable balances, and current economic conditions that may affect a customers’ ability to pay. We recorded a $1.1 million bad debt reserve in the third quarter of 2009 related to one of our large international contracts whose collectability was deemed to be uncertain.

If a major customer’s creditworthiness deteriorates, or if actual defaults are higher than our historical experience, or if other circumstances arise, our estimates of the recoverability of amounts due to us could be overstated, and an additional allowance could be required, which could have a negative impact on our earnings and cash flow.

Income Taxes

We follow the accounting guidance for income taxes, in reporting the effects of income taxes in our consolidated financial statements. Deferred tax assets and liabilities are determined based on the “temporary differences” between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. We evaluate all remaining deferred tax assets based on our current outlook, and, as of December 31, 2009, all U.S. and certain foreign net operating losses and net deferred tax assets have been eliminated through the recording of a valuation allowance. We recognize interest and penalties related to uncertain tax positions in income tax expense. On January 1, 2007, we adopted accounting for uncertainty in income taxes. The adoption of this interpretation required no material cumulative effect adjustment to be recorded.

Warranty

We record estimated warranty costs on the accrual basis of accounting. These warranty reserves are recorded by applying the five year historical returns percentage to the current level of product shipments within the agreed-upon warranty period. The costs associated with servicing these warranties are updated at least annually.

Pension Benefits

We sponsor defined benefit pension plans for three employees based in Germany, one employee based in Belgium and two employees based in Netherlands in addition to three former employees that were part of our Belgium plan. Accounting for the cost of these plans requires the estimation of the cost of the benefits to be provided well into the future and attributing that cost over the expected work life of employees participating in these plans. This estimation requires our judgment about the discount rate used to determine these obligations, rate of future compensation increases, withdrawal and mortality rates and participant retirement age. Differences between our estimates and actual results may significantly affect the cost of our obligations under these plans.

In the valuation of this pension benefit liability, management utilizes various assumptions. We determine our discount rate based on an investment grade bond yield curve with a duration that approximates the benefit payment timing of each plan. This rate can fluctuate based on changes in investment grade bond yields.

Future compensation rates, withdrawal rates and participant retirement age are determined based on historical information. These assumptions are not expected to significantly change. Mortality rates are determined based on a review of published mortality tables.

Stock-Based Compensation

We recognize stock-based compensation expense for all stock options and restricted stock awards over the period from the date of grant to the date when the award is no longer contingent on the employee providing additional service (substantive vesting period). We utilize the Black-Scholes valuation method to establish fair value of all awards. The Black-Scholes valuation method requires that we make certain assumptions regarding estimated forfeiture rates, expected holding period and stock price volatility.

Foreign Currency Translation

Assets and liabilities of our international operations are translated into U.S. dollars using month-end or year-end exchange rates, while revenues and expenses are translated at average exchange rates throughout the year. The resulting net translation adjustments are recorded as a component of accumulated other comprehensive income (loss). The local currency is the functional currency for all of our locations.

These areas involving critical accounting estimates are periodically reviewed and discussed with the Audit Committee of our Board of Directors.

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Recent Accounting Pronouncements

For reference purposes, we list recent accounting pronouncements in Item 8, “Financial Statements and Supplementary Data”, that may have a material impact on our business.

Item 7A. 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 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Tollgrade Communications, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of Tollgrade Communications, Inc. at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
March 10, 2010

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Tollgrade Communications, Inc. and Subsidiaries
Consolidated Balance Sheets
In thousands (except par value)

	December 31, 2009			December 31, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	66,046		$	57,976
Short-term investments		3			2,419
Accounts receivable:
Trade, net of allowance for doubtful accounts at $1,496 in 2009 and $222 in 2008		6,998			9,392
Other		1,007			632
Inventories		2,119			7,865
Prepaid expenses and deposits		759			1,200
Deferred and refundable income taxes		196			453
Current assets related to discontinued operations		—			4,261
Total current assets		77,128			84,198
Property and equipment, net		3,101			2,661
Intangibles		7,110			36,678
Deferred tax assets		119			81
Other assets		229			262
Noncurrent assets related to discontinued operations		—			467
Total assets	$	87,687		$	124,347
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	927		$	1,227
Accrued warranty		504			926
Accrued expenses		2,319			1,511
Accrued salaries and wages		1,190			354
Accrued royalties payable		137			288
Income taxes payable		393			268
Deferred revenue		2,463			3,024
Current liabilities related to discontinued operations		—			1,125
Total current liabilities		7,933			8,723
Pension obligation		983			889
Deferred tax liabilities		290			1,792
Other tax liabilities		738			489
Total liabilities		9,944			11,893
Commitments and contingencies
Shareholders’ equity:
Common stock, $0.20 par value 50,000 authorized shares, issued shares, 13,788 in 2009 and 13,733 in 2008		2,746			2,744
Additional paid-in capital		75,244			73,923
Treasury stock, at cost, 1,151 shares in 2009 and 1,072 shares in 2008		(8,563	)		(8,081	)
Retained earnings		9,543			45,748
Accumulated other comprehensive loss		(1,227	)		(1,880	)
Total shareholders’ equity		77,743			112,454
Total liabilities and shareholders’ equity	$	87,687		$	124,347

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

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Tollgrade Communications, Inc. and Subsidiaries
Consolidated Statements of Operations
In thousands (except per share data)

	Years Ended December 31,
	2009			2008			2007
Revenues:
Products	$	19,936		$	26,997		$	36,143
Services		25,005			22,055			15,689
Total revenues		44,941			49,052			51,832
Cost of sales:
Products		11,812			14,181			15,874
Services		7,143			6,146			4,103
Amortization		2,576			3,085			2,199
Inventory write-down		3,070			759			—
Impairment of long-lived assets		27,151			201			1,090
Severance		778			—			—
Total cost of sales		52,530			24,372			23,266
Gross margin		(7,589	)		24,680			28,566
Operating expenses:
Selling and marketing		6,809			6,835			7,807
General and administrative		12,141			9,455			9,702
Research and development		9,411			10,789			10,987
Severance expense		1,180			827			922
Impairment of long-lived assets		293			—			20,036
Total operating expense		29,834			27,906			49,454
Loss from operations		(37,423	)		(3,226	)		(20,888	)
Other income		567			1,337			2,770
Loss before income taxes		(36,856	)		(1,889	)		(18,118	)
(Benefit) provision for income taxes		(874	)		1,137			1,220
Loss from continuing operations		(35,982	)		(3,026	)		(19,338	)
Loss from discontinued operations		(223	)		(4,089	)		(6,815	)
Net loss	$	(36,205	)	$	(7,115	)	$	(26,153	)
PER SHARE INFORMATION:
Weighted average shares of common stock and equivalents:
Basic		12,683			13,102			13,219
Diluted		12,683			13,102			13,219
Net loss per common share:
Basic	$	(2.85	)	$	(0.54	)	$	(1.98	)
Diluted	$	(2.85	)	$	(0.54	)	$	(1.98	)
Net loss per common share from continuing operations:
Basic	$	(2.83	)	$	(0.23	)	$	(1.46	)
Diluted	$	(2.83	)	$	(0.23	)	$	(1.46	)
Net loss per common share from discontinued operations:
Basic	$	(0.02	)	$	(0.31	)	$	(0.52	)
Diluted	$	(0.02	)	$	(0.31	)	$	(0.52	)

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

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Tollgrade Communications, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholder’s Equity
In thousands

															Accumulated
															Other						Other
	Common Stock				Additional		Treasury Stock					Retained			Comprehensive						Comprehensive
	Shares		Amount		Paid-In		Shares		Amount			Earnings			Loss			Total			Loss
Balance at December 31, 2006		13,709	$	2,742	$	72,477		462	$	(4,791	)	$	79,016		$	—		$	149,444
Exercise of Common Stock Options		10		2		87													89
Tax Benefit from exercise of stock options						10													10
Purchase of Treasury Stock								113		(1,109	)								(1,109	)
Compensation expense for options and restricted stock, net		12				815													815
Actuarial gain, net of tax																32			32		$	32
Foreign currency translation																(128	)		(128	)		(128	)
Net Loss													(26,153	)					(26,153	)		(26,153	)
Comprehensive Loss																			—		$	(26,249	)
Balance at December 31, 2007		13,731		2,744		73,389		575		(5,900	)		52,863			(96	)		123,000
Purchase of Treasury Stock								497		(2,181	)								(2,181	)
Compensation expense for options and restricted stock, net		2				534													534
Actuarial gain, net of tax																87			87		$	87
Foreign currency translation																(1,871	)		(1,871	)		(1,871	)
Net Loss													(7,115	)					(7,115	)		(7,115	)
Comprehensive Loss																					$	(8,899	)
Balance at December 31, 2008		13,733		2,744		73,923		1,072		(8,081	)		45,748			(1,880	)		112,454
Exercise of Common Stock Options		10		2		52													54
Purchase of Treasury Stock								79		(482	)								(482	)
Compensation expense for options and restricted stock, net		45				1,269													1,269
Actuarial loss net of tax																(13	)		(13	)	$	(13	)
Foreign currency translation																666			666			666
Net Loss													(36,205	)					(36,205	)		(36,205	)
Comprehensive Loss																					$	(35,552	)
Balance at December 31, 2009		13,788	$	2,746	$	75,244		1,151	$	(8,563	)	$	9,543		$	(1,227	)	$	77,743

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

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Tollgrade Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)

	Years Ended December 31,
	2009			2008			2007
Cash flows from operating activities:
Net loss	$	(36,205	)	$	(7,115	)	$	(26,153	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Loss from discontinued operations		223			4,089			6,815
Depreciation and amortization		3,761			4,559			3,588
Impairment of long-lived assets		27,444			201			21,126
Valuation allowance		—			123			9,922
Compensation expense related to stock plans		1,236			468			727
Gain on disposed assets		(42	)		—			—
Deferred income taxes		(1,030	)		182			(9,435	)
Excess tax benefits from share based compensation		—			—			(10	)
Write-down of inventory		3,070			759			—
Provision for losses on inventories		231			969			875
Provision for allowance for doubtful accounts		1,119			100			86
Changes in assets and liabilities, net of acquisitions:
Accounts receivable — trade		2,362			3,782			2,998
Accounts receivable — other		786			1,215			(37	)
Inventories		2,445			348			(1,750	)
Refundable income taxes		—			—			897
Prepaid expenses and deposits		284			(375	)		(224	)
Accounts payable		(1,276	)		(3,431	)		1,656
Accrued warranty		(434	)		(218	)		(125	)
Accrued expenses, deferred revenue and salaries and wages		(310	)		(417	)		(1,640	)
Accrued royalties payable		(152	)		(383	)		488
Income taxes payable		114			(287	)		557
Net cash provided by discontinued operations:		57			38			31
Net cash provided by operating activities:		3,683			4,607			10,392
Cash flows from investing activities:
Proceeds from sale of assets		3,074			265			892
Proceeds from note receivable		112			—			—
Purchase of Ericsson test business		(300	)		—			—
Purchase of BTD from Teradyne		—			—			(11,855	)
Purchase of investments		—			(4,266	)		(12,194	)
Redemption/maturity of investments		2,416			2,479			16,885
Capital expenditures, including capitalized software		(762	)		(469	)		(2,293	)
Net cash used in investing activities of discontinued operations:		(57	)		(38	)		(31	)
Net cash provided by (used in) investing activities:		4,483			(2,029	)		(8,596	)
Cash flows from financing activities:
Repurchase of treasury shares		(482	)		(2,181	)		(1,109	)
Proceeds from the exercise of stock options		54			—			89
Excess tax benefit from share based compensation		—			—			10
Net cash used in financing activities:		(428	)		(2,181	)		(1,010	)
Net increase in cash and cash equivalents		7,738			397			786
Effect of exchange rate change on cash and cash equivalents		332			(643	)		58
Cash and cash equivalents at beginning of year		57,976			58,222			57,378
Cash and cash equivalents at end of year	$	66,046		$	57,976		$	58,222
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes	$	7		$	14		$	3

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

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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION

Tollgrade Communications, Inc. and subsidiaries design, engineer, market and support centralized test and measurement systems and service offerings to the telecommunications and power utility markets in the United States and in certain international markets.

We reported our quarterly results for the first three interim periods of 2009 based on fiscal quarters ending March 28, 2009, June 27, 2009 and September 26, 2009 and for the fourth interim period ended December 31, 2009. We reported our quarterly results for the first three interim periods of 2008 based on fiscal quarters ending March 29, 2008, June 28, 2008 and September 27, 2008 and for the fourth interim period ended on December 31, 2008.

In 2010, we will report our quarterly results for the first three interim periods based on the periods ending March 31, 2010, June 30, 2010 and September 30, 2010. For consistency in reporting, the 2009 fiscal quarterly periods will be changed, which may result in a change in the total assets, liabilities, equity, revenues and expenses and net loss from those amounts which were previously reported.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. The actual results of the Company could differ from those estimates.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

CASH AND CASH EQUIVALENTS

We consider highly liquid investments with a maturity of less than three months at the date of purchase to be cash equivalents. Substantially all of the Company’s cash and cash equivalents are maintained at one financial institution. No collateral or security is provided on these deposits, other than $250,000 of deposits which is insured by the Federal Deposit Insurance Corporation.

INVESTMENTS

Short-term investments at December 31, 2009 and 2008 primarily consisted of individual municipal bonds stated at cost, which approximated market value. These securities have maturities of more than three months and less than one year from the date of purchase and/or contain a callable provision in which the bonds can be called within one year from date of purchase. The primary investment purpose is to provide a return on investment of funds held for future business purposes, including acquisitions and capital expenditures. Realized gains and losses are computed using the specific identification method. These debt securities are classified as “held to maturity,” and are recorded at amortized cost, which approximates market value.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The allowance for doubtful accounts is based on our assessment of the collectability of customer accounts. We regularly review the allowance by considering factors such as historical experience, credit quality, age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay.

INVENTORIES

Inventories are stated at the lower of cost or market, on a first-in, first-out basis. Excess capacity is not included in the standard cost of inventory. We evaluate our inventories on a periodic basis for slow moving, customer consumption rates on our legacy product lines, end of life products due to technology changes, excess quantities and obsolete stock on hand. The carrying value of such inventory that is determined not to be realizable is reduced, in whole or in part, by a charge to cost of sales. The evaluation process relies in large part on a review of inventory items that have not been sold, purchased or used in production within a one-year period. Management also reviews, where appropriate, inventory products that do not meet this threshold but which may be unrealizable due to discontinuance of products, evolving technologies, loss of certain customers or other known factors.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the respective assets. Leasehold improvements are amortized over the relative lease term or the estimated useful life, whichever is shorter. The cost of renewals and betterments that extend the lives or productive capacities of properties and equipment is capitalized. Expenditures for normal repairs and maintenance are charged to operations as incurred. The cost of property and equipment retired or otherwise disposed of and the related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is reflected in current operations.

VALUATION OF LONG-LIVED ASSETS

We assess potential impairments to our long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of

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the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results.

PRODUCT WARRANTY

We record estimated warranty costs on the accrual basis of accounting. These warranty reserves are recorded by applying the five year historical returns percentage to the current level of product shipments within the agreed-upon warranty period. The costs associated with servicing these warranties are updated at least annually.

REVENUE RECOGNITION

We market and sell test system hardware and related software to the telecommunications industry. We follow the revenue recognition accounting guidance for recognizing hardware and software sales. This guidance requires, among other things, that revenue should be recognized only when title has transferred and risk of loss has passed to a customer with the capability to pay, and that there are no significant remaining obligations related to the sale. The bulk of our hardware sales are made to the former large domestic carriers and European telecommunication companies and other large customers. Delivery terms of hardware sales are predominantly FOB origin. Revenue is recognized for these customers upon shipment against a valid purchase order. Where title and risk of loss do not pass to the customer until the product reaches the customer’s delivery site, revenue is deferred unless we can objectively determine delivery occurred before the end of the applicable reporting period. We reduce collection risk by requiring letters of credit or other payment guarantees for significant sales to new customers, certain international customers and customers in weak financial condition.

For perpetual software license fee and maintenance revenue, we follow the accounting guidance for software revenue recognition, which requires that software license fee revenue be recorded only when evidence of a sales arrangement exists, the software has been delivered, and a customer with the capacity to pay has accepted the software, leaving no significant obligations on our part to perform. We require a customer purchase order or other written agreement to document the terms of a software order and written, unqualified acceptance from the customer prior to revenue recognition. In certain limited cases, however, agreements provide for automatic customer acceptance after the passage of time from a pre-determined event and we have relied on these provisions for an indication of the timing of revenue recognition. In certain cases for orders of custom software, or orders that require significant software customization, we employ contract accounting using the percentage-of-completion method, whereby revenue is recognized based on costs incurred to date compared to total estimated contract cost in accordance with the accounting guidance for construction-type and certain production-type contracts. The revenue for orders with multiple deliverables such as hardware, software and/or installation or other services may be separated into stand-alone fair values if not already documented in the purchase order or agreement and where list prices or other objective evidence of fair value exists to support such allocation, in accordance with the accounting for revenue arrangements with multiple deliverables. Revenue will not be recognized for any single element until all elements considered essential to the functionality of the delivered elements under the contract are delivered and accepted.

The recognition of revenue requires certain judgment by management. If any undelivered elements, which can include hardware, software or services, are essential to the functionality of the system as defined in the contract, revenue will not be recorded until all of the items considered essential are delivered as one unit of accounting. Although infrequent, in some situations contingencies will be noted by the customer on the written acceptance. In these situations, management will use judgment to determine the importance of such contingencies for recognizing revenue related to the sale. Our general practice is to defer revenue recognition unless these contingencies are inconsequential.

Our software customers usually enter into separate agreements for software maintenance upon expiration of the stated software warranty period. Maintenance agreements include software upgrades and bug fixes as they become available; however, newly developed features must be purchased separately. Post-warranty maintenance for new features is either included under the current maintenance agreement without additional charge, and is considered in the maintenance agreement fees, or is separately charged upon expiration of the warranty. Depending upon the timing of the new feature purchase and the length of the maintenance agreement, we must evaluate whether or not a portion of a perpetual right to use fee should be treated as post-contract support to be deferred and recognized over the remaining life of the maintenance agreement.

Software maintenance revenue is recognized on a straight-line basis over the period the respective arrangements are in effect. Revenue recognition, especially for software products, involves critical judgments and decisions that can result in material effects to reported net income.

COST OF SALES

Cost of sales includes the charges associated with the manufacturing of our products. These costs consist primarily of material cost, outside manufacturing costs, salaries and wages, depreciation and amortization expenses, rent expense, inventory write-downs, obsolescence, and slow-moving reserves as well as warranty costs, and production overhead. As of December 31, 2009, almost all in-house production has been outsourced to a third party sub-contractor.

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SHIPPING AND HANDLING COSTS

Costs incurred for shipping and handling are included in the cost of equipment and service. Amounts billed to a customer for shipping and handling are reported as revenue.

INTANGIBLE ASSETS

Accounting guidance for goodwill and other intangible assets, requires that indefinite-lived intangible assets and goodwill be tested for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If the carrying amount exceeds its fair value, an impairment charge is recognized in the amount by which the carrying value exceeds fair value. With respect to goodwill in 2007, we determined that we had one reporting unit and performed our annual impairment test as of December 31, 2007. At December 31, 2007, we based step one of our goodwill impairment testing on a comparison of fair value, which we estimated based on our market capitalization and an estimated control premium, to the Company’s book value. Our analysis work in step two indicated a 100% impairment of goodwill in 2007 as a result of a decline in our share price in the fourth quarter of 2007. Historically, indefinite lived intangible assets were valued using the relief from royalty method with no residual value. Regarding indefinite lived intangible assets, during 2007 our annual impairment tests indicated partial impairment and the results of our review of useful lives, based on current events and circumstances, required the assignment of definite lives to these assets. Refer to Note 4 for further discussion of these impairment charges. During 2009 and 2008, we had no goodwill or indefinite-lived intangible assets.

The values assigned to finite-lived assets were determined using an undiscounted cash flow model and no residual value. Furthermore, the accounting guidance requires purchased intangible assets with a finite life to be amortized over their useful lives using a methodology which reflects the pattern in which the economic benefit of the assets is consumed. Amortization of these assets is generally straight-line. All amortization of intangible assets is recorded in cost of sales.

Finite-lived intangibles and their related useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable or the period of economic benefit has changed. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the related asset or group of assets to estimated undiscounted future cash flows expected to be generated by the asset or group of assets. If the carrying amount of an asset exceeds its fair value, which is generally estimated based on future cash flows, an impairment charge is recognized by the amount by which the carrying amount of an asset exceeds the fair value of the asset. If the estimate of an intangible asset’s remaining useful life would be changed, the remaining carrying amount of the intangible asset would be amortized prospectively over the revised remaining useful life.

At the end of 2009, we had a triggering event which required us to review the recoverability of the intangible asset associated with our Loopcare post-warranty software maintenance agreements. Through our evaluation process, we determined that the fair value of this asset approximated $2.3 million compared to its then remaining carrying value of $29.3 million and as such, took an impairment charge of approximately $27.0 million in the fourth quarter of 2009. The premise of the valuation is based on the highest and best use of the asset by market participants.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs, which consist primarily of employee costs, are charged to operations as incurred; however, certain research and development costs that apply to specific customer application/support work or repair and maintenance work are captured and allocated back to cost of sales. As of December 31, 2009, 2008, and 2007, research and development costs that were allocated back to cost of sales amounted to $1.5 million, $1.4 million and $1.1 million, respectively.

CAPITALIZED SOFTWARE COSTS

In accordance with accounting guidance for costs of computer software to be sold, leased or otherwise marketed, any costs incurred to establish the technological feasibility of software to be sold or otherwise marketed are expensed as research and development costs. Costs incurred subsequent to the establishment of technological feasibility, and prior to the general availability of the product to the public are capitalized. Software related intangible assets are amortized based on the greater of the amount computed using the ratio that current gross revenues bear to the total of current and anticipated future gross revenues for that product or the straight-line method over the remaining estimated economic life. We define technological feasibility as coding and testing in accordance with detailed program designs. Such costs are generally amortized over five years.

INCOME TAXES

In accordance with accounting guidance for income taxes, deferred tax liabilities and assets are determined based on the “temporary differences” between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Effective January 1, 2007, we adopted accounting for uncertainty in income taxes, which clarifies the accounting for uncertainties in income taxes recognized on an enterprise’s financial statements. There was no material cumulative effect as a result of this adoption.

We recognize windfall tax benefits associated with the exercise of stock options directly to stockholders’ equity only when realized. A windfall tax benefit occurs when the actual tax benefit realized upon an employee’s disposition of a share-based award exceeds the recorded deferred tax asset, if any, associated with the award that was recorded.

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SEGMENT INFORMATION

We follow the accounting guidance for disclosures about segments of an enterprise and related information. This statement establishes standards for reporting information about operating segments, products and services, geographic areas and major customers in annual and interim financial statements. We manage and operate our business as one operating segment. Operating results are regularly reviewed by our chief operating decision maker regarding decisions about the allocation of resources and to assess performance.

RECLASSIFICATIONS

Certain reclassifications for discontinued operations have been made to prior year amounts to conform to the current year presentation.

RECENT ACCOUNTING PRONOUNCEMENTS

     Fair Value Measurements: In February 2008, accounting guidance was issued on fair value measurements. The accounting guidance delayed the effective date for the application of recently adopted accounting for fair value measurements to nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis until fiscal years beginning after November 15, 2008. Management has determined that the adoption of these changes did have a material impact on the Consolidated Financial Statements. See footnote 4 for impact and disclosures related to fair values measurement to nonfinancial assets.

     Factors used to Determine Useful Life of Intangible Assets: In April 2008, the FASB issued a staff position that amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The objective of this staff position is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. This staff position applies to all intangible assets, whether acquired in a business combination or otherwise, and is to be applied prospectively to intangible assets acquired on or after January 1, 2009. The adoption of this staff position did not have a material effect on our consolidated financial statements.

     Disclosure for Pension and other Postretirement Plan Assets: In December 2008, the FASB issued a staff position that provides guidance on an employer’s disclosures about defined benefit pension or other postretirement plan assets, including investment policies and strategies, major categories of plan assets, inputs and valuation techniques used to measure the fair value of plan assets, and significant concentrations of risk within plan assets. This staff position is effective on December 31, 2009. The adoption of this staff position did not have a material effect on our consolidated financial statements. See note 8 for disclosures related to pension plan assets..

     Fair Value Disclosures in Interim and Annual Reports: In April 2009, new accounting guidance was issued to enhance disclosures of the fair value of financial instruments for both interim and annual periods. The Company adopted the new accounting guidance as of June 30, 2009.

     Subsequent Events Disclosure: In May 2009, the FASB issued a statement that establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, the statement sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. Our adoption of the new statement on June 30, 2009 had no impact on the financial statements as management already followed a similar approach prior to the adoption of this standard.

     References of Accounting Standards: In June 2009, Accounting Standards Codification TM was issued and replaces the previously issued authoritative accounting guidance. The new accounting guidance identifies the source of authoritative accounting principles recognized by the Financial Accounting Standards Board to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. The Company adopted the new accounting guidance as of September 30, 2009.

     Revenue Recognition for Multiple-Deliverable Arrangements: In October 2009, new accounting guidance was issued for revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new accounting guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The company is still evaluating the impact of adopting the new guidance. The impact on the Company’s financial position, results of operations and cash flows will depend on the types of future arrangements.

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     Revenue Recognition for Certain Arrangements that Include Software Elements: In October 2009, new accounting guidance was issued for revenue arrangements that include both tangible products and software elements. This new accounting guidance affects companies that sell or lease tangible products in an arrangement that contains software that is more than incidental to the tangible product as a whole. Additionally, clarification is given regarding what guidance should be used in allocation and measuring revenue. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The company is still evaluating the impact of adopting this new guidance. The impact on the Company’s financial position, results of operations and cash flows will depend on the types of future arrangements.

2. ACCOUNTING FOR STOCK-BASED COMPENSATION

We have one active equity 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 shares authorized for issuance under the 2006 Plan to 2,800,000 shares. This amendment was adopted by our Board of Directors in May 2009 and approved by our shareholders in August 2009. Awards under the 2006 Plan may be granted to directors, officers and employees in the form of stock options, restricted shares, stock appreciation rights, performance shares or performance units.

The 2006 Plan was intended to replace our 1995 Long-Term Incentive Compensation Plan (the “1995 Plan”) and 1998 Employee Incentive Compensation Plan (the “1998 Plan”), the terms of which provided that no further awards could be granted under these plans beyond October 15, 2005 and January 29, 2008, respectively.

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 grant.

As of December 31, 2009 and December 31, 2008, there were 1,577,557 and 459,039 shares authorized but not granted under the 2006 Plan, respectively. During 2009 and 2008, the Company granted from the 2006 Plan 615,500 and 684,400 options to 39 and 135 employees, respectively. There were no options granted by the Company from the 1998 Plan in 2009 and 2008.

During 2009 and 2008, the Board of Directors approved the issuance of 45,037 and 11,540 restricted shares under the 2006 Plan, respectively. The 45,037 restricted shares granted during 2009 were issued to eight non-employee members of our Board of Directors. In 2008, 2,463 restricted shares were issued to one non-employee member of the Board of Directors and 9,077 restricted shares were issued to certain employees. The restricted share awards granted during 2008 and 2009 to non-employee directors were subject to a one-year period of restriction, and provide each director the right to receive the shares one year following the date of grant, regardless of whether the director is still serving on the Board of Directors, unless the director is removed from the Board for cause during the period of restriction. During the one year restriction period, directors can vote but are not permitted to trade restricted shares.

Certain of the shares subject to the restricted share awards granted during 2008 to employees were subject to performance-based restrictions, and the remaining shares were subject to time-based restrictions. Of the 9,077 restricted shares awarded during 2008, 6,049 have been forfeited subject to the terms of such awards, either due to termination of employment during the period of restriction or because we did not achieve the required performance targets.

Stock-Based Compensation Expense

Stock based compensation is based on the fair value of share-based payment awards on the date of grant using the black-scholes option pricing model and the following weighted average assumptions for the options granted during the years ended December 31, 2009, 2008 and 2007:

	Year Ended			Stock Options Year Ended			Year Ended
	December 31, 2009			December 31, 2008			December 31, 2007
|	| |
Weighted average grant date fair values	$	2.60		$	2.68		$	3.69
Expected life (in years)		5.0			5.0			5.0
Risk free interest rate		1.9	%		2.8	%		3.6	%
Expected Volatility		53.8	%		48.1	%		48.6	%

Expected volatility is based on historical stock price over the estimated holding period. The estimated holding period is primarily based on historical experience. The expected life of options granted is based on historical stock option exercise data. The risk free rate is based upon the treasury note applicable for that specific holding period.

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

						Weighted Average
	Number of Shares			Range of Exercise Price		Exercise Price
Outstanding, December 31, 2006		1,358,385		$	7.28 - 159.19	$	30.24
Granted		160,000			7.78 - 9.84		7.91
Exercised (A)		(10,500	)		7.56 - 9.49		8.49
Cancelled/Forfeited/Expired		(67,323	)		8.49 - 159.19		43.74
Outstanding, December 31, 2007		1,440,562			7.28 - 159.19		27.28
Granted		684,400			3.27 - 6.57		5.97
Exercised (A)		—			—		—
Cancelled/Forfeited/Expired		(519,472	)		6.57 - 55.90		12.16
Outstanding, December 31, 2008		1,605,490			3.27 - 159.19		23.08
Granted		615,500			5.17 - 5.86		5.47
Exercised (A)		(10,000	)		5.87 - 6.48		6.11
Cancelled/Forfeited/Expired		(526,195	)		3.27 - 159.19		19.10
Outstanding, December 31, 2009		1,684,795		$	3.27 - 159.19	$	27.29

	Number of Shares
Options exercisable at:
December 31, 2007		1,280,563	$	29.70
December 31, 2008		937,757	$	35.14
December 31, 2009		957,353	$	27.29

(A) The intrinsic value associated with exercised options which represent the difference between the strike price and the market value of Tollgrade stock at the time of exercise was less than $0.1 million in 2009, 2008 and 2007, respectively.

The following table summarized the status of stock options, outstanding and exercisable, at December 31, 2009:

	Stock Options Outstanding								Stock Options Exercisable
	Number
	Outstanding		Weighted		Weighted				Number		Weighted
	as of		Average		Average		Aggregate		Exercisable as		Average		Aggregate
Range of Exercise	December 31,		Remaining		Exercise		Intrinsic		of December		Exercise		Intrinsic
Prices	2009		Contractual Life		Price ($)		Value ($)		31, 2009		Price ($)		Value (B) ($)
$3.27 - 5.32		151,500		9.14	$	4.28	$	527,285		61,001	$	4.41	$	131,306
5.38 - 5.38		311,500		9.07		5.38				20,000		5.38
5.74 - 6.03		148,000		9.91		5.96				35,000		5.74
6.57 - 6.57		357,947		6.95		6.57				175,504		6.57
7.78 - 8.49		248,332		6.68		8.06				198,332		8.13
9.49 - 28.40		251,316		2.38		19.27				251,316		19.27
28.70 - 55.90		110,950		1.11		46.37				110,950		46.37
103.59 - 103.59		5,000		0.75		103.59				5,000		103.59
117.34 - 117.34		88,000		0.52		117.34				88,000		117.34
159.19 - 159.19		12,250		0.49		159.19				12,250		159.19
Total $3.27-159.19		1,684,795		6.29	$	18.01	$	527,285		957,353	$	27.29	$	131,306

(B) The aggregate intrinsic value in the preceding table represents the difference between the strike price and the market value of Tollgrade stock which was $6.04 and $6.33 on December 31, 2009 and December 31, 2008, respectively. The total number of exercisable shares in-the-money was 116,001 and zero shares on December 31, 2009 and December 31, 2008, respectively.

					Weighted Average
			Weighted Average		Remaining		Aggregate Intrinsic
	No. of Shares		Exercise Price		Contractual Term		Value (1)
Vested		957,353	$	27.29		4.32	$	131,306
Expected to Vest		727,442	$	5.50		9.09	$	395,979
Total		1,684,795	$	18.01		6.29	$	527,285

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(1) The aggregate intrinsic value in the preceding table represents the difference between the exercise price and the value of Tollgrade stock, which was $6.04 and $6.33 on December 31, 2009 and December 31, 2008, respectively.

Unrecognized compensation cost related to stock options and restricted shares granted under our equity incentive plans which is expected to be incurred through 2012 was $1.5 million on December 31, 2009. The unrecognized compensation cost is expected to be recognized over a weighted average period of three years. During 2009, we recorded cash received from the exercise of stock options of $0.1 million. During 2008, there were no stock option exercises. During 2007, we recorded cash received from the exercise of stock options of $0.1 million and related tax benefit of less than $0.1 million.

The shares that were repurchased are being held for later resale or to be utilized under certain employee benefit programs and are not considered cancelled or retired shares.

3. ACQUISITIONS AND DISCONTINUED OPERATIONS

On April 15, 2009, we entered into a multi-year managed services agreement with a leading global network equipment provider, pursuant to which we provide customer support and engineering service capabilities. We entered into this agreement as part of our continued strategic focus to grow our managed services business. In connection with the agreement, we paid $0.3 million for certain assets and hired 22 of their employees. The acquisition was recorded under the purchase method of accounting in accordance with generally accepted accounting pronouncements. Accordingly, the results of operations of the acquired assets are included in our consolidated financial statements for the period ended December 31, 2009.

On May 27, 2009, we completed the sale of our cable product line to private equity buyers in Pittsburgh, Pennsylvania, and recorded a gain of less than $0.1 million. This divesture allowed us to continue our business focus on our core telecommunications markets and customers, as the cable product line no longer supported our refocused growth strategies.

The assets and liabilities, results of operations and cash flows of the cable product line have been classified as discontinued operations in the consolidated financial statements for all periods presented through the date of sale. Cash flows for cable have been segregated in the consolidated statement of cash flows as separate line items within operating and investing activities.

We determined that the operations and cash flows of the cable product line have been eliminated from our ongoing operations as a result of the disposal transaction and that we will not have any significant continuing involvement in the buyer’s operations.

The following table details selected financial information for the cable product line included within discontinued operations:

	Twelve Months Ended
	December 31,			December 31,			December 31,
	2009			2008			2007
Revenues:
Products	$	2,376		$	6,377		$	12,750
Services		723			1,795			1,978
	$	3,099		$	8,172		$	14,728
Loss from discontinued operations
Loss from discontinued operations, before tax	$	(223	)	$	(4,089	)	$	(6,815	)
Income tax expense		—			—			—
Loss from discontinued operations, net of tax	$	(223	)	$	(4,089	)	$	(6,815	)

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The major classes of assets and liabilities related to discontinued operations are as follows:

	December 31, 2008
ASSETS
Accounts receivable trade, net of allowance for doubtful accounts	$	1,168
Accounts receivable other		36
Inventories		2,808
Prepaid expenses		249
Property and equipment, net		292
Intangibles and capitalized software, net		174
Assets related to discontinued operations		4,727
LIABILITIES
Accounts payable		38
Accrued warranty		663
Accrued expenses		153
Accrued royalties		11
Deferred revenue		259
Liabilities related to discontinued operations	$	1,124

The following condensed pro forma results of operations reflect the pro forma combination of the Company and the acquired BTD business as if the combination occurred as of the beginning of 2007. Revenues for the periods prior to the Company’s ownership were based on historical information provided by Teradyne, Inc. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the operating results that actually would have been incurred had the BTD acquisition consummated on January 1, 2007. In addition, these results are not intended to be projections of future results.

	(In Thousands, Except Per Share
	Data)
	Unaudited Pro Forma
	Year Ended
	December 31, 2007
Revenues	$	62,986
Loss from operations	$	(20,817	)
Net loss	$	(26,082	)
Pro forma basic and diluted loss per share	$	(1.97	)
Actual basis and diluted loss per share	$	(1.98	)

4. INTANGIBLES

We perform impairment reviews of our long-lived assets upon a change in business conditions or upon the occurrence of a triggering event. In mid-December 2009, a major customer notified us that they would not be renewing their LoopCare post-warranty software maintenance service agreement with us following the contract’s expiration date on December 31, 2009, but would instead consolidate their purchase of maintenance services (including LoopCare and 4TEL post-warranty services) through a single large supplier. Based on this “triggering event” and following the appropriate accounting guidance, we evaluated the carrying value of the intangible asset related to our LoopCare post-warranty intangible asset using an undiscounted cash flow model, Step 1 impairment review, and found the asset to be impaired. We then performed a valuation of this asset to help determine its fair value. Through this valuation process, we determined that the fair value of this asset approximated $2.3 million compared to its current carrying value of $29.3 million and, as such, took an impairment charge of approximately $27.0 million in the fourth quarter of 2009. The fair value measurement would be considered a Level 3 measurement as the valuation performed to determine the fair value utilized an income approach, specifically, an excess earnings approach. The Company’s significant inputs used in determining the fair value included the Company’s forecasted revenues, direct costs, deprecation and the associated contributory asset charges. The Company used a present value factor of 14% and an estimated 15 year period of forecasted revenues and costs based on the estimated useful life of the intangible asset. The assumptions used were based on a market participant’s view. In addition, through this valuation process, we

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determined that a fifteen year life, instead of a remaining forty six year life, for this asset is more indicative of current market and technological conditions, as well as the anticipated future ability to extend existing maintenance agreements.

In 2008 we determined that certain long-lived assets, primarily related to assets acquired as part of our Emerson acquisition, were impaired and an impairment loss of $0.2 million was recorded to reflect these assets at their fair market value.

Due to the decline in the value of our shares during the fourth quarter of 2007, we performed an impairment review of our goodwill at its measurement date of December 31, 2007. Since we are a single segment reporting unit, we based our step one goodwill impairment test on a comparison of the estimated fair value of the Company to our net book value. Fair value is considered to be our market capitalization plus an estimated control premium. Based on our work in determining the implicit value of goodwill, we concluded that our goodwill was entirely impaired and consequently recorded a non-cash charge in the fourth quarter of 2007 of approximately $20.0 million.

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

	Useful		December 31, 2009
	Life				Accumulated
	(Years)		Gross		Amortization		Impairments		Net
Amortizing Intangible Assets:
Post Warranty Service Agreements		6-15	$	37,779		5,438	$	26,960	$	5,381
Technology		2-10		14,000		12,488		191		1,321
Customer Relationships		5-15		927		613		—		314
Trade names and other		0.5-10		537		443		—		94
Total Intangible Assets			$	53,243	$	18,982	$	27,151	$	7,110

	Useful		December 31, 2008
	Life				Accumulated
	(Years)		Gross		Amortization		Impairments		Net
Amortizing Intangible Assets:
Post Warranty Service Agreements		6-50	$	37,563	$	3,752	$	—	$	33,811
Technology		2-10		13,987		11,700		30		2,257
Customer Relationships		5-15		904		334		112		458
Trade names and other		0.5-10		534		322		59		152
Total Intangible Assets			$	52,988	$	16,108	$	201	$	36,678

Amortization expense was $2.6 million, $3.1 million, and $2.2 million for the years ended December 31, 2009, 2008, and 2007, respectively.

Differences between reported amortization expense and the change in reported accumulated amortization may vary because of foreign currency translation differences between balance sheet and income statement.

Due to the significant intangible asset impairment charge incurred during the fourth quarter of 2009 related to our LoopCare post-warranty maintenance services described above, we currently estimate an annual reduction of amortization expense of approximate $0.5 million as a result of this impairment. Amortization expense is expected to be approximately $1.6, $1.2, $0.7, $0.6, and $0.5 million for each of the years ended December 31, 2010, 2011, 2012, 2013 and 2014, respectively.

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5. INVENTORIES

Inventories consisted of the following (in thousands):

	December 31, 2009			December 31, 2008
Raw materials	$	3,584		$	4,621
Work in process		830			3,142
Finished goods		2,352			1,782
		6,766			9,545
Reserves for slow moving and obsolete inventory		(4,647	)		(1,680	)
	$	2,119		$	7,865

Throughout 2009, we began a program to out-source our in-house production capabilities to third party vendors. As of December 31, 2009, this program is virtually complete. During the third quarter of 2009, we implemented a program to evaluate certain legacy products based on anticipated future consumption and technological end-of-life cycle. As a result of this evaluation, we wrote-off $3.1 million for slow moving and obsolete inventory in the third quarter of 2009. As part of our overall 2008 restructuring program, we took a $0.8 million charge in the first quarter of 2008 for inventory associated with products that were no longer part of our strategic focus.

6. PROPERTY AND EQUIPMENT

     Property and equipment consisted of the following (in thousands):

	Years		December 31, 2009			December 31, 2008
Test equipment and tooling		3-5	$	10,747		$	10,215
Office equipment and fixtures		5-7		10,187			9,453
Leasehold improvements		1-6		2,777			2,723
Gross Property and Equipment				23,711			22,391
Less accumulated depreciation and amortization				(20,610	)		(19,730	)
Net Property and Equipment			$	3,101		$	2,661

     Depreciation expense was $1.2 million in 2009, $1.4 million in 2008, and $1.4 million in 2007.

7. PRODUCT WARRANTY

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

	December 31, 2009			December 31, 2008
Balance at the beginning of the year	$	926		$	1,148
Accruals for warranties issued during the year		894			1,682
Settlements during the year		(1,316	)		(1,904	)
Balance at the end of the year	$	504		$	926

8. PENSIONS

We sponsor contributory or noncontributory defined benefit plans for six active European employees and three other pensioners that have left our employment. Benefits under these plans are based upon years of service and final average pensionable earnings, or a minimum benefit based upon years of service, whichever is greater.

As part of a 2007 acquisition, we assumed three defined benefit pension plans: one which related to two employees based in the Netherlands, one which related to four employees based in Belgium and one which related to three employees based in Germany. The Netherlands and Belgian plan assets are invested in insurance vehicles, the assets of which are contained within the general investment fund of the plan’s insurance contract provider and are considered Level 2 assets. These assets are recorded at the net realizable value

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based upon cash surrender value of the policies. Since our German plan has no plan assets as of December 31, 2009, we would be responsible for the $0.9 million underfunded position of this plan by utilizing cash from our general operating bank accounts.

We use a December 31 measurement date for our pension plans and may have an interim measurement date if significant events occur. Below are details related to pension benefits.

	Pension			Pension
	Benefits			Benefits
(in thousands)	2009			2008
Change in projected benefit obligation:
Projected benefit obligation at January 1,	$	1,257		$	1,260
Curtailments		(70	)		—
Service cost		80			83
Interest cost		76			65
Plan participants’ contributions		5			5
Actuarial loss(gains)		35			(96	)
Effect of foreign currency		41			(60	)
Projected benefit obligation at December 31,	$	1,424		$	1,257

	2009		2008
Change in fair value of plan assets:
Fair value of plan assets at January 1,	$	368	$	352
Employer contributions		24		23
Plan participants’ contributions		5		5
Actual return on plan assets (net of cost)		32		5
Effect of foreign currency		12		(17	)
Fair value of plan assets at December 31,	$	441	$	368
Unfunded status of plans at December 31,	$	983	$	889

	2009		2008
Amounts recognized in accumulated other comprehensive income:
Prior service cost		—		—
Actuarial gains	$	106	$	87
Total	$	106	$	87

At December 31, 2009 and 2008, the following amounts were recognized in the consolidated balance sheet:

	Pension		Pension
	Benefits		Benefits
(in thousands)	2009		2008
Noncurrent assets	$	—	$	—
Noncurrent liabilities		983		889
Net amount recognized at December 31,	$	983	$	889

Other changes in plan assets and benefit obligations recognized in 2009 other comprehensive income/loss:

Curtailments (gain)/loss	$	(6	)
Current year actuarial (gain)/loss		17
Amortization of actuarial gain/(loss)		5
Foreign currency exchange rate change		(3	)
Total recognized in other comprehensive income	$	13

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The accumulated benefit obligation for all defined benefit pension plans at December 31, 2009 and 2008 was as follows:

	Pension		Pension
	Benefits		Benefits
(in thousands)	2009		2008
Projected benefit obligation in excess of plan assets:
Projected benefit obligation	$	1,424	$	1,257
Fair value of plan assets	$	441	$	368
Accumulated benefit obligation in excess of plan assets:
Accumulated benefit obligation	$	1,126	$	933
Fair value of plan assets	$	441	$	368

Following are the details of the net periodic benefit costs related to the pension plans:

	Pension			Pension
	Benefits			Benefits
(in thousands)	2009			2008
Components of net periodic benefit cost:
Service cost	$	80		$	83
Interest cost		76			65
Actuarial (gain)		(4	)		—
Curtailment (gain)		(65	)		—
Expected return on plan assets		(15	)		(15	)
Net periodic benefit cost	$	72		$	133

Employer contributions in 2010 are expected to be less than $20,000. The amount of accumulated other comprehensive income expected to be recognized in net periodic pension cost during 2010 related to prior service cost and actuarial gains is insignificant.

(in thousands)
Expected benefit payments:
2010 — 2014		—
2015 — 2019	$	310

Assumptions used to determine the benefit obligation at December 31, 2009 and 2008 and net periodic benefit cost for the years ended December 31, 2009 and 2008 are detailed below:

	2009			2008
Weighted-average assumptions used to determine the benefit obligation
Discount rate		5.75	%		6.00	%
Rate of compensation increase		3.00	%		3.00	%

	2009			2008
Weighted-average assumptions used to determine the net benefit costs
Discount rate		6.00	%		5.37	%
Rate of compensation increase		3.00	%		3.00	%
Expected annual return on plan assets		3.80	%		4.00	%

The company is currently using a 3.8% assumed rate of return on plan assets. This rate was determined based upon Euro zone government and corporate bond yields of 10 year and 30 year maturities.

9. LICENSE AND ROYALTY FEES

We have entered into several technology license agreements with certain major Digital Loop Carrier vendors and major Operation Support System equipment manufacturers under which we have been granted access to the licensor’s patent technology and the right to manufacture and sell the patent technology in our product line. We are obligated to pay royalty fees, as defined, through the terms of these license agreements. Under these agreements, license and royalty fees are due only upon purchase of the technology or shipment of units; there are no contingent payment provisions in any of these arrangements. The terms of these agreements automatically renew (unless earlier terminated) for periods ranging from one to five years, except for one, which has a perpetual term. Royalty fees of $0.4 million, $0.5 million and $0.9 million were incurred in 2009, 2008 and 2007, respectively, and are included in cost of product sales in the accompanying consolidated statements of operations.

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10. INCOME TAXES

The (benefit) provision for income taxes consisted of the following (in thousands):

	2009			2008			2007
Current:
Federal	$	(202	)	$	(16	)	$	(19	)
Foreign		482			777			742
State		15			7			10
		295			768			733
Deferred:
Federal		(1,105	)		—			648
Foreign		(32	)		369			(180	)
State		(32	)		—			19
		(1,169	)		369			487
	$	(874	)	$	1,137		$	1,220

The federal current income tax benefit recorded for 2009 primarily relates to a refund of the 2008 NOL carryback to tax year 2003. Additionally, the 2009 and 2008 benefit is a result of adjustments to reserves for uncertain tax positions to reflect current requirements under the accounting guidance for income tax uncertainties. The federal and state deferred tax benefit recorded for 2009 is attributable to the write down of the LoopCare software maintenance intangible asset for book purposes. The write down reduces book basis below tax basis. The foreign current tax expense primarily relates to income tax obligations generated by profitable operations in foreign jurisdictions. The foreign deferred tax benefit recorded in 2009 and 2008 relates primarily to temporary differences arising as a result of life differentials between book and tax on intangible and fixed assets. State current tax expense in 2009 and 2008 is primarily attributable to taxes generated in a state which levies obligations based on margin.

Reconciliation of the federal statutory rate to the effective tax rates are as follows:

	Years Ended December 31,
	2009			2008			2007
Federal statutory tax rate		(34	%)		(34	%)		(34	%)
Foreign income taxes		—			(1	%)		—
Valuation allowance		35	%		49	%		38	%
Tax contingency reserve		1	%		5	%		1	%
Intangible write down		(3	%)		—			—
Other		(1	%)		—			—
Effective tax rate		(2	%)		19	%		5	%

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The components of and changes in the deferred tax assets and liabilities recorded in the accompanying balance sheets at December 31, 2009 and 2008 were as follows (in thousands):

	December 31,			December 31,
	2009			2008
Deferred Tax Assets:
Excess of tax basis over book basis for:
Property and equipment	$	295		$	328
Goodwill and intangible assets		10,233			9,331
Inventory		691			634
Reserves recorded for:
Warranty		44			602
Inventory		1,649			819
Allowance for doubtful accounts		524			132
Severance		138			34
Federal net operating loss carryforward		9,737			3,660
State net operating loss carryforward		4,152			3,409
Stock based compensation		774			595
Unrealized foreign exchange		453			—
Pension benefit		42			39
Other		31			31
Gross deferred tax assets	$	28,763		$	19,614
Valuation allowance		(28,567	)		(15,848	)
Deferred tax assets		196			3,766
Deferred Tax Liabilities:
Excess of book basis over tax basis for:
Intangible assets	$	(78	)	$	(4,984	)
Property and equipment		(154	)		(14	)
Other		(117	)		(90	)
Total deferred tax liabilities		(349	)		(5,088	)
Net deferred tax liabilities	$	(153	)	$	(1,322	)
Reconciliation to the consolidated balance sheet:
Deferred tax assets current:	$	18		$	389
Deferred tax assets noncurrent:		119			81
Deferred tax liabilities noncurrent:		(290	)		(1,792	)
Net deferred tax liabilities	$	(153	)	$	(1,322	)

The valuation allowance increased by $12.7 million in 2009, $3.2 million in 2008 and $9.9 million in 2007. Increases in the valuation allowance were related primarily to reserving for deferred tax assets net of deferred tax liabilities which would reverse in future periods and federal, certain foreign and state net operating losses considered more likely than not to be not realizable in future periods.

At December 31, 2009, we had gross federal, state and foreign net operating loss carryforwards of $26.4 million, $47.4 million, and $2.1 million, respectively. We also had an AMT tax credit carryforward of $0.1 million. These tax net operating loss and tax credit carryforwards expire at various dates through 2030 if not utilized. Loss carryforward limitations could possibly result in expiring or reduced utilization of a portion of all of these carryforwards.

We are subject to periodic audits of our various tax returns by government agencies which could result in possible tax liabilities. Although the outcome of these matters cannot currently be determined, we do not believe that amounts, if any, which may be required to be paid by reason of such audits will have a material adverse effect on our financial statements.

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Unrecognized Tax Benefits Tabular Reconciliation (in thousands)

	2009			2008			2007
Beginning balance — January 1,	$	489		$	272		$	96
Additional uncertain tax positions		285			244			201
Reductions due to expirations of statute of limitations		(36	)		(27	)		(25	)
Ending balance — December 31,	$	738		$	489		$	272

We include interest and penalties related to uncertain tax positions in income tax expense. At December 31, 2009, 2008 and 2007, our accrual for interest and penalties related to uncertain tax positions was insignificant.

We are no longer subject to examination by various U.S. taxing authorities for years before 2006. The company was not subject to foreign jurisdictions prior to 2007.

At this time, we do not expect unrecognized tax benefits to significantly change within the next twelve months. The total amount of the company’s unrecognized tax benefits at December 31, 2009 is $0.7 million, of which $0.7 million would impact the company’s effective tax rate, if recognized.

At December 31, 2009, we intend to permanently reinvest accumulated earnings in foreign subsidiaries. As a result, deferred taxes have not been provided on foreign earnings at December 31, 2009. If our intention changes and such amounts are expected to be repatriated, deferred taxes will be provided.

11. COMMITMENTS AND CONTINGENCIES

We lease office space and equipment under agreements which are accounted for as operating leases. The office lease for our Cheswick, Pennsylvania facility was extended on September 14, 2009 until March 31, 2011. The lease for our Piscataway, New Jersey office expires on April 30, 2012. We also have office leases in Bracknell, United Kingdom; Kontich, Belgium; and Wuppertal, Germany, which expire on December 24, 2012, April 1, 2012, and January 31, 2011 respectively. In the fourth quarter of 2009, we notified the landlord of our Kontich, Belgium office that we planned on terminating our lease in early 2010 in accordance with the provisions of the lease agreement. We are also involved in various month-to-month leases for research and development and office equipment at all three European locations. In addition, all three of the European office leases include provisions for possible adjustments in annual future rental commitments relating to excess taxes, excess maintenance costs that may occur and increases in rent based on the consumer price index and based on increases in our annual lease commitments, none of these commitments are material.

Future minimum lease payment under operating leases having initial or remaining non-cancellable lease terms in excess of one year are as follows (in thousands):

	At December 31, 2009
2010	$	968
2011		645
2012		360
2013		25
2014		25
Thereafter		—
	$	2,023

Our lease expense was $1.0 million in 2009, $1.2 million in 2008 and $1.3 million in 2007.

Additionally, we have arrangements with certain manufacturing subcontractors under which we are contingently obligated to purchase $0.1 million of raw material parts in the event they would not be consumed by the manufacturing process in the normal course of business. This liability has been recorded in the consolidated balance sheet as we have a legal obligation to purchase this inventory as of December 31, 2009. The recording of this obligation in the financial statements did not result in a charge to the Consolidated Statements of Operations. We fully expect to utilize this inventory during the normal course of business and have not recorded any reserve related to this specific item.

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.

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12. MAJOR CUSTOMERS, REVENUE CONCENTRATION AND DEPENDENCE ON CERTAIN SUPPLIERS

The following table represents our total sales by major product lines as well as the % of their sales on total revenue.

	December 31 ,				December 31 ,				December 31,
	2009				2008				2007
MCU	$	5.7	13	%	$	8.9	18	%	$	12.7	24	%
Test Products		14.2	32	%		18.1	37	%		23.6	46	%
Other		0.1	0	%		0.0	0	%		0.0	0	%
Services		24.9	55	%		22.1	45	%		15.5	30	%
Total	$	44.9	100	%	$	49.1	100	%	$	51.8	100	%

As of December 31, 2009, we had approximately $5.4 million of accounts receivable with five customers, each of which individually exceeded 10% of our December 31, 2009 receivable balances. As of December 31, 2008, the Company had approximately $4.5 million of accounts receivable with three customers, each of which individually exceeded 10% of our December 31, 2008 receivable balances.

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

	December 31 ,				December 31 ,				December 31,
	2009				2008				2007
Company A	$	10,262	23	%	$	13,436	27	%	$	16,283	31	%
Company B		5,254	12	%		—	0	%		—	0	%
Company C		4,534	10	%		3,796	8	%		2,695	5	%
Company D		4,523	10	%		4,554	9	%		3,384	7	%
Company E		3,118	7	%		7,448	15	%		3,954	8	%
Company F		—	0	%		1,435	3	%		7,054	14	%
Total	$	27,691			$	30,669			$	33,370

Our sales are primarily in three geographic areas: the Americas (including 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:

	December 31 , 2009		December 31 , 2008		December 31 , 2007
Region :
Asia	$	1,079	$	828	$	2,041
Americas		3,408		2,390		3,240
EMEA		12,479		18,029		17,863
Total International		16,966		21,247		23,144
Total Domestic		27,975		27,805		28,688
Total Revenue	$	44,941	$	49,052	$	51,832

In 2009 and 2008, we utilized two key contract manufactures to perform a majority of the circuit board assembly and in-circuit testing work on our telecommunication products. We paid each of these two contract manufacturers $2.6 million and $0.3 million in 2009 and $3.4 million and $0.4 million in 2008, respectively.

13. SHORT-TERM INVESTMENTS

The estimated fair values of our financial instruments are as follows (in thousands):

	December 31, 2009				December 31, 2008
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	66,046	$	66,046	$	57,976	$	57,976
Short-term investments	$	3	$	3	$	2,419	$	2,419

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14. PER SHARE INFORMATION

Basic earnings per common share are computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed by dividing net income 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 shares, which are 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.

As of December 31, 2009, 2008 and 2007, 1,682,327, 1,840,760 and 821,310 of equivalent shares, respectively, were anti-dilutive. Basic earnings per share are calculated on the actual number of weighted average common shares outstanding for the period, while diluted earnings per share must include the effect of any dilutive securities

     Earnings per share are as follows (in thousands except per share information):

	December 31, 2009			December 31, 2008			December 31, 2007
Net loss	$	(36,205	)	$	(7,115	)	$	(26,153	)
Weighted average common shares outstanding		12,683			13,102			13,219
Effect of dilutive securities — stock options		—			—			—
		12,683			13,102			13,219
Loss per common share:
Basic	$	(2.85	)	$	(0.54	)	$	(1.98	)
Diluted	$	(2.85	)	$	(0.54	)	$	(1.98	)
Loss per common share from continuing operations:
Basic	$	(2.83	)	$	(0.23	)	$	(1.46	)
Diluted	$	(2.83	)	$	(0.23	)	$	(1.46	)
Loss per common share from discontinued operations:
Basic	$	(0.02	)	$	(0.31	)	$	(0.52	)
Diluted	$	(0.02	)	$	(0.31	)	$	(0.52	)

15. EMPLOYEE DEFINED CONTRIBUTION PLANS

We offer our employees a 401(k) benefit plan. Eligible employees, as defined in the plan, may contribute up to 20% of eligible compensation, not to exceed the statutory limit. We do not make matching contributions to the plan. We also offer a group personnel pension plan to employees of our United Kingdom subsidiary. Eligible employees, as defined in the plan, may contribute up to 100% of eligible compensation, not to exceed the statutory limit. For this plan, we make matching contributions of up to 6% of eligible compensation. Our expense related to the Plan totaled less than $0.1 million for each of the years ended December 31, 2009 and 2008, respectively.

16. SEVERANCE EXPENSE

Over the past several years, we have had various restructuring programs that have resulted in reductions in force, have severed relations with certain executives and had a resignation of our president and chief executive officer and as such, have recorded some significant severance and separation costs. A summary of these actions are as follows:

During the third quarter of 2009, we developed a plan to significantly reduce and restructure our workforce across all levels of the organization in an effort to reduce costs to better align our human resources to match ongoing revenue streams. The total severance costs associated with this action was approximately $1.4 million, of which $0.5 million was recorded to cost of sales while $0.9 million was recorded to operating expenses. During the first and second quarter of 2009, we implemented certain initiatives aimed at increasing efficiency and decreasing cost which included reductions in our professional services, operations and marketing staff. Severance expense associated with these actions was $0.3 million. In addition, we also incurred a third quarter 2009 charge of $0.2

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million related to the departure of our former chief financial officer. Cash payments related to the aforementioned actions were $1.5 million in 2009. Our related severance accrual as of December 31, 2009 was $0.4 million, which has been paid in early 2010.

During the first quarter of 2008, we implemented a restructuring program whereby we reduced our engineering and senior management staff, made changes to our field service and sales staffing, and realigned existing resources to new projects. The severance costs associated with this program amounted to approximately $0.4 million. In addition, we incurred severance costs in the fourth quarter related to the separation of three executives that amounted to approximately $0.4 million. All cash payments related to this action have been paid in 2008 and no further expense is expected.

During the fourth quarter of 2007, our former chief executive officer and president resigned and the employment of two other executives was terminated. The costs associated with these separations amounted to approximately $0.8 million. An additional cost of $0.1 million was recorded for employee severance costs in relation to other restructuring activity. All cash payments related to this action have been paid in 2007 and no further expense is expected.

17. QUARTERLY FINANCIAL DATA (Unaudited)

The following tables present unaudited quarterly operating results for each of our last eight fiscal quarters. This information has been prepared by us on a basis consistent with our audited financial statements and includes all adjustments (consisting only of normal recurring adjustments) that we consider necessary for a fair statement of the data. Such quarterly results are not necessarily indicative of the future results of operations.

	March 28,			June 27,			September 26,			December 31,
	2009			2009			2009			2009
Revenue	$	10,317		$	10,643		$	11,326		$	12,655
Gross profit		5,284			5,197			2,230			(20,300	)
Net (loss)	$	(1,223	)	$	(1,509	)	$	(7,082	)	$	(26,391	)
(Loss) Per Share Information
Weighted average shares
Basic		12,679			12,681			12,682			12,690
Diluted		12,679			12,681			12,682			12,690
Basic	$	(0.09	)	$	(0.12	)	$	(0.56	)	$	(2.08	)
Diluted	$	(0.09	)	$	(0.12	)	$	(0.56	)	$	(2.08	)

	March 29,			June 28,			September 29,		December 31,
	2008			2008			2008		2008
Revenue	$	11,189		$	12,114		$	12,898	$	12,851
Gross profit		4,795			6,323			7,096		6,466
Net (loss) income	$	(6,504	)	$	(255	)	$	918	$	(1,274	)
(Loss) Earnings Per Share Information
Weighted average shares
Basic		13,158			13,158			13,173		12,908
Diluted		13,158			13,158			13,173		12,908
Basic	$	(0.49	)	$	(0.02	)	$	0.07	$	(0.10	)
Diluted	$	(0.49	)	$	(0.02	)	$	0.07	$	(0.10	)

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SCHEDULE II

TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2009, 2008 and 2007
(In thousands)

Col. A	Col. B		Col C.				Col. D			Col. E
	Balance at		Additions							Balance at
	Beginning		Charged to		Charged to					End
	of Year		Expense		Other Accounts		Deductions			of Year
Allowance for doubtful accounts:
Year ended December 31, 2009	$	222		1,274		—		—		$	1,496
Year ended December 31, 2008	$	309		100		—		(187	)	$	222
Year ended December 31, 2007	$	355		86		—		(132	)	$	309
Inventory reserve:
Year ended December 31, 2009	$	1,680		2,967		—		—		$	4,647
Year ended December 31, 2008	$	1,306		953		—		(579	)	$	1,680
Year ended December 31, 2007	$	1,247		277		—		(218	)	$	1,306
Warranty reserve:
Year ended December 31, 2009	$	926		894		—		(1,316	)	$	504
Year ended December 31, 2008	$	1,148		1,682		—		(1,904	)	$	926
Year ended December 31, 2007	$	1,273		1,588		—		(1,713	)	$	1,148
Valuation allowance on net deferred tax assets:
Year ended December 31, 2009	$	15,848		—		12,719		—		$	28,567
Year ended December 31, 2008	$	12,655		123		3,070		—		$	15,848
Year ended December 31, 2007	$	2,733		9,922		—		—		$	12,655

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of December 31, 2009, we have carried out an evaluation, under the supervision of, and with the participation of, our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934) were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosure.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed by, or under the supervision of our principal executive and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Our management has concluded that, as of December 31, 2009, our internal control over financial reporting was effective.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2009, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Evaluation of Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

Item 9B. Other Information.

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Information related to our executive officers is included in Item I of this Form 10-K under the caption “Executive Officers of the Company.” Information related to the directors will be included under the caption “Election of Directors” in the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission relating to our 2010 Annual Meeting of Shareholders (the “2010 Proxy Statement”), which information is incorporated herein by reference. Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 will be included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2010 Proxy Statement, which information is incorporated herein by reference. Information relating to the Company’s Audit Committee and the Audit Committee Financial Expert will be included under the caption/sub caption “The Board of Directors and its Committees — Committees of the Board of Directors” in the section “Audit Committee” in the 2010 Proxy Statement, which section is incorporated herein by reference.

We have adopted a Code of Ethics applicable to our chief executive officer, chief financial officer, controller, and other individuals performing similar functions. A copy of the Company’s Code of Ethics is available on our website at www.tollgrade.com.

Item 11. Executive Compensation.

Information relating to executive compensation will be included under the captions “Director Compensation,” “Compensation of Executive Officers,” “Employment Agreements, Separation of Employment and Change-in-Control Agreements,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” and sub-captions thereof in the 2010 Proxy Statement, which information is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information relating to the security ownership of beneficial owners of 5% or more of the Company’s Common Stock and of our executive officers and directors of the Company will be included under the caption “Stock Ownership of Certain Beneficial Owners and Management” in the 2010 Proxy Statement, which information is incorporated herein by reference.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information about the Company’s Common Stock that may be issued upon the exercise of options outstanding under its equity compensation plans and the number of securities remaining available for future issuance under its equity compensation plans as of December 31, 2009.

					No. of securities remaining
					available for future issuance
					under equity compensation plans
	No. of securities to be		Weighted average exercise		(excluding securities to be issued
	issued upon exercise of		price of outstanding		upon exercise of outstanding
	outstanding options		options		options)
Equity compensation plans approved by security holders
1995 Long-Term Incentive Compensation Plan (1)		430,732	$	45.36		—
2006 Long-Term Incentive Compensation Plan		1,128,947	$	6.04		1,577,557
Equity compensation plans not approved by security holders
1998 Employee Incentive Compensation Plan (1)		125,116	$	31.81		—
Total:		1,684,795				1,577,557

(1) No further grants may be made under these plans.

See Note 2 to the consolidated financial statements for additional information regarding the Company’s equity compensation plans.

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Item 13. Certain Relationships and Related Transactions and Director Independence.

Information relating to this Item will be included under the caption “Certain Relationships and Related Transactions” in the 2010 Proxy Statement, which information is incorporated herein by reference. Information relating to this Item will also be included under the caption “The Board of Directors and Its Committees” in the 2010 Proxy Statement, which information is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services.

Information relating to this Item will be included under the caption “Ratification of Independent Registered Public Accounting Firm” in the 2010 Proxy Statement, which information is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a) The following documents have been filed as part of this report or, where noted, incorporated by reference:

(1)	Financial Statements The financial statements of the Company are listed in the Index to Consolidated Financial Statements on Page 46.
(2)	Financial Statement Schedule The financial statement schedule filed in response to Item 8 and Item 15(d) of Form 10-K, Schedule II (Valuation and Qualifying Accounts), is listed in the Index to Consolidated Financial Statements on Page 46.
(3)	The following exhibits are included herewith and made a part hereof:

Exhibit
Number	Description
3.1	Amended and Restated Articles of Incorporation of the Company (the “Articles”) as amended through May 6, 1998 (conformed copy), incorporated herein by reference to Exhibit 3.1 to the Annual Report of Tollgrade Communications, Inc. (the “Company”) on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on March 24, 1999 (the “1998 Form 10-K”).
3.1a	Statement with Respect to Shares dated July 23, 1996 (conformed copy), incorporated herein by reference to Exhibit 3.1a to the 1998 Form 10-K.
3.1b	Amendment to Articles incorporated herein by reference, filed on the Company’s Current Report on Form 8-K filed with the SEC on May 21, 2007.
3.2	Amended and Restated Bylaws of the Company filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on May 21, 2007.
10.1*	1995 Long-Term Incentive Compensation Plan, amended and restated as of January 24, 2002, incorporated herein by reference to Exhibit B to the 2002 Proxy Statement of the Company, filed with the SEC on March 22, 2002.
10.2*	Form of Stock Option Agreement dated December 14, 1995 and December 29, 1995 for Non-Statutory Stock Options granted under the 1995 Long-Term Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.15 to the Company’s Form 10-K, filed with the SEC on March 19, 1997 (the “1996 Form 10-K”).
10.3*	Form of Stock Option Agreement for Non-Statutory Stock Options granted under the 1995 Long-Term Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.2 to the Company’s Form 10-Q, filed with the SEC on November 12, 1996.
10.4*	Form of Non-employee Director Stock Option Agreement with respect to the Company’s 1995 Long-Term Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.25 to the Company’s Form 10-K filed with the SEC on March 25, 1998 (the “1997 Form 10-K”).
10.5*	1998 Employee Incentive Compensation Plan, amended and restated as of January 24, 2002, incorporated herein by reference to Exhibit 10.25 to the Company’s Form 10-K, filed with the SEC on March 22, 2002 (the “2001 Form 10-K”).
10.6	Lease and License for Alterations dated October 18, 2007 among Tollgrade UK Limited, Tollgrade Communications, Inc., Bedell Corporate Trustees Limited and Atrium Trustees (as Trustees of the Park One Unit Trust), filed as Exhibit 10.2 to the Company’s Form 10-Q filed with the SEC on November 8, 2007.
10.7	Agreement dated November 27, 2006 by and between Knightsbridge Realty L.L.C. and Tollgrade Communications, Inc., filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 30, 2006.

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Exhibit
Number	Description
10.8	Lease Agreement, dated as of August 31, 2005, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 7, 2005.
10.9	Amendment of Lease, dated May 22, 2009, between the Regional Industrial Development Corporation of Southwestern Pennsylvania and Tollgrade Communications, Inc., filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q filed with the SEC on August 6, 2009.
10.10___	Amendment of Lease, dated September 14, 2009, between the Regional Industrial Development Corporation of Southwestern Pennsylvania and Tollgrade Communications, Inc., filed herewith.
10.11*	Management Incentive Compensation Plan, as amended, filed as Exhibit 10.1 to the Company’s Form 10-Q filed with the SEC on April 27, 2007.
10.12*	Tollgrade Communications, Inc. 2006 Long-Term Incentive Compensation Plan as amended and restated as of August 5, 2009, filed herewith.
10.13*	Form of Stock Option Agreement for Non-Statutory Stock Options granted under the 2006 Long-Term Incentive Compensation Plan, filed as Exhibit 10.1 to the Company’s Form 10-Q filed with the SEC on October 27, 2006.
10.14*	Form of Employee Restricted Share Agreement for restricted share grants pursuant to the 2006 Long-Term Incentive Compensation Plan, filed as Exhibit 10.37 to the Company’s Form 10-K filed with the SEC on March 17, 2008 (the “2007 Form 10-K”).
10.15*	Form of Director Restricted Share Agreement for restricted share grants pursuant to the 2006 Long-Term Incentive Compensation Plan, filed as Exhibit 10.38 to the 2007 Form 10-K.
10.16*	Amendment dated December 13, 2007 to the Management Incentive Compensation Plan, filed as Exhibit 10.39 to the 2007 Form 10-K.
10.17*	Amendment dated December 13, 2007 to the 1995 Long-Term Incentive Compensation Plan, filed as Exhibit 10.40 to the 2007 Form 10-K.
10.18*	Amendment dated December 13, 2007 to the 1998 Long-Term Incentive Compensation Plan, filed as Exhibit 10.41 to the 2007 Form 10-K.
10.19*	Severance Policy, filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on January 31, 2008.
10.20*	Employment Agreement, dated April 10, 2008 between the Company and Joseph A. Ferrara, filed as Exhibit 10.1 to the Current Report on Form 8-K/A filed with the SEC on April 16, 2008.
10.21*	Severance and Retention Agreement dated October 14, 2008 between the Company and Kenneth J. Shebek, filed as Exhibit 10.3 to the Current Report on Form 8-K filed with the SEC on October 22, 2008.
10.22*	Severance Agreement dated October 14, 2008 between the Company and David L. Blakeney, filed as Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on October 22, 2008.
10.23*	Severance Agreement dated October 14, 2008 between the Company and Gary W. Bogatay, Jr., filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on October 22, 2008.
10.24*	Agreement dated November 21, 2008 between the Company and Samuel C. Knoch, filed as Exhibit 10.1 to the Current Report on Form 8-K/A filed with the SEC on November 26, 2008.
10.25*	Agreement dated November 28, 2008 between the Company and Matthew J. Rosgone, filed as Exhibit 10.1 to the Current Report on Form 8-K/A filed with the SEC on December 3, 2008.
10.26*	Summary of Compensatory Arrangement with Robert H. King, as described in the Current Report on Form 8-K filed with the SEC on February 20, 2009.
10.27*	Agreement dated March 17, 2009 between Tollgrade Communications, Inc. and Sara M. Antol, filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on March 19, 2009 (the “March 19, 2009 8-K”).
10.28*	Agreement dated March 17, 2009 between Tollgrade Communications, Inc. and Gary W. Bogatay, Jr. filed as Exhibit 10.2 to the March 19, 2009 8-K.
10.29*	Severance Agreement dated March 17, 2009 between Tollgrade Communications, Inc. and Joe O’Brien, filed as Exhibit 10.3 to the March 19, 2009 8-K.
10.30*	Severance Agreement dated March 17, 2009 between Tollgrade Communications, Inc. and Robert King, filed as Exhibit 10.4 to the March 19, 2009 8-K.
10.31*	Severance Agreement dated March 17, 2009 between Tollgrade Communications, Inc. and Grant Cushny, filed as Exhibit 10.5 to the March 19, 2009 8-K.
10.32*	Severance Agreement dated March 17, 2009 between Tollgrade Communications, Inc. and David L. Blakeney, filed as Exhibit 10.6 to the March 19, 2009 8-K.

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Exhibit
Number	Description
10.33*	Severance and Retention Agreement dated March 17, 2009 between Tollgrade Communications, Inc. and Kenneth J. Shebek, filed as Exhibit 10.7 to the March 19, 2009 8-K.
10.34	Asset Purchase Agreement by and among Tollgrade Communications, Inc. (PA), Tollgrade Communications, Inc. (DE) and Cheetah Technologies, L.P., dated May 1, 2009, filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on May 5, 2009.
10.35*	Agreement dated September 17, 2009 by and between Tollgrade Communications, Inc. and Gary W. Bogatay, Jr., filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on September 22, 2009.
10.36*	Summary of compensation program for non-employee directors, filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q filed with the SEC on November 3, 2010.
10.37*	Separation and Release Agreement dated November 5, 2009 between Tollgrade Communications, Inc. and Sara M. Antol, filed herewith.
10.38*	Severance Agreement dated November 19, 2009 between Tollgrade Communications, Inc. and Jennifer M. Reinke, filed herewith.
10.39*	Severance Agreement dated November 24, 2009 between Tollgrade Communications, Inc. and Michael D. Bornak, filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on November 30, 2009.
21.1	List of subsidiaries of the Company, filed as Exhibit 21.1 to the 2007 Form 10-K.
23.1	Consent of PricewaterhouseCoopers LLP, filed herewith.
31.1	Certification of Chief Executive Officer, filed herewith.
31.2	Certification of Chief Financial Officer, filed herewith.
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 350, filed herewith.

* Management contract or compensatory plan, contract or arrangement required to be filed by Item 601(b)(10)(iii) of Regulation S-K.

Copies of the exhibits filed as part of this Form 10-K are available free of charge to any shareholder of record upon written request to the Secretary, Tollgrade Communications, Inc., 493 Nixon Road, Cheswick, Pennsylvania 15024.

™LoopCare is a trademark of Tollgrade Communications, Inc.
™Stratum is a trademark of Tollgrade Communications, Inc.
™HUB is a trademark of Tollgrade Communications, Inc.
™ICE is a trademark of Tollgrade Communications, Inc.
™LightHouse is a trademark of Tollgrade Communications, Inc.
™N(x)Test is a trademark of Tollgrade Communications, Inc.
™LTSC is a trademark of Tollgrade Communications, Inc.
^®Tollgrade is a registered trademark of Tollgrade Communications, Inc.
^®DigiTest is a registered trademark of Tollgrade Communications, Inc.
^®EDGE is a registered trademark of Tollgrade Communications, Inc.
^®MCU is a registered trademark of Tollgrade Communications, Inc.
^®4TEL is a registered trademark of Tollgrade Communications, Inc.
^®Celerity is a registered trademark of Tollgrade Communications, Inc.
All other trademarks are the property of their respective owners.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of March 10, 2010.

	TOLLGRADE COMMUNICATIONS, INC.
By	/s/ Joseph A. Ferrara
	Joseph A. Ferrara
	Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated as of March 10, 2010.

Signature	Title
/s/ Joseph A. Ferrara Joseph A. Ferrara	Chairman, Chief Executive Officer and President (Principal Executive Officer)
/s/ Scott C. Chandler Scott C. Chandler	Director
/s/ Richard H. Heibel Richard H. Heibel	Director
/s/ Charles E. Hoffman Charles E. Hoffman	Director
/s/ Robert W. Kampmeinert Robert W. Kampmeinert	Director
/s/ Edward H. Kennedy Edward H. Kennedy	Director
/s/ Edward B. Meyercord Edward B. Meyercord, III	Director
/s/ Jeffrey M. Solomon Jeffrey M. Solomon	Director
/s/ Michael D. Bornak Michael D. Bornak	Chief Financial Officer and Treasurer (Principal Financial Officer)
/s/ Mark C. Lang Mark C. Lang	Corporate Controller (Principal Accounting Officer)

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

Exhibit
Number	Description
3.1	Amended and Restated Articles of Incorporation of the Company (the “Articles”) as amended through May 6, 1998 (conformed copy), incorporated herein by reference to Exhibit 3.1 to the Annual Report of Tollgrade Communications, Inc. (the “Company”) on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on March 24, 1999 (the “1998 Form 10-K”).
3.1a	Statement with Respect to Shares dated July 23, 1996 (conformed copy), incorporated herein by reference to Exhibit 3.1a to the 1998 Form 10-K.
3.1b	Amendment to Articles incorporated herein by reference, filed on the Company’s Current Report on Form 8-K filed with the SEC on May 21, 2007.
3.2	Amended and Restated Bylaws of the Company filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on May 21, 2007.
10.1	1995 Long-Term Incentive Compensation Plan, amended and restated as of January 24, 2002, incorporated herein by reference to Exhibit B to the 2002 Proxy Statement of the Company, filed with the SEC on March 22, 2002.
10.2	Form of Stock Option Agreement dated December 14, 1995 and December 29, 1995 for Non-Statutory Stock Options granted under the 1995 Long-Term Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.15 to the Company’s Form 10-K, filed with the SEC on March 19, 1997 (the “1996 Form 10-K”).
10.3	Form of Stock Option Agreement for Non-Statutory Stock Options granted under the 1995 Long-Term Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.2 to the Company’s Form 10-Q, filed with the SEC on November 12, 1996.
10.4	Form of Non-employee Director Stock Option Agreement with respect to the Company’s 1995 Long-Term Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.25 to the Company’s Form 10-K filed with the SEC on March 25, 1998 (the “1997 Form 10-K”).
10.5	1998 Employee Incentive Compensation Plan, amended and restated as of January 24, 2002, incorporated herein by reference to Exhibit 10.25 to the Company’s Form 10-K, filed with the SEC on March 22, 2002 (the “2001 Form 10-K”).
10.6	Lease and License for Alterations dated October 18, 2007 among Tollgrade UK Limited, Tollgrade Communications, Inc., Bedell Corporate Trustees Limited and Atrium Trustees (as Trustees of the Park One Unit Trust), filed as Exhibit 10.2 to the Company’s Form 10-Q filed with the SEC on November 8, 2007.
10.7	Agreement dated November 27, 2006 by and between Knightsbridge Realty L.L.C. and Tollgrade Communications, Inc., filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 30, 2006.
10.8	Lease Agreement, dated as of August 31, 2005, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 7, 2005.
10.9	Amendment of Lease, dated May 22, 2009, between the Regional Industrial Development Corporation of Southwestern Pennsylvania and Tollgrade Communications, Inc., filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q filed with the SEC on August 6, 2009.
10.10	Amendment of Lease, dated September 14, 2009, between the Regional Industrial Development Corporation of Southwestern Pennsylvania and Tollgrade Communications, Inc., filed herewith.
10.11	Management Incentive Compensation Plan, as amended, filed as Exhibit 10.1 to the Company’s Form 10-Q filed with the SEC on April 27, 2007.
10.12	Tollgrade Communications, Inc. 2006 Long-Term Incentive Compensation Plan as amended and restated as of August 5, 2009, filed herewith.
10.13	Form of Stock Option Agreement for Non-Statutory Stock Options granted under the 2006 Long-Term Incentive Compensation Plan, filed as Exhibit 10.1 to the Company’s Form 10-Q filed with the SEC on October 27, 2006.
10.14	Form of Employee Restricted Share Agreement for restricted share grants pursuant to the 2006 Long-Term Incentive Compensation Plan, filed as Exhibit 10.37 to the Company’s Form 10-K filed with the SEC on March 17, 2008 (the “2007 Form 10-K”).
10.15	Form of Director Restricted Share Agreement for restricted share grants pursuant to the 2006 Long-Term Incentive Compensation Plan, filed as Exhibit 10.38 to the 2007 Form 10-K.
10.16	Amendment dated December 13, 2007 to the Management Incentive Compensation Plan, filed as Exhibit 10.39 to the 2007 Form 10-K.

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Exhibit
Number	Description
10.17	Amendment dated December 13, 2007 to the 1995 Long-Term Incentive Compensation Plan, filed as Exhibit 10.40 to the 2007 Form 10-K.
10.18	Amendment dated December 13, 2007 to the 1998 Long-Term Incentive Compensation Plan, filed as Exhibit 10.41 to the 2007 Form 10-K.
10.19	Severance Policy, filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on January 31, 2008.
10.20	Employment Agreement, dated April 10, 2008 between the Company and Joseph A. Ferrara, filed as Exhibit 10.1 to the Current Report on Form 8-K/A filed with the SEC on April 16, 2008.
10.21	Severance and Retention Agreement dated October 14, 2008 between the Company and Kenneth J. Shebek, filed as Exhibit 10.3 to the Current Report on Form 8-K filed with the SEC on October 22, 2008.
10.22	Severance Agreement dated October 14, 2008 between the Company and David L. Blakeney, filed as Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on October 22, 2008.
10.23	Severance Agreement dated October 14, 2008 between the Company and Gary W. Bogatay, Jr., filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on October 22, 2008.
10.24	Agreement dated November 21, 2008 between the Company and Samuel C. Knoch, filed as Exhibit 10.1 to the Current Report on Form 8-K/A filed with the SEC on November 26, 2008.
10.25	Agreement dated November 28, 2008 between the Company and Matthew J. Rosgone, filed as Exhibit 10.1 to the Current Report on Form 8-K/A filed with the SEC on December 3, 2008.
10.26	Summary of Compensatory Arrangement with Robert H. King, as described in the Current Report on Form 8-K filed with the SEC on February 20, 2009.
10.27	Agreement dated March 17, 2009 between Tollgrade Communications, Inc. and Sara M. Antol, filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on March 19, 2009 (the “March 19, 2009 8-K”).
10.28	Agreement dated March 17, 2009 between Tollgrade Communications, Inc. and Gary W. Bogatay, Jr. filed as Exhibit 10.2 to the March 19, 2009 8-K.
10.29	Severance Agreement dated March 17, 2009 between Tollgrade Communications, Inc. and Joe O’Brien, filed as Exhibit 10.3 to the March 19, 2009 8-K.
10.30	Severance Agreement dated March 17, 2009 between Tollgrade Communications, Inc. and Robert King, filed as Exhibit 10.4 to the March 19, 2009 8-K.
10.31	Severance Agreement dated March 17, 2009 between Tollgrade Communications, Inc. and Grant Cushny, filed as Exhibit 10.5 to the March 19, 2009 8-K.
10.32	Severance Agreement dated March 17, 2009 between Tollgrade Communications, Inc. and David L. Blakeney, filed as Exhibit 10.6 to the March 19, 2009 8-K.
10.33	Severance and Retention Agreement dated March 17, 2009 between Tollgrade Communications, Inc. and Kenneth J. Shebek, filed as Exhibit 10.7 to the March 19, 2009 8-K.
10.34	Asset Purchase Agreement by and among Tollgrade Communications, Inc. (PA), Tollgrade Communications, Inc. (DE) and Cheetah Technologies, L.P., dated May 1, 2009, filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on May 5, 2009.
10.35	Agreement dated September 17, 2009 by and between Tollgrade Communications, Inc. and Gary W. Bogatay, Jr., filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on September 22, 2009.
10.36	Summary of compensation program for non-employee directors, filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q filed with the SEC on November 3, 2010.
10.37	Separation and Release Agreement dated November 5, 2009 between Tollgrade Communications, Inc. and Sara M. Antol, filed herewith.
10.38	Severance Agreement dated November 19, 2009 between Tollgrade Communications, Inc. and Jennifer M. Reinke, filed herewith.
10.39	Severance Agreement dated November 24, 2009 between Tollgrade Communications, Inc. and Michael D. Bornak, filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on November 30, 2009.
21.1	List of subsidiaries of the Company, filed as Exhibit 21.1 to the 2007 Form 10-K.
23.1	Consent of PricewaterhouseCoopers LLP, filed herewith.
31.1	Certification of Chief Executive Officer, filed herewith.
31.2	Certification of Chief Financial Officer, filed herewith.
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 350, filed herewith.

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EX-10.10

Exhibit 10.10

AMENDMENT OF LEASE

     THIS AGREEMENT, made this 14^th day of Sept. 2009 between the REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA, a Pennsylvania nonprofit corporation having its principal office in the City of Pittsburgh, Allegheny County, Pennsylvania hereinafter called (“Landlord”), and TOLLGRADE COMMUMCATIONS, INC., a Pennsylvania corporation, hereinafter called (“Tenant”).

     WHEREAS, the parties hereto previously entered into a Lease, dated August 31, 2005 as extended by Renewal Notice letter dated December 14, 2006, and an Amendment of Lease dated May 22, 2009 (collectively the “Lease”), for occupancy within the 111,600 square foot building known as Harmar Industrial Building, 493 Nixon Road, Cheswick, Pennsylvania 15024 (the “Premises”) in the County of Allegheny, Pennsylvania, and

     WHEREAS, the parties hereto desire to amend the Lease as hereinafter set forth; and

     NOW, THEREFORE, intending to be legally bound hereby, the parties hereto agree as follows:

1. The foregoing preamble clauses are incorporated herein by reference thereto.

2. Lease Section 3, Term, is changed to extend the term of the lease beyond the current expiration date of March 31, 2010. The extended term shall begin April 1, 2010, continue for a period of twelve (12) months, and terminate on March 31, 2011.

3. Lease Section 3.2.1, Renewal Term, is changed to provide Tenant with the Option to Renew the Lease for a period of one (l) year commencing April 1, 2011 and expiring March 31, 2012 (the “Renewal Term”), provided: (i) that this Lease is in full force and effect immediately prior to the date of the commencement of the Renewal Term; and (ii) that there is no then-existing Event of Default under any of the provisions of the Lease.

4. Lease Section 4.1.1, Initial Term Base Rent, shall reflect that the Tenant’s monthly base rental amount of $35,572.50 will continue through March 31, 2010. Beginning April 1, 2010 and continuing through March 31, 2011, the new monthly base rental amount shall be TWENTY-SEVEN THOUSAND EIGHTY-THREE and 33/100 DOLLARS ($27,083.33).

5. Lease Section 4.1.2, Renewal Term Base Rent, shall reflect the Tenant’s monthly base rental amount during the Renewal Term shall be TWENTY-EIGHT THOUSAND EIGHT HUNDRED THIRTY AND 00/100 DOLLARS ($28,830.00).

     Except as amended hereby, all other terms and conditions of the Lease shall remain unchanged and in full force and effect.

     IN WITNESS WHEREOF, the parties hereto have caused this Amendment of Lease to be duly executed the day and year first above written.

Attest:	REGIONAI INDUSTRIAL DEVELOPMENT
	CORPORATIONOF SOUTHWESTERN
	PENNSYLVANIA
/s/David P. Myron VP & Treasurer	By	/s/Donald F. Smith, Jr. Donald F. Smith, Jr., President
(CorporateSeal)
Attest:	TOLLGRADE COMMUNICATIONS, INC.
/s/Jennifer M. Reinke	By	/s/Sara M. Antol
	Title:	Secretary & G.C.
(Corporate Seal)

EX-10.12

Exhibit 10.12

Tollgrade Communications, Inc.
2006 Long-Term Incentive Compensation Plan
(as amended and restated on August 5, 2009)

Article 1. Establishment, Objectives, and Duration

1.1	Establishment of the Plan. Tollgrade Communications, Inc., a Pennsylvania corporation (hereinafter referred to as the “Company”), hereby establishes an incentive compensation plan to be known as the “Tollgrade Communications, Inc. 2006 Long-Term Incentive Compensation Plan” (hereinafter referred to as the “Plan”), as set forth in this amended and restated document (this “Restatement”). The Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Shares and Performance Units.
	The Plan was approved by the Company’s stockholders on May 9, 2006 and became effective as of May 10, 2006 (the “Effective Date”) and, as amended and restated hereby, shall remain in effect as provided in Section 1.3 hereof. This Restatement is made effective as of August 5, 2009 (the “Restatement Effective Date”) and shall remain in effect for the duration of the Plan, subject to any subsequent amendment made pursuant to the terms hereof. Awards made on or after the Restatement Effective Date shall be subject to the terms and conditions of this Restatement as amended from time to time and not to the terms of any prior Plan document.
1.2	Objectives of the Plan. The objectives of the Plan are to optimize the profitability and growth of the Company through incentives which are consistent with the Company’s goals and which link the personal interests of Participants to those of the Company’s stockholders; to provide Participants with an incentive for excellence in individual performance; and to promote teamwork among Participants.
	The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract and retain the services of Participants who make significant contributions to the Company’s success and to allow Participants to share in the success of the Company.
1.3	Duration of the Plan. The Plan was adopted by the Board of Directors on March 6, 2006, subject to approval by the Company’s stockholders, and shall commence on the Effective Date, as described in Section 1.1 hereof, and shall remain in effect, subject to the right of the Board of Directors to amend or terminate the Plan at any time pursuant to Article 14 hereof, until all Shares subject to it shall have been purchased or acquired according to the Plan’s provisions. However, in no event may an Award be granted under the Plan on or after May 9, 2016.

Article 2. Definitions

Whenever used in the Plan, the following terms shall have the meanings set forth below, and when the meaning is intended, the initial letter of the word shall be capitalized:

2.1	“Appropriate Administrator” means, in the case of any Awards to Employees, the Committee, and in the case of any Awards to Nonemployee Directors, the Board.
2.2	“Award” means, individually or collectively, a grant under this Plan of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Shares or Performance Units.

2.3	“Award Agreement” means an agreement entered into by the Company and each Participant setting forth the terms and provisions applicable to Awards granted under this Plan.
2.4	“Beneficial Owner” or “Beneficial Ownership” shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act.
2.5	“Board” or “Board of Directors” means the Board of Directors of the Company.
2.6	“Cause” shall mean with respect to the termination of an Employee’s employment, unless otherwise determined by the Committee at the time of the grant of the Award (i) in the case where there is no employment agreement, change of control agreement or similar agreement in effect between the Employee and the Company at the time of the grant of the Award (or where there is such an agreement but it does not define “cause” or words of like import), termination due to an Employee’s dishonesty, fraud, conviction of a felony, insubordination, willful misconduct, refusal to perform services, or unsatisfactory performance of his or her duties for the Company as determined by the Committee in its sole discretion; or (ii) in the case where there is an employment agreement, change in control agreement or similar agreement in effect between the Employee and the Company at the time of the grant of the Award that defines “cause” (or words of like import), as defined under such agreement.

2.7 “Change in Control” of the Company will be deemed to have occurred as of the first day any one (1) or more of the following paragraphs shall have been satisfied:

(a)	Any Person (other than the Person in control of the Company as of the Effective Date of the Plan, or other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing more than thirty-five percent (35%) of the combined voting power of the Company’s then outstanding securities; or
(b)	(i) A liquidation of the Company; or (ii) the sale or disposition of all or substantially all of the Company’s assets (other than one in which in the stockholders of the Company, as determined immediately prior to such transaction, hold, directly or indirectly, as determined immediately following such transaction, a majority of the voting power of each surviving, resulting or acquiring corporation which, immediately following such transaction, holds more than 10% of the consolidated assets of the Company immediately prior to the transaction); or (iii) a merger, consolidation, or reorganization of the Company with or involving any other corporation, other than a merger, consolidation, or reorganization that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least sixty-five percent (65%) of the combined voting power of the voting securities of the Company (or such surviving entity) outstanding immediately after such merger, consolidation, or reorganization.
(c)	During any two-year period (not including any period prior to the Effective Date of this Plan), individuals who at the beginning of such period constitute the Board and any new Director whose nomination or election was approved by a vote of at least two-thirds of the Directors then still in office who were either Directors at the beginning of the period or

whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board.

	However, in no event shall a Change in Control be deemed to have occurred, with respect to a Participant, if that Participant is part of a purchasing group, which consummates the Change in Control transaction. The Participant shall be deemed “part of a purchasing group” for purposes of the preceding sentence if the Participant is an equity participant or has agreed to become an equity participant in the purchasing company or group (except for (i) passive ownership of less than five percent (5%) of the voting equity securities of the purchasing company; or (ii) ownership of equity participation in the purchasing company or group which is otherwise deemed not to be significant, as determined prior to the Change in Control by a majority of the nonemployee continuing Directors).
2.8	“Code” means the Internal Revenue Code of 1986, as amended from time to time.
2.9	“Committee” means the Compensation Committee of the Board, as specified in Article 3 herein, or such other Committee appointed by the Board in accordance with Section 3.1 to administer the Plan with respect to grants of Awards.
2.10	“Company” means Tollgrade Communications, Inc., a Pennsylvania corporation, and any successor thereto as provided in Article 17 herein.
2.11	“Director” means any individual who is a member of the Board of Directors of the Company.
2.12	“Effective Date” shall have the meaning ascribed to such term in Section 1.1 hereof.
2.13	“Employee” means any active employee of the Company. Directors who are not employed by the Company shall not be considered Employees under this Plan.
2.14	“Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto.
2.15	“Fair Market Value” shall be the mean between the following prices, as applicable, for the date as of which fair market value is to be determined as quoted in The Wall Street Journal (or in such other reliable publication as the Committee, in its discretion, may determine to rely upon): (i) if the Common Stock is listed on the New York Stock Exchange, the highest and lowest sales prices per share of the Common Stock as quoted in the NYSE Composite Transactions listing for such date, (ii) if the Common Stock is not listed on such exchange, the highest and lowest sales prices per share of Common Stock for such date on (or on any composite index including) the principal United States securities exchange registered under the 1934 Act on which the Common Stock is listed or (iii) if the Common Stock is not listed on any such exchange, the highest and lowest sales prices per share of the Common Stock for such date on the National Association of Securities Dealers Automated Quotations System or any successor system then in use (“NASDAQ”). If there are no such sale price quotations for the date as of which fair market value is to be determined but there are such sale price quotations within a reasonable period both before and after such date, then fair market value shall be determined by taking a weighted average of the means between the highest and lowest sales prices per share of the Common Stock as so quoted on the nearest date before and the nearest date after the date as of which fair market value is to be determined. The average should be weighted inversely by the respective numbers of trading days between the selling dates and the date as of which fair market value is to be determined. If there are no such sale price quotations on or within a reasonable period both before

	and after the date as of which fair market value is to be determined, then fair market value of the Common Stock shall be the mean between the bona fide bid and asked prices per share of Common Stock as so quoted for such date on NASDAQ, or if none, the weighted average of the means between such bona fide bid and asked prices on the nearest trading date before and the nearest trading date after the date as of which fair market value is to be determined, if both such dates are within a reasonable period. The average is to be determined in the manner described above in this Section 2.15. If the fair market value of the Common Stock cannot be determined on any basis previously set forth in this Section 2.15 for the date as of which fair market value is to be determined, the Committee shall in good faith determine the fair market value of the Common Stock on such date. Fair market value shall be determined without regard to any restriction other than a restriction which, by its terms, will never lapse.
2.16	“Incentive Stock Option” or “ISO” means an option to purchase Shares granted under Article 6 herein and which is designated as an Incentive Stock Option and which is intended to meet the requirements of Code Section 422.
2.17	“Insider” shall mean an individual who, immediately prior to the grant of any Award, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company. For purposes of this Section 2.17, an individual (i) shall be considered as owning not only Shares of stock owned individually but also all Shares of stock that are at the time owned, directly or indirectly, by or for the spouse, ancestors, lineal descendants and brothers and sisters (whether by whole or half blood) of such individual and (ii) shall be considered as owning proportionately any Shares owned, directly or indirectly, by or for any corporation, partnership, estate or trust in which such individual is a stockholder, partner or beneficiary.
2.18	“Named Executive Officer” means a Participant who, as of the date of vesting and/or payout of an Award, as applicable, is one of the group of “covered employees,” as defined in the regulations promulgated under Code Section 162(m), or any successor statute.
2.19	“Nonemployee Director” means an individual who is a member of the Board of Directors of the Company but who is not an Employee of the Company.
2.20	“Nonqualified Stock Option” or “NQSO” means an option to purchase Shares granted under Article 6 herein and which is not intended to meet the requirements of Code Section 422.
2.21	“Option” means an Incentive Stock Option or a Nonqualified Stock Option, as described in Article 6 herein.
2.22	“Option Price” means the price at which a Share may be purchased by a Participant pursuant to an Option.
2.23	“Participant” means an Employee or a Nonemployee Director who has outstanding an Award granted under the Plan.
2.24	“Performance-Based Exception” means the performance-based exception from the tax deductibility limitations of Code Section 162(m).
2.25	“Performance Share” means an Award granted to a Participant, as described in Article 9 herein.
2.26	“Performance Unit” means an Award granted to a Participant, as described in Article 9 herein.

2.27	“Period of Restriction” means the period during which the transfer of Shares of Restricted Stock is limited in some way (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Appropriate Administrator, at its discretion), and the Shares are subject to a substantial risk of forfeiture, as provided in Article 8 herein.
2.28	“Person” shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d) thereof.
2.29	“Restricted Stock” means an Award granted to a Participant pursuant to Article 8 herein.
2.30	“Retirement” shall mean any voluntary termination of employment by an Employee following the attainment of age 65.
2.31	“Shares” means the shares of Common Stock of the Company.
2.32	“Stock Appreciation Right” or “SAR” means an Award designated as an SAR, pursuant to the terms of Article 7 herein.

Article 3. Administration

3.1	The Committee. Except as set forth in Section 3.5 below, the Plan shall be administered by the Compensation Committee of the Board, or by any other Committee appointed by the Board consisting of not less than two (2) Directors who (i) are “non-employee” directors and otherwise meet the “disinterested administration” rules of Rule 16b-3 under the Exchange Act and (ii) are “outside directors” under Section 162(m)(4)(C) of the Code, or any successor provision. The members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board of Directors.
3.2	Authority of the Committee. Except as set forth in Section 3.5 below, except as limited by law or by the Articles of Incorporation or Bylaws of the Company, and subject to the provisions herein, the Committee shall have full power to grant Options, SARs, Restricted Stock, Performance Shares and Performance Units as described herein and to determine the Employees to whom any such Award shall be made and the number of Shares to be covered thereby; determine the sizes and types of Awards; determine the terms and conditions of Awards in a manner consistent with the Plan; construe and interpret the Plan and any agreement or instrument entered into under the Plan as they apply to Employees; and establish, amend, or waive rules and regulations for the Plan’s administration as they apply to Employees; and (subject to the provisions of Article 14 herein) amend the terms and conditions of any outstanding Award except for Incentive Stock Options to the extent such terms and conditions are within the discretion of the Committee as provided in the Plan. Further, the Committee shall make all other determinations, which may be necessary or advisable for the administration of the Plan, as the Plan applies to Employees. As permitted by law and applicable listing requirements, the Committee may delegate its authority as identified herein.
3.3	Decisions Binding. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders and resolutions of the Board shall be final, conclusive and binding on all persons, including the Company, its stockholders, Employees, Participants, and their estates and beneficiaries.

3.4

Non-Competition. If a grantee of an Option, SAR, Restricted Stock, Performance Units or Performance Shares (i) engages in the operation or management of a business (whether as owner, partner, officer, director, employee or otherwise and whether during or after termination of employment) which is in competition with the Company, (ii) induces or attempts to induce any customer, supplier, licensee or other individual, corporation or other business organization having a business relationship with the Company to cease doing business with the Company or in any way interferes with the relationship between any such customer, supplier, licensee or other person and the Company or (iii) solicits any employee of the Company to leave the employment thereof or in any way interferes with the relationship of such employee with the Company, the Appropriate Administrator, in its discretion, may immediately terminate all outstanding Options and/or SARs held by the grantee, declare forfeited all Restricted Stock held by the grantee as to which the restrictions have not yet lapsed and/or immediately cancel any award of Performance Units or Performance Shares. Whether a grantee has engaged in any of the activities referred to in the preceding sentence which would cause the outstanding Options and/or SARs to be terminated, and/or the Restricted Stock to be forfeited and/or any award of Performance Units or Performance Shares to be cancelled shall be determined, in its discretion, by the Appropriate Administrator, and any such determination by the Appropriate Administrator shall be final and binding.

3.5

Grants to Nonemployee Directors. Notwithstanding the foregoing, unless otherwise determined by the Board, the Board shall grant Nonqualified Stock Options, SARs, Restricted Stock, Performance Shares and Performance Units, and otherwise exercise the same authority as the Committee as described in Section 3.2 above, with respect to Nonemployee Directors.

Article 4. Shares Subject to the Plan and Maximum Awards

4.1

Number of Shares Available for Grants. Subject to adjustment as provided in Section 4.4 herein, the number of Shares hereby reserved for issuance to Participants under the Plan shall be 2,800,000, all of which may be granted pursuant to Incentive Stock Options; provided however, that, of that total, the maximum number of Shares of Restricted Stock granted pursuant to Article 8 herein, shall be 300,000.

The following rules shall apply to grants of such Awards under the Plan:

(a) The maximum aggregate number of Shares that may be granted or that may vest, as applicable, pursuant to any Award held by any one Named Executive Officer shall be 200,000 during any calendar year of the term of the Plan;

(b) The maximum aggregate cash payout received during any year by any one Named Executive Officer with respect to Awards granted shall be $1,000,000.

4.2	Lapsed Awards. If any Award granted under this Plan is canceled, terminates, expires, or lapses for any reason, any Shares subject to such Award again shall be available for the grant of an Award under the Plan.
4.3	Share Counting. (a) None of the following Shares shall become available for the grant of an Award under the Plan:

          (i) Shares tendered by a Participant as full or partial payment to the Company upon exercise of Options which are the subject of an Award granted under this Plan.

     (ii) Shares reserved for issuance upon an Award of SARs, to the extent the number of Shares reserved exceeds the number of Shares actually issued upon exercise of such SARs.

     (iii) Shares withheld by, or otherwise remitted to, the Company to satisfy a Participant’s tax withholding obligations upon the lapse of restrictions on Restricted Stock, or the exercise of Options or SARs, which are the subject of an Award under this Plan, or upon any other taxable event arising as a result of Awards granted under this Plan.

(b) When a SAR which is the subject of an Award under this Plan is exercised, and payment upon exercise is made in Shares as permitted in Section 7.5 of this Plan, the number of Shares with respect to which the SAR is exercised shall be counted against the Shares reserved under this Plan, regardless of the number of Shares actually issued to settle the SAR upon exercise.

4.4 Adjustments in Authorized Shares. In the event of any change in corporate capitalization, such as a stock split, or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Code Section 368) or any partial or complete liquidation of the Company, such adjustment shall be made in the number and class of Shares which may be delivered under Section 4.1 and as to the number of Shares which may be awarded under the Plan to any Named Executive Officer during the term of the Plan, and in the number and class of and/or price of Shares subject to outstanding Awards granted under the Plan, as may be determined to be appropriate and equitable by the Appropriate Administrator, in its sole discretion, to prevent dilution or enlargement of rights; provided, however, that the number of Shares subject to any Award shall always be a whole number.

Article 5. Eligibility and Participation

5.1

Eligibility. Persons eligible to participate in this Plan include all Employees of the Company (including, but not limited to, Employees who are members of the Board, covered employees as defined in Section 162(m)(3) of the Code, or any successor provision) and all Nonemployee Directors of the Company.

5.2

Actual Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from all eligible Employees those to whom Awards shall be granted and shall determine the nature and amount of each Award and the Board may, from time to time, select from all eligible Nonemployee Directors those to whom Awards shall be granted and shall determine the nature and amount of each Award.

Article 6. Stock Options

6.1	Grant of Options. Subject to the terms and provisions of the Plan, the Committee may grant Incentive Stock Options or Nonqualified Stock Options or both types of Options (but not in tandem) to Employees and the Board may grant Nonqualified Stock Options to Nonemployee Directors in such number, and upon such terms, and at any time and from time to time as shall be determined by the Appropriate Administrator.
6.2	Award Agreement. Each Option grant shall be evidenced by an Award Agreement that shall specify the Option Price, the duration of the Option, the number of Shares to which the Option pertains, and such other provisions as the Appropriate Administrator shall determine. The Award Agreement also shall specify whether the Option is intended to be an ISO within the meaning of Code Section 422, or an NQSO whose grant is intended not to fall under the provisions of Code Section 422.
6.3	Option Price. The Option Price at which each Option may be exercised shall be no less than one hundred percent (100%) of the fair market value per share of the Common Stock covered by the Option on the date of grant, except that in the case of an Incentive Stock Option granted to an Insider, the option price shall not be less than one hundred ten percent (110%) of such fair market value on the date of grant. For purposes of this Section 6.3, the fair market value of the Common Stock shall be as determined in Section 2.15. Notwithstanding the authority granted to the Committee pursuant to Section 3.2 and the Board pursuant to Section 3.5, once an Option is granted, neither the Committee nor the Board shall have authority to reduce the Option Price, nor may any Option be surrendered to the Company as consideration for the grant of a new Option with a lower Option Price without the approval of the Company’s shareholders, except under Section 4.4.
6.4	Duration of Options. Each Option granted to a Participant shall expire at such time as the Appropriate Administrator shall determine at the time of grant; provided, however, that no Option shall be exercisable after the expiration of ten years (five years in the case of an Incentive Stock Option granted to an Insider) from the date of grant.
6.5	Exercise of Options. Options granted under this Article 6 shall be exercisable at such times and be subject to such restrictions and conditions as the Appropriate Administrator shall in each instance approve, which need not be the same for each grant or for each Participant. Notwithstanding any other provision contained in the Plan or in any Award Agreement referred to in Section 2.3, but subject to the possible exercise of the Committee’s discretion contemplated in the last sentence of this paragraph, the aggregate fair market value, determined as provided in Section 2.15 on the date of grant, of the Shares with respect to which Incentive Stock Options are exercisable for the first time by an Employee during any calendar year under all plans of the corporation employing such Employee, any parent or subsidiary corporation of such corporation and any predecessor corporation of any such corporation shall not exceed $100,000. If the date on which one or more of such Incentive Stock Options could first be exercised would be accelerated pursuant to any provision of the Plan or any Award Agreement, and the acceleration of such exercise date would result in a violation of the limitation set forth in the preceding sentence, then, notwithstanding any such provision, but subject to the provisions of the next succeeding sentence, the exercise dates of such Incentive Stock Options shall be accelerated only to the date or dates, if any, that do not result in a violation of such limitation and, in such event, the exercise dates of the Incentive Stock Options with the lowest Option Prices shall be accelerated to the earliest such dates. The Committee may, in its discretion, authorize the acceleration of the exercise date of one

	or more Incentive Stock Options even if such acceleration would violate the $100,000 limitation set forth in the first sentence of this paragraph and even if such Incentive Stock Options are thereby converted in whole or in part to Nonqualified Stock Options.
6.6	Payment. Options granted under this Article 6 shall be exercised by the delivery of a written notice of exercise to the Company, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares.
	The Option Price upon exercise of any Option shall be payable to the Company in full either: (a) in cash in United States dollars (including check, bank draft or money order), or (b) by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total Option Price, or (c) by a combination of (a) and (b).
	The Company will also cooperate with any person exercising an Option who participates in a cashless exercise program of a broker or other agent under which all or part of the Shares received upon exercise of the Option are sold through the broker or other agent or under which the broker or other agent makes a loan to such person. Notwithstanding the foregoing, unless the Appropriate Administrator, in its discretion, shall otherwise determine at the time of grant in the case of an Incentive Stock Option, or at any time in the case of a Nonqualified Stock Option, the exercise of the Option shall not be deemed to occur and no Shares of Common Stock will be issued by the Company upon exercise of the Option until the Company has received payment of the Option Price in full.
6.7	Restrictions on Share Transferability. The Appropriate Administrator may impose such restrictions on any Shares acquired pursuant to the exercise of an Option granted under this Article 6 as it may deem advisable, including, without limitation, restrictions under applicable Federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded, and under any blue sky or state securities laws applicable to such Shares.
6.8	Termination of Employment. Subject to the provisions of Section 6.5 in the case of Incentive Stock Options, unless the Committee, in its discretion, shall otherwise determine:

(i)

If the employment of an Employee who is not disabled within the meaning of Section 422(c)(6) of the Code (a “Disabled Grantee”) is voluntarily terminated with the consent of the Company or an Employee retires under any retirement plan of the Company, any outstanding Incentive Stock Option held by such Employee shall be exercisable by the Employee (but only to the extent exercisable by the Employee immediately prior to the termination of employment) at any time prior to the expiration date of such Incentive Stock Option or within three months after the date of termination of employment, whichever is the shorter period;

(ii)

If the employment of an Employee who is not a Disabled Grantee is voluntarily terminated with the consent of the Company or an Employee retires under any retirement plan of the Company, any outstanding Nonqualified Stock Option held by such Employee shall be exercisable by the Employee (but only to the extent exercisable by the Employee immediately prior to the termination of employment) at any time prior to the expiration date of such Nonqualified Stock Option or within one year after the date of termination of employment, whichever is the shorter period;

(iii)	If the employment of an Employee who is a Disabled Grantee is voluntarily terminated with the consent of the Company, any outstanding Option held by such Employee shall be exercisable by the Employee in full (whether or not so exercisable by the Employee immediately prior to the termination of employment) at any time prior to the expiration date of such Option or within one year after the date of termination of employment, whichever is the shorter period;
(iv)	Following the death of an Employee during employment, any outstanding Option held by the Employee at the time of death shall be exercisable in full (whether or not so exercisable by the Employee immediately prior to the death of the Employee) by the person entitled to do so under the Will of the Employee, or, if the Employee shall fail to make testamentary disposition of the stock option or shall die intestate, by the legal representative of the Employee at any time prior to the expiration date of such stock option or within one year after the date of death of the Employee, whichever is the shorter period;
(v)	Following the death of an Employee after termination of employment during a period when an Option is exercisable, the Option shall be exercisable by such person entitled to do so under the Will of the Employee by such legal representative (but only to the extent exercisable by the Employee immediately prior to the termination of employment) at any time prior to the expiration date of such Option or within one year after the date of death, whichever is the shorter period;
(vi)	Unless the exercise period of a stock option following termination of employment has been extended as provided in Section 13.1, if the employment of an Employee terminates for any reason other than voluntary termination with the consent of the Company, retirement under any retirement plan of the Company or death, all outstanding Options held by the Employee at the time of such termination of employment shall automatically terminate; provided, however, that if the employment of an Employee is involuntarily terminated by the Company without Cause, any Option held by such Employee at the time of such termination shall be exercisable by the Employee (but only to the extent exercisable by the Employee immediately prior to the termination of employment) at any time prior to the expiration date of such Option or within three months after the date of termination of employment in the case of an Incentive Stock Option or within one year after the date of termination of employment in the case of a Nonqualified Stock Option, whichever is the shorter period. Whether termination of employment is a voluntary termination with the consent of the Company or an involuntary termination with or without cause shall be determined, in its discretion, by the Committee and any such determination by the Committee shall be final and binding.

6.9 Termination of Board Service. Unless the Board, in its discretion, shall otherwise determine:

(i) If a Nonemployee Director ceases to be a Director of the Company for any reason other than resignation, removal for cause or death, any then outstanding stock option held by such Nonemployee Director shall be exercisable by the Nonemployee Director (but only to the extent exercisable by the Nonemployee Director immediately prior to ceasing to be a Director) at any time prior to the expiration date of such stock option or within one year after the date the Nonemployee Director ceases to be a Director, whichever is the shorter period;

(ii)	If during his or her term of office as a Director a Nonemployee Director resigns from the Board (which shall not include not standing for reelection at the end of his or her then current term) or is removed from office for cause, any then outstanding stock option held by such Nonemployee Director shall be exercisable by the Nonemployee Director (but only to the extent exercisable by the Nonemployee Director immediately prior to ceasing to be a Director) at any time prior to the expiration date of such stock option or within 90 days after the date of resignation or removal, whichever is the shorter period;
(iii)	Following the death of a Nonemployee Director during service as a Director of the Company, any outstanding stock option held by the Nonemployee Director at the time of death (whether or not exercisable by the Nonemployee Director immediately prior to death) shall be exercisable by the person entitled to do so under the Will of the Nonemployee Director, or, if the Nonemployee Director shall fail to make testamentary disposition of the stock option or shall die intestate, by the legal representative of the Nonemployee Director, at any time prior to the expiration date of such stock option or within one year after the date of death, whichever is the shorter period;
(iv)	Following the death of a Nonemployee Director after ceasing to be a Director, any outstanding stock option held by such Nonemployee Director at the time of death shall be exercisable (but only to the extent exercisable by the Nonemployee Director immediately prior to death) by such person entitled to do so under the Will of the Nonemployee Director or by such legal representative at any time prior to the expiration date of such stock option or within one year after the date of death, whichever is the shorter period.
	Interpretation of the foregoing shall be done by the Board and any determination by the Board shall be final and binding.

6.10 Nontransferability of Options. No Option granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by Will or if the Participant dies intestate by the laws of descent and distribution of the state of domicile of the Participant at the time of death. Further, all Options granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant.

Article 7. Stock Appreciation Rights

7.1	Grant of SARs. Subject to the terms and conditions of the Plan, SARs may be granted to Employees or Nonemployee Directors at any time and from time to time as shall be determined by the Appropriate Administrator.
	The Appropriate Administrator shall have complete discretion in determining the number of SARs granted to each Participant (subject to Article 4 herein) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such SARs.
	The grant price of an SAR shall equal the Fair Market Value of a Share on the date of grant of the SAR.
7.2	Exercise of SARs. SARs may be exercised upon whatever terms and conditions the Appropriate Administrator, in its sole discretion, imposes upon them.

7.3	SAR Agreement. Each SAR grant shall be evidenced by an Award Agreement that shall specify the grant price, the term of the SAR, and such other provisions as the Appropriate Administrator shall determine.
7.4	Term of SARs. The term of an SAR granted under the Plan shall be determined by the Appropriate Administrator, in its sole discretion; provided, however, that such term shall not exceed ten (10) years.
7.5	Payment of SAR Amount. Upon exercise of an SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying:

(a) The difference between the Fair Market Value of a Share on the date of exercise over the grant price; by

(b) The number of Shares with respect to which the SAR is exercised.

	At the discretion of the Appropriate Administrator, the payment upon SAR exercise may be in cash, in Shares of equivalent value, or in some combination thereof.
7.6	Rule 16b-3 Requirements. Notwithstanding any other provision of the Plan, the Appropriate Administrator may impose such conditions on exercise of an SAR as may be required to satisfy the requirements of Section 16 of the Exchange Act and the regulations promulgated thereunder (or any successor statute or regulation).
7.7	Termination of Employment. Each SAR Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the SAR following termination of the Participant’s employment with the Company and/or its Subsidiaries or the Participant’s termination of Board Service, as the case may be. Such provisions shall be determined in the sole discretion of the Appropriate Administrator, shall be included in the Award Agreement entered into with Participants, need not be uniform among all SARs issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of such employment or service.
7.8	Nontransferability of SARs. No SAR granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or, if the grantee dies intestate, by the laws of descent and distribution of the state of domicile of the grantee at the time of death. Further, all SARs granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant.

Article 8. Restricted Stock

8.1	Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the Appropriate Administrator, at any time and from time to time, may grant Shares of Restricted Stock to Employees or Nonemployee Directors in such amounts as the Appropriate Administrator shall determine.
8.2	Restricted Stock Agreement. Each Restricted Stock grant shall be evidenced by a Restricted Stock Award Agreement that shall specify the Period(s) of Restriction, the number of Shares of Restricted Stock granted, and such other provisions as the Appropriate Administrator shall determine.

8.3	Transferability. Except as provided in this Article 8, the Shares of Restricted Stock granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction established by the Appropriate Administrator and specified in the Restricted Stock Award Agreement, or upon earlier satisfaction of any other conditions, as specified by the Appropriate Administrator in its sole discretion and set forth in the Restricted Stock Award Agreement. All rights with respect to the Restricted Stock granted to a Participant under the Plan shall be available during his or her lifetime only to such Participant.
8.4	Other Restrictions. The Appropriate Administrator shall impose such other conditions and/or restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including, without limitation, a requirement that Participants pay a stipulated purchase price for each Share of Restricted Stock, restrictions based upon the achievement of specific performance goals (Company-wide, divisional, and/or individual), time-based restrictions on vesting following the attainment of the performance goals, and/or restrictions under applicable Federal or state securities laws. Notwithstanding the foregoing, all grants of Restricted Stock shall have a Period of Restriction of at least three (3) years, except that (a) the Period of Restriction for any Award may be shortened pursuant to the Restricted Stock Award Agreement in connection with death, disability or Retirement or pursuant to Section 13.1, (b) Awards with restrictions based upon achievement of performance goals shall have a Period of Restriction of a least one (1) year, and (c) Awards to Nonemployee Directors shall have a Period of Restriction of at least one (1) year.
	The Company shall retain the certificates representing Shares of Restricted Stock in the Company’s possession until such time as all conditions and/or restrictions applicable to such Shares have been satisfied.
	Except as otherwise provided in this Article 8, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after the last day of the applicable Period of Restriction.
8.5	Voting Rights. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares.
8.6	Termination of Employment. Each Restricted Stock Award Agreement shall set forth the extent to which the Participant shall have the right to receive unvested Restricted Shares following termination of the Participant’s employment with the Company or service on the Board, as the case may be. Such provisions shall be determined in the sole discretion of the Appropriate Administrator, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Shares of Restricted Stock issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of such employment or service; provided, however that, except in the cases of terminations connected with a Change in Control and terminations by reason of death or disability the vesting of Shares of Restricted Stock which qualify for the Performance-Based Exception and which are held by Named Executive Officers shall occur at the time they otherwise would have, but for the employment termination.

Article 9. Performance Units and Performance Shares

9.1 Grant of Performance Units/Shares. Subject to the terms of the Plan, Performance Units and/or Performance Shares may be granted to Participants in such amounts and upon such terms, and at any time and from time to time, as shall be determined by the Appropriate Administrator.

9.2	Value of Performance Units/Shares. Each Performance Unit shall have an initial value that is established by the Appropriate Administrator at the time of grant. Each Performance Share shall have an initial value equal to the Fair Market Value of a Share on the date of grant. The Appropriate Administrator shall set performance goals in its discretion which, depending on the extent to which they are met, will determine the number and/or value of Performance Units/Shares that will be paid out to the Participant. For purposes of this Article 9, the time period during which the performance goals must be met shall be called a “Performance Period.”
9.3	Earning of Performance Units/Shares. Subject to the terms of this Plan, after the applicable Performance Period has ended, the holder of Performance Units/Shares shall be entitled to receive payout on the number and value of Performance Units/Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance goals have been achieved.
9.4	Form and Timing of Payment of Performance Units/Shares. Payment of earned Performance Units/Shares shall be made in a single lump sum within 21/2 months following the close of the applicable Performance Period. Subject to the terms of this Plan, the Appropriate Administrator, in its sole discretion, may pay earned Performance Units/Shares in the form of cash or in Shares (or in a combination thereof) which have an aggregate Fair Market Value equal to the value of the earned Performance Units/Shares at the close of the applicable Performance Period. Such Shares may be granted subject to any restrictions deemed appropriate by the Appropriate Administrator.
	Participants may, at the discretion of the Appropriate Administrator, be entitled to exercise their voting rights with respect to such Shares.
9.5	Termination of Employment Due to Death, Disability, or Retirement. Unless determined otherwise by the Appropriate Administrator and set forth in the Participant’s Award Agreement, in the event the employment or the Board service of a Participant is terminated by reason of death, disability, or Retirement during a Performance Period, the Participant shall receive a payout of the Performance Units/Shares which is prorated, as specified by the Appropriate Administrator in its discretion.
	Payment of earned Performance Units/Shares shall be made at a time specified by the Appropriate Administrator in its sole discretion and set forth in the Participant’s Award Agreement. Notwithstanding the foregoing, with respect to Named Executive Officers who retire during a Performance Period, payments shall be made at the same time as payments are made to Participants who did not terminate employment during the applicable Performance Period.
9.6	Termination of Employment or Board Service for Other Reasons. In the event that a Participant’s employment or Board service terminates for any reason other than those reasons set forth in Section 9.5 herein, all Performance Units/Shares shall be forfeited by the Participant to the Company unless determined otherwise by the Appropriate Administrator, as set forth in the Participant’s Award Agreement.
9.7	Nontransferability. Performance Units/Shares may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or if the grantee dies intestate by the laws of descent and distribution of the state of domicile of the grantee at the time of death. Further, a Participant’s rights under the Plan shall be exercisable during the Participant’s lifetime only by the Participant or the Participant’s legal representative.

Article 10. Performance Measures

Unless and until the Appropriate Administrator proposes for shareholder vote and shareholders approve a change in the general performance measures set forth in this Article 10, the attainment of which may determine the degree of payout and/or vesting with respect to Awards to Named Executive Officers which are designed to qualify for the Performance Based Exception, the performance measure(s) to be used for purposes of such grants shall be chosen from among the following alternatives:

(a) Revenues of the Company or any specified division;

(b) Percentage increase over a specified period in revenues of the Company or any specified division;

(c) Expenses or any designated category of expenses of the Company or any specified division;

(d) Percentage decrease over a specified period in expenses or any designated category of expenses of the Company or any specified division;

(e) Pretax or after-tax income of the Company or any specified division, or figures derived from income of the Company or any specified division to account for non-cash charges such as amortization and depreciation; and

(f) Percentage increase over a specified period in pretax or after-tax income of the Company or any specified division.

The Appropriate Administrator shall have the discretion to adjust the determinations of the degree of attainment of the preestablished performance goals; provided, however, that Awards which are designed to qualify for the Performance Based Exception, and which are held by Named Executive Officers, may not be adjusted upward (the Committee shall retain the discretion to adjust such Awards downward).

In the event that applicable tax and/or securities laws change to permit the Appropriate Administrator discretion to alter the governing performance measures without obtaining shareholder approval of such changes, the Appropriate Administrator shall have sole discretion to make such changes without obtaining shareholder approval. In addition, in the event that the Appropriate Administrator determines that it is advisable to grant Awards, which shall not qualify for the Performance-Based Exception, the Appropriate Administrator may make such grants without satisfying the requirements of Code Section 162(m).

Article 11. Beneficiary Designation

Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant’s death shall be paid to the Participant’s estate.

Article 12. Rights of Employees and Nonemployee Directors

12.1

Employment and Board Service. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant’s employment at any time, nor confer upon any Participant any right to continue in the employ of the Company, nor shall it confer any right to a person to continue as a Director of the Company or interfere in any way with the rights of shareholders of the Company or the Board to elect and remove Directors.

12.2

Participation. No Employee or Nonemployee Director shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award.

Article 13. Change in Control

13.1	Treatment of Outstanding Awards. Upon the occurrence of a Change in Control, unless otherwise specifically prohibited under applicable laws, or by the rules and regulations of any governing governmental agencies or national securities exchanges:
	(a) Any and all Options and SARs granted hereunder shall become immediately exercisable, and shall remain exercisable throughout their entire term;
	(b) Any restriction periods and restrictions imposed on Restricted Shares shall lapse;
	(c) The target payout opportunities attainable under all outstanding Awards of Restricted Stock, Performance Units and Performance Shares shall be deemed to have been fully earned for the entire Performance Period(s) as of the effective date of the Change in Control. The vesting of all Awards denominated in Shares shall be accelerated as of the effective date of the Change in Control, and there shall be paid out in cash to Participants within thirty (30) days following the effective date of the Change in Control an amount equal to one hundred percent (100%) of all targeted cash payout opportunities associated with outstanding cash-based Awards; and
	(d) Subject to Article 14 herein, the Appropriate Administrator shall have the authority to make any modifications to the Awards as determined by the Appropriate Administrator to be appropriate before the effective date of the Change in Control.
13.2	Acceleration of Award Vesting. Notwithstanding any provision of this Plan or any Award Agreement provision to the contrary, the Appropriate Administrator, in its sole and exclusive discretion, shall have the power at any time to accelerate the vesting of any Award granted under the Plan to a Participant, including without limitation acceleration to such a date that would result in said Awards becoming immediately vested, except that the Appropriate Administrator shall not have the authority to accelerate any Award (a) that would otherwise qualify for the Performance-Based Exception in any manner that would cause the Award to fail to qualify as such or (b) in a manner that would conflict with the last sentence of the first paragraph of Section 8.4.
13.3	Termination, Amendment, and Modifications of Change in Control Provisions. Notwithstanding any other provision of this Plan or any Award Agreement provision, the provisions of this Article 13 may not be terminated, amended, or modified on or after the date of a Change in Control to affect adversely any Award theretofore granted under the Plan without the prior written consent of the Participant with respect to said Participant’s outstanding Awards;

provided, however, the Board of Directors, upon recommendation of the Committee, may terminate, amend, or modify this Article 13 at any time and from time to time prior to the date of a Change in Control.

Article 14. Amendment, Modification, and Termination

14.1	Amendment, Modification, and Termination. The Board or the Committee may terminate the Plan in whole or in part at any time. The Board or the Committee may alter, amend, suspend or modify the Plan from time to time in such respects as the Board or the Committee may deem advisable in order that any Awards shall conform to any change in applicable laws or regulations or in any other respect the Board or the Committee may deem to be in the best interests of the Company; provided, however, that no such amendment or modification shall, without shareholder approval:
	(a) Except as provided in Section 4.4, increase the number of Shares which may be issued under the Plan;
	(b) Expand the types of Awards available to Participants under the Plan;
	(c) Materially expand the class of persons eligible to participate in the Plan;
	(d) Delete or limit the provisions in Section 6.3 prohibiting the repricing of Options or reduce the price at which Shares may be offered under Options; or
	(e) Extend the termination date for making Awards under the Plan.
	In addition, the Plan shall not be amended without the approval of such amendment by the Company’s shareholders if such approval is required under (1) the rules and regulations of NASDAQ or any stock exchange on which the Shares are then listed, or (2) other applicable laws, rules, or regulations, including, but not limited to, Rule 16b-3 under the Exchange Act, including any successor to such Rule.
14.2	Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee may make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4.4 hereof) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan; provided that no such adjustment shall be authorized to the extent that such authority would be inconsistent with the Plan’s meeting the requirements of Section 162(m) of the Code, as from time to time amended.
14.3	Awards Previously Granted. No termination, amendment, or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award.
14.4	Compliance with Code Section 162(m). At all times when Code Section 162(m) is applicable, all Awards granted under this Plan shall comply with the requirements of Code Section 162(m); provided, however, that in the event the Committee determines that such compliance is not desired with respect to any Award or Awards available for grant under the Plan, then compliance

with Code Section 162(m) will not be required. In addition, in the event that changes are made to Code Section 162(m) to permit greater flexibility with respect to any Award or Awards available under the Plan, the Committee may, subject to this Article 15, make any adjustments it deems appropriate.

14.5

Code Section 409A Compliance. To the extent applicable, it is intended that this Plan and any Awards granted hereunder, are excepted from, or otherwise comply with, the requirements of Section 409A of the Code and any related regulations or other guidance promulgated with respect to such Section by the U.S. Department of Treasury or the Internal Revenue Service (“Section 409A”). Any provision that would cause the Plan or any Award granted hereunder to fail to satisfy Section 409A shall have no force or effect until amended to comply with Section 409A, which amendment may be retroactive to the extent permitted by Section 409A. Unless otherwise required by applicable law or listing requirement, such amendment shall not require the approval of the shareholders.

Article 15. Withholding

15.1

Tax Withholding. The Company shall have the power and the right to deduct or withhold, or require an Employee to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of this Plan.

15.2

Share Withholding. With respect to withholding required upon the exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock, or upon any other taxable event arising as a result of Awards granted hereunder, Employees may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the action. All such elections shall be irrevocable, made in writing, signed by the Employee, and shall be subject to any restrictions or limitations that the Committee, in its sole discretion, deems appropriate.

Article 16. Indemnification

Each person who is or shall have been a member of the Committee, or of the Board, shall be indemnified and held harmless by the Company against and from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s Articles of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.

Article 17. Successor

All obligations of the Company under the Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or

indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.

Article 18. Legal Construction

18.1	Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural.
18.2	Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

Article 19. Requirements of Law.

The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

Article 20. Securities Law Compliance.

With respect to (i) a Director of the Company, (ii) an executive officer of the Company or other person who is required to file reports pursuant to the rules promulgated under Section 16 of the Exchange Act and (iii) Insiders, transactions under this Plan are intended to comply with all applicable conditions or Rule 16b-3 or its successors under the Exchange Act. To the extent any provision of the Plan or action by the Appropriate Administrator fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Appropriate Administrator.

Article 21. Governing Law.

To the extent not preempted by Federal law, the Plan and all agreements hereunder, shall be construed in accordance with and governed by the laws of the Commonwealth of Pennsylvania.

* * * * * * * * * * * * * * * * * * *

EX-10.37

Exhibit 10.37

SEPARATION AND RELEASE
AGREEMENT

     THIS AGREEMENT (“Agreement”) by and between Sara M. Antol (“Employee”) and TOLLGRADE COMMUNICATIONS, INC., a Pennsylvania corporation (the “Corporation”) (Employee and the Corporation are referred to sometimes hereinafter individually as “Party” and collectively as, the “Parties”).

RECITALS

     A. Employee currently is employed by the Corporation as its General Counsel and Corporate Secretary.

     B. Employee and the Corporation are parties to that certain Agreement, dated as of March 17, 2009, which provides that Employee would receive certain payments and other benefits under certain circumstances in the event her employment with the Corporation is terminated (the “Severance Agreement”).

     C. The Corporation has determined it appropriate to terminate the Executive’s employment with the Corporation, with such termination of employment to take effect on the Date of Termination (as such term is defined herein).

     D. The Severance Agreement provides that Employee’s receipt of severance payments under such agreement will be subject to Employee’s signing and not revoking for a period of seven (7) days a separation and mutual release of claims agreement (the “Release Condition”).

     E. On and subject to the terms and conditions of this Agreement, and in satisfaction of the Release Condition, Employee and the Corporation desire to settle fully and finally all matters between them, including, without limitation, any matters that relate to Employee’s employment, the termination of that employment, or Employee’s association with the Corporation generally.

     In consideration of the premises and the covenants and agreements set forth in this Agreement, the Parties hereto, intending to be legally bound, agree as follows:

     1. Termination of Employment. Employee acknowledges that her employment with the Corporation will terminate effective as of November 5, 2009 (the “Date of Termination”). From and after the Date of Termination, Employee shall not make any statements or engage in conduct which would lead any person or entity to believe that she is an employee, consultant, agent or other authorized representative of the Corporation or any of its subsidiaries; provided that if the Parties enter into a written consulting or similar agreement following the Date of Termination, Employee’s performance in accordance with the terms of such agreement shall not be deemed a breach of the foregoing.

     2. Separation Pay and Continuation of Benefits. Employee and the Corporation agree that Employee’s termination of employment falls under the provisions of Section 4(c) of the Severance Agreement. Accordingly, on the eighth day following execution of this Agreement, provided this Agreement has not been revoked by Employee pursuant to the terms of Section 17(e), the Corporation shall pay and/or provide to Employee the separation pay and benefits to which Employee is entitled under the Severance Agreement for termination of employment under the circumstances described in Section 4(c) (notwithstanding the provisions of Section 4(c) of the Severance Agreement relating to payment being made on the fifth day following the Date of Termination). Further, it is agreed that pursuant to

Section 6(b) of the Severance Agreement, Employee shall be deemed for purposes of the Corporation’s health and welfare benefits plans to have remained in the continuous employment of the Corporation until January 31, 2011, rather than the one-year period set forth in Section 6(b) of the Severance Agreement. Employee’s health and welfare benefits will therefore end on January 31, 2011. Further, the Parties agree that for purposes of the Corporation’s 2006 Long-Term Incentive Compensation Plan, the 1995 Long-Term Incentive Compensation Plan and the 1998 Employee Incentive Compensation Plan, Employee’s termination of employment shall be considered a “voluntary termination with the consent of the Company.” Through the first anniversary of the Date of Termination, the Corporation shall maintain, if available in the directors and officers’ insurance market, directors and officers insurance covering Employee for actions taken or omissions occurring at or prior to the Date of Termination on terms then in effect for the remaining directors and officers.

     3. Return of Corporation Property. Employee agrees to promptly return to the Corporation all property belonging to the Corporation and to otherwise comply with the Corporation’s normal employment termination procedures. By way of example only, the Corporation’s property includes, but is not limited to, items such as keys, vehicles, credit cards, pagers, computers, all originals and copies (regardless of the form or format on which such originals and copies are maintained) of all Corporation specifications and pricing information, all customer lists and other customer-related information, all supplier lists and other supplier-related information, computer discs, tapes and other documents which relate to the business of the Corporation and/or its customers and/or its suppliers.

     4. General Release and Covenant Not-to-Sue. Except as otherwise explicitly provided in this Agreement, Employee knowingly and voluntarily releases and forever discharges the Corporation, its successors, assigns, subsidiaries, affiliates, employees, shareholders, officers and directors (collectively “Releasees”) of and from any and all Claims which Employee and Employee’s heirs, executors, administrators, successors, and assigns have or may have against the Releasees at any time at or prior to the execution of this Agreement, including, but not limited to, any alleged violation of any federal, state or local anti-discrimination law, any alleged violation of Title VII of the Civil Rights Act of 1964, as amended, The Americans with Disabilities Act of 1990, as amended, The Civil Rights Act of 1991, Sections 1981 through 1988 of Title 42 of the United States Code, as amended, The Employee Retirement Income Security Act of 1974, as amended, The Older Workers Benefit Protection Act, The Pennsylvania Human Relations Act, as amended, any other federal, state or local civil or human rights law or any other local, state or federal law, regulation or ordinance, any public policy, contract, tort or common law; or any claim for costs, fees or other expenses, including attorneys’ fees incurred in these matters. This general release also includes, but is not limited to, claims arising under the Age Discrimination in Employment Act.

The Corporation also knowingly and voluntarily releases and forever discharges Employee, her successors, heirs and assigns, of and from any and all Claims which the Corporation and the Releasees have or may have against Employee at any time at or prior to the execution of this Agreement; or any claim for costs, fees or other expenses, including attorneys’ fees incurred in these matters.

As used herein, “Claims” means all claims, counterclaims, cross-claims, actions, causes of action, demands, obligations, debts, disputes, covenants, contracts, agreements, rights, suits, rights of contribution and indemnity, liens, expenses, assessments, penalties, charges, injuries, losses, costs (including, without limitation, attorneys’ fees and costs of suit), damages (including, without limitation, compensatory, consequential, bad faith or punitive damages), and liabilities, direct or indirect, of any and every kind, character, nature and manner whatsoever, in law or in equity, civil or criminal, administrative or judicial, in contract or in tort (including, without limitation, bad faith and negligence of any kind) or otherwise, whether now known or unknown, claimed or unclaimed, asserted or unasserted, suspected or unsuspected, discovered or undiscovered, accrued or unaccrued, anticipated or unanticipated, fixed or

contingent, liquidated or unliquidated, state or federal, under common law, statute or regulation. Without limiting the generality hereof, this release (and the defined term “Claims” as used in this Agreement) covers Claims based upon torts (such as, for example, negligence, fraud, defamation, wrongful discharge); express and implied contracts (except this Agreement); federal, state or local statutes and ordinances; and every other source of legal rights and obligations which may be validly waived or released.

Employee covenants and represents that he or she has not filed and will not in the future file or permit to be filed in her name, or on her behalf, any lawsuit or other legal proceeding asserting Claims which are within the scope of the release in Section 4 against any of the Releasees. Further, Employee represents and warrants that he or she has not suffered any on-the-job injury for which she has not filed a claim.

Nothing contained in this Section 4 shall be deemed to waive any remedy available to Employee at law or in equity in the event of a breach by the Corporation (or any of its successors) of its or their obligations under this Agreement.

Excluded from the release and covenant not to sue set forth in this Section 5 are any Claims which cannot be waived by law and any rights that may arise after the date of this Agreement (including matters arising pursuant to this Agreement, any benefit policy, plan or program) and any claims against any Releasee for fraud, deceit, theft or misrepresentation. This Agreement does not prevent Employee from filing a charge with the Equal Employment Opportunity Commission (the “EEOC”) or any other government agency concerning claims of discrimination, although Employee waives her right to recover monetary damages in any claim or suit brought by or through the EEOC or any other state or local agency on Employee’s behalf under any federal or state discrimination law, except where prohibited by law.

Employee understands that if this Agreement were not signed, Employee would have the right to voluntarily assist other individuals or entities in bringing claims against the Releasees. Employee hereby waives that right and agrees that he/she will not, for a period of two (2) years following the Date of Termination, provide any such assistance other than assistance in an official investigation or proceeding conducted by a governmental agency. Corporation and Employee further agree that Employee may provide information pursuant to any valid subpoena.

The Parties acknowledge and agree that it is their intention that the releases set forth in Section 5 be effective as full and final releases of each and every thing released herein.

     5. Non-Disclosure and Non-Competition Agreement. The Corporation and Employee acknowledge that they are parties to a Non-Disclosure and Non-Competition Agreement (the “NDNCA”). Following the Date of Termination, Employee shall continue to remain bound by the covenants and agreements of the NDNCA which are stated therein to survive or continue beyond the termination of Employee’s employment, and Employee will further abide by the noncompetition covenants set forth in Section 5 of the Severance Agreement.

     6. Non-Admission of Liability. It is acknowledged and agreed that nothing contained herein, including but not limited to the consideration paid hereunder, constitutes or will be construed as an admission of liability or of any wrongdoing or violation of law on the part of either Party hereto.

     7. Non-Disparagement.

(a) Employee agrees that she will not, at any time, make any disparaging statements about the Corporation or any Releasee to any current, former or prospective employer, any applicant referral source, any current, former or prospective employee of the Corporation,

	any current, former or prospective customer or supplier of the Corporation, the media, or to any other person or entity.
(b)	The Corporation will instruct its employees not to make any disparaging statements about Employee to any former or prospective employer of Employee or to any other person or entity.
(c)	As used in this Section 7, the term “disparaging statement” means any communication, oral or written, which would cause or tend to cause the recipient of the communication to question the integrity, competence, or good character of the person or entity to whom the communication relates.

     8. Remedies for Breach. Each Party will be entitled to pursue any remedy available at law or in equity for any breach of this Agreement by the other Party. Each Party acknowledges that remedies at law may be inadequate to protect against its breach of this Agreement and hereby in advance agrees, without prejudice to any rights to judicial relief the other Party may otherwise have, to the granting of equitable relief, including injunctive relief, in the other Party’s favor without proof of actual damages.

     9. Representations/Warranties by Employee. Employee represents and warrants to the Corporation that the following statements are true and correct:

(a)	Employee is signing this Agreement voluntarily and is legally competent to do so.
(b)	Employee has been advised to consult an attorney of her own choice before signing this Agreement and has had the opportunity to do so.
(c)	Employee has read and fully understands each of the provisions of this Agreement, has been given sufficient and reasonable time to consider each of them and fully understands her rights under all applicable laws and the ramifications and consequences of the execution of this Agreement.
(d)	No promises, agreements or representations have been made to Employee to induce her to sign this Agreement, except those that are written in this Agreement.
(e)	Employee has not, in whole or in part, sold, assigned, transferred, conveyed or otherwise disposed of any of the Claims covered by the release set forth in Section 4 and the consideration received by Employee for such release constitutes lawful and adequate consideration.

     10. Waiver of Rights. If in one or more instances either Party fails to insist that the other Party perform any of the terms of this Agreement, such failure shall not be construed as a waiver by such Party of any past, present, or future right granted under this Agreement; and the obligations of both Parties under this Agreement shall continue in full force and effect.

     11. Severability/Applicability. If any provision, section or subsection of this Agreement is adjudged by any court to be void or unenforceable in whole or in part, this adjudication shall not affect the validity of the remainder of this Agreement, including any other provision, section or subsection. Each provision, section and subsection of this Agreement is separable from every other provision, section and subsection, and constitutes a separate and distinct covenant.

     12. Successors & Assigns. This Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors, assigns, executors, administrators and personal representatives.

     13. Notices. All notices, requests, demands, claims and other communications under this Agreement shall be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly given the next business day (or when received if sooner) if it is sent by (a) confirmed facsimile; (b) overnight delivery; or (c) registered or certified mail, return receipt requested, postage prepaid, and addressed, to the respective address of such Party specified below its or her signature below.

     14. Entire Agreement. Employee and the Corporation agree that this Agreement is not intended to supersede or replace the Severance Agreement, and that the Severance Agreement shall remain in full force and effect unmodified by this Agreement. This Agreement, together with the Severance Agreement, constitutes the entire understanding of the Parties with respect to the subject matter hereof. Except for the Severance Agreement and the NDNCA, this Agreement replaces all prior and contemporaneous written or oral agreements relating to Employee’s employment, compensation and employment termination.

     15. Interpretation; Enforcement. This Agreement will be interpreted and enforced according to the laws of the Commonwealth of Pennsylvania, without regard to its conflicts of laws provision. The Parties hereto further agree that any action to enforce any right or obligation under this Agreement shall be subject to the exclusive jurisdiction of the courts of the Commonwealth of Pennsylvania. Each Party hereby consents to personal jurisdiction in any action brought in any court, federal or state, within the Commonwealth of Pennsylvania having subject matter jurisdiction in this matter. Each Party hereby irrevocably waives any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens, which it may now or hereafter have to the bringing of any such action or proceeding in such jurisdiction.

     16. Amendment. No provision of this Agreement may be modified, amended or revoked, except in a writing signed by Employee and an authorized officer of the Corporation.

     17. Acknowledgment of Waiver of Claims Under ADEA.

(a)	Employee acknowledges that he or she is waiving and releasing any rights under the Age Discrimination in Employment Act of 1967 (“ADEA”) and that this waiver and release is knowing and voluntary.
(b)	Employee and the Corporation agree that this waiver and release does not apply to any rights or claims that might arise under the ADEA after the date of this Agreement.
(c)	Employee acknowledges that the consideration given for this Agreement is in addition to anything of value to which Employee was already entitled.
(d)	Employee has forty-five (45) days from the day Employee receives this Agreement to review and consider this Agreement before signing it. If Employee chooses, Employee may sign this Agreement before the expiration of the forty-five (45) day period. In the event that Employee signs and returns this Agreement in less than forty-five (45) days, Employee agrees and acknowledges that such decision was entirely voluntary and that

	Employee had the opportunity to consider this Agreement for the entire forty-five (45) day period. Employee agrees that any modifications, material or otherwise, made to this Agreement do not restart or affect in any manner the original forty-five (45) day consideration period.
(e)	Employee has seven (7) days after signing this Agreement to revoke the Agreement by delivering a written notice of revocation to the Corporation. This Agreement will not be effective until the revocation period has expired. To be effective, a revocation must be in writing and must be delivered to the Corporation by the close of business on the seventh (7th) day following the date that Employee signs this Agreement.
(f)	Employee is advised to consult an independent attorney of her choosing before signing this Agreement. By signing this Agreement, Employee acknowledges that he or she has carefully read and fully understands all of its provisions, and that he or she is signing it voluntarily. Employee also acknowledges that he or she is not relying on any representations by any representative of the Corporation concerning the meaning of any aspect of this Agreement.

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

WITNESS:
/s/Joseph O’Brien	/s/Sara M. Antol [Employee Name]
	11/5/09
	[Date]
	Address:
	[Employee address]
	TOLLGRADE COMMUNICATIONS, INC.

By: Name:	/s/Joseph A. Ferrara Joseph A. Ferrara
Title:	President & CEO
Date:	11/5/2009
Address:
493 Nixon Rd.
Cheswick, PA 15024
Attention: General Counsel

EX-10.38

Exhibit 10.38

November 16, 2009

Jennifer M. Reinke
[Address]

Dear Jennifer:

     Tollgrade Communications, Inc. (“Tollgrade”) considers the stability of its executive management team to be essential to Tollgrade’s best interests. This severance agreement (the “Agreement”) describes the severance compensation which Tollgrade agrees will be provided to you in the event your employment with Tollgrade is terminated under the circumstances described below. This Agreement will remain in effect for a period of two (2) years from the date signed by you below.

     1. Consideration. In consideration of your promotion to General Counsel for Tollgrade, your increased annual salary, and the mutual agreements of the parties set forth herein, the parties, intending to be legally bound, understand and agree to enter this Agreement.

     2. At-will Employment. Notwithstanding any provisions of this Agreement, any offer letter, confidentiality agreement, or other document that you sign in connection with your employment, your employment at Tollgrade is and continues to be “at-will” employment and may be terminated at any time with or without cause or notice. This Agreement does not constitute or create a contract or commitment for your employment with Tollgrade for any fixed term.

     3. Scope of Agreement. This Agreement is not intended to supersede the terms of any offer letter, confidentiality agreement, non-competition agreement, or other document which you sign or have signed in connection with your employment with Tollgrade, except insofar as such document deals with severance pay (e.g., in the event the terms of any offer letter conflict with the terms of this Agreement the terms of this Agreement shall control).

     4. Separation Benefits. In the event that your employment with Tollgrade is terminated Without Cause (as defined herein), you shall be, contingent upon the execution of a general release of any and all claims against Tollgrade, entitled to the following:

     (a) Severance Pay, in the amount of six (6) months of your Base Salary (as defined herein), net of any applicable taxes and other lawful deductions or withholdings. Said Severance Pay is to be paid in one (1) lump sum on Tollgrade’s next regularly scheduled pay date following your last date of employment that follows the expiration of the time periods provided for your review and revocation of the release of claims provided to you by Tollgrade, which shall not exceed, in the aggregate, twenty-eight (28) days or such longer period as is required by statute.

     (b) Outplacement Services as appropriate for your position. The specific outplacement services to be provided to you shall be determined by Tollgrade in its reasonable discretion, consistent with the foregoing sentence.

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     (c) The provision of certain Employee Benefits. From the date of termination and continuing for six (6) months following your date of termination, you shall be entitled to continue to receive the same or reasonably equivalent medical, dental and vision insurance benefits provided by Tollgrade to you as of your date of termination, as though you had remained in the employment of Tollgrade for such period. If for any reason, whether by law or provisions of Tollgrade’s employee benefit plans or otherwise, any benefits to which you would be entitled under the foregoing sentence cannot be provided to you, then Tollgrade hereby agrees to pay the actual cost of COBRA coverage for said period, not to exceed six (6) months following the date of termination of your employment. After that time, you will be responsible to pay the total cost of COBRA if you choose to continue COBRA coverage. Tollgrade shall not be required to pre-fund its obligation to pay for COBRA coverage for said period. Notwithstanding the foregoing, to the extent Tollgrade reasonably requests you to elect COBRA continuation coverage during such period to enable Tollgrade to continue providing coverage as required hereunder, you shall timely do so. If you fail to timely elect COBRA coverage, Tollgrade is released of its obligations under this Section 4(c) of this Agreement. If you are not eligible for COBRA coverage for any reason, Tollgrade hereby agrees to pay the actual cost of conversion coverage for said period, not to exceed six (6) months following the date of termination of your employment. After that time, you will be responsible to pay the total cost of coverage. If you fail to timely elect conversion coverage, Tollgrade is released of its obligations under this Section 4(c) of this Agreement.

     5. Definition of “Base Salary.” For purposes of this Agreement, the term “Base Salary” means the highest annual base salary you received during the 24 months preceding your termination date, excluding bonuses, commissions and other similar payments.

6. Definition of “Cause.” For purposes of this Agreement, termination of your employment for “Cause” shall be limited solely and exclusively to any of the following grounds:

(a) Fraud, misappropriation, theft, embezzlement or other willful and deliberate acts of similar dishonesty;

(b) Conviction of, or a plea of guilty or nolo contender to, a felony or a crime involving moral turpitude;

(c) Illegal use of drugs in the workplace;

(d) Intentional and willful misconduct that subjects the Corporation to criminal liability or material civil liability;

(e) Willful and deliberate breach of the Executive’s duty of loyalty, including, but not limited to, the diversion or usurpation of corporate opportunities properly belonging to the Corporation;

(f) Willful and deliberate disregard of the Corporation’s policies and procedures in any material respect;

(g) Material breach or violation of the Corporation’s Code of Ethics for Senior Executive and Financial Officers or a material breach or violation of the Corporation’s Code of Business Conduct and Ethics, if applicable:

(h) Willful and deliberate breach or violation of any of the material terms of this Agreement, including but not limited to, the covenants and restrictions set forth in this Agreement;

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(i) Willful and deliberate insubordination, willful and deliberate refusal to perform, or willful gross neglect in the performance of, his/her duties or responsibilities, or willful and deliberate refusal to follow the proper instruction of the Corporation, if any; or

(j) Failure of the Executive to fully cooperate as directed by the Corporation in any action, litigation, investigation or other proceeding brought before or by any Governmental Authority.

     7. Definition of “Without Cause.” For purposes of this Agreement, “Without Cause” shall mean any reason for terminating your employment with Tollgrade other than for “Cause,” as defined herein.

     8. No Obligations Hereunder If Your Employment Is Terminated For Cause. If your employment is terminated for Cause, Tollgrade shall have no obligations to you under this Agreement.

     9. Notices. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered personally, sent by courier or mailed by United States certified or registered mail, return receipt requested, postage prepaid. All notices to Tollgrade shall be directed to the attention of the Chief Executive Officer of Tollgrade with a copy to the Vice President, Human Resources of Tollgrade. All notices to you may be delivered to your last-known address as maintained by Tollgrade and you are responsible for maintaining the accuracy of that address.

     10. Successors; Binding Agreement.

     (a) This Agreement shall inure to the benefit of, and be binding upon, any corporate or other successor or assignee of Tollgrade which shall acquire, directly or indirectly, by merger, consolidation or purchase, or otherwise, all or substantially all of the business or assets of Tollgrade. Tollgrade shall require any such successor to expressly to assume and agree to perform this Agreement in the same manner and to the same extent as Tollgrade would be required to perform if no such succession had taken place.

     (b) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die after termination of employment where any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your estate.

     11. No Waiver or Modification. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in a writing signed by you and an authorized officer of Tollgrade that expressly references this letter agreement. No waiver by either party hereto at any time of any breach by the other party hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of such provision or of similar or dissimilar provisions or conditions at the same, or at any prior or subsequent time.

     12. Payment of Final Pay. Nothing herein shall modify Tollgrade’s rights regarding the final payment of monies to you upon your termination of employment such as accrued by unpaid salary, any vacation pay and other cash entitlements which may have been accrued by you as of your termination date.

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     13. Entire Agreement. This Agreement represents the entire agreement and understanding between the parties as to the subject matter hereof and supersedes all prior contemporaneous agreements, whether written or oral as to its subject-matter. You agree that you have not relied upon any oral representations that are not contained in this Agreement.

     14. Severability; Validity. If any provision of this Agreement shall be held invalid, illegal or unenforceable in any jurisdiction, for any reason, then, to the fullest extent permitted by law: (a) all other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in order to carry out the intent of the parties hereto as nearly as may be possible, (b) such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of any other provision hereof, and (c) any court or arbitrator having jurisdiction thereover shall have the power to reform such provision to the extent necessary for such provision to be enforceable under applicable law.

     15. Governing Law and Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without regard to conflicts of laws principles. You hereby irrevocably submit to the personal jurisdiction of the United States District Court for the Western District of Pennsylvania or the Court of Common Pleas of Allegheny County, Pennsylvania in any action or proceeding arising out of or relating to this Agreement, and that all claims in respect of any such action or proceeding may be heard and determined in either such court. In no event shall California law apply to this Agreement.

     16. Employment Taxes. All payments made pursuant to this Agreement shall be subject to withholding of applicable income and employment taxes. If any payment due you pursuant to this Agreement results in a tax being imposed pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended (“Section 4999”), then Tollgrade shall reduce the total payments payable to you to the maximum amount payable without incurring the Section 4999 tax.

     17. Covenant Not to Compete. You covenant and agree that if you receive payment under this Agreement, then during the Restricted Period (as defined below), you shall not in the United States of America, directly or indirectly, whether as principal or as agent, officer, director, employee, consultant, shareholder or otherwise alone or in association with any other person, corporation or other entity, engage or participate in, be connected with, lend credit or money to, furnish consultation or advice or permit your name to used in connection with, any Competing Business (as defined below). “Restricted Period” shall mean the period of time during which you receive a payment of severance hereunder following the termination of your employment with Tollgrade, plus any amount of time during such period during which you are in violation of this provision. “Competing Business” shall mean any person, corporation or other entity engaged in the business of selling or attempting to sell any product or service which competes with (i) products or services sold by Tollgrade within the two years prior to termination of your employment or (ii) new products of Tollgrade with respect to which, at the date of your termination, we had allocated engineering resources to develop such new products.

     18. Section 409A Compliance. It is intended that any payments due to you hereunder will not be subject to Section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”). However, to the extent it is determined that payment under this Agreement would violate the six-month delay requirement of Section 409A, any payment that otherwise would have been made during the six-month period will be paid in a single sum on the first day of the seventh month following the date of such separation from service.

     19. Precedence. This Agreement is not intended to establish and does not establish a practice or policy for the treatment of any other employees with respect to severance or any other matter.

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     20. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument.

     If you would like to enter into this Agreement, kindly sign and return to Tollgrade the enclosed copy of this letter, which will then constitute our agreement on this subject.

Very truly yours,
TOLLGRADE COMMUNICATIONS, INC.
By:	/s/Joseph Ferrara
Name:	Joseph Ferrara
Title:	CEO & President
Date:	11/17/09
AGREED:
/s/Jennifer M. Reinke
Jennifer M. Reinke
Date:	11/17/09

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Registration Nos. 333-04290, 333-136693, 333-52907, 333-83007, 333-55470, 333-65502, 333-95965, 333-96965 and 333-96969) of Tollgrade Communications, Inc. of our report dated March 10, 2010 relating to the financial statements, financial statement schedule, and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
March 10, 2010

EX-31.1

CERTIFICATION EXHIBIT 31.1

I, Joseph A. Ferrara, certify that:

1.	I have reviewed this Report on Form 10-K of Tollgrade Communications, Inc.
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 10, 2010

/s/ JOSEPH A. FERRARA Name:    Joseph A. Ferrara

Title:    Chief Executive Officer and President

EX-31.2

CERTIFICATION EXHIBIT 31.2

I, Michael D. Bornak certify that:

1.	I have reviewed this Report on Form 10-K of Tollgrade Communications, Inc.
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure, controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 10, 2010

/s/ MICHAEL D. BORNAK Name:    Michael D. Bornak

Title:    Chief Financial Officer and Treasurer

EX-32

Exhibit 32

RULE 13a-14(b) CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

Pursuant to 18 U.S.C. Section 1350, the undersigned officers of Tollgrade Communications, Inc. (the “Corporation”) hereby certify that the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2009 (the “Report”) fully complies with the requirements of Sections 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

Dated: March 10, 2010

/s/ JOSEPH A. FERRARA Name:    Joseph A. Ferrara

Title:   Chief Executive Officer and President

/s/ MICHAEL D. BORNAK. Name:    Michael D. Bornak

Title:   Chief Financial Officer and Treasurer