8-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): January 26, 2006

TOLLGRADE COMMUNICATIONS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Pennsylvania
(State or Other Jurisdiction
of Incorporation) 000-27312
(Commission
File Number) 25-1537134
(IRS Employer
Identification Number)

493 Nixon Road
Cheswick, Pennsylvania 15024
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (412) 820-1400
N/A
(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS

	ITEM 2.02 RESULTS OF OPERATIONS AND FINANCIAL CONDITION
	ITEM 4.02(A) NON-RELIANCE ON PREVIOUSLY ISSUED FINANCIAL STATEMENTS OR A RELATED AUDIT REPORT OR COMPLETED INTERIM REVIEW.
	ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
SIGNATURE
Exhibit Index
EXHIBIT 99.1

ITEM 2.02 RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     On February 1, 2006, Tollgrade Communications, Inc. (the “Company”) issued a press release announcing the Company’s preliminary unaudited results of operations for the fourth quarter ended December 31, 2005. Included in that release was an announcement that on January 26, 2006, the Company’s management and the Audit Committee of the Company’s Board of Directors concluded that previously issued financial statements for the years ended December 31, 2001, 2002, 2003 and 2004, including the unaudited quarterly financial information for each of the three years ended December 31, 2004 and for each of the first three quarters for the year ended December 31, 2005, should be restated. A copy of this press release is attached as Exhibit 99.1.

     The information furnished pursuant to this Item of the Current Report on Form 8-K (including the exhibits hereto) shall not be deemed to be “filed” under Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section or Section 11 or 12(a)(2) of the Securities Act of 1933, as amended, and is not incorporated by reference into any of the Company’s filings under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, whether made before or after the date of this report and irrespective of any general incorporation language in such filing, unless the Company expressly states in such filing that such information is to be considered or incorporated by reference therein.

ITEM 4.02(A) NON-RELIANCE ON PREVIOUSLY ISSUED FINANCIAL STATEMENTS OR A RELATED AUDIT REPORT OR COMPLETED INTERIM REVIEW.

     On January 26, 2006, management and the Audit Committee of the Company concluded that previously issued financial statements for the years ended December 31, 2001, 2002, 2003 and 2004, including previously issued unaudited quarterly financial information for each of the three years ended December 31, 2004 and for each of the first three quarters for the year ended December 31, 2005 should not be relied upon due to errors in these financial statements. The restatement adjustments relate to certain intangible assets acquired by the Company in its LoopCare™ and Cheetah™ acquisitions that should have been assigned finite useful lives, rather than indefinite lives, at their respective acquisition dates in September 2001 and February 2003. The assets affected include the LoopCare Base Software and Cheetah Customer Base, which will be amortized over 10 and 15 years, respectively, from the date of acquisition. The Company has had discussions with the Staff of the Securities and Exchange Commission regarding these matters, and subsequent to these discussions the Company has determined to restate its financial statements for the relevant periods described below. The amortization of these intangible assets results in non-cash adjustments which do not have any impact on the Company’s operating cash flows.

     The Company intends to restate its previously issued financial statements for the years ended December 31, 2003 and 2004 within the Company’s Form 10-K for the

year ended December 31, 2005 and to amend its quarterly filings for 2005. The Company expects to file the 2005 Form 10-Q/As and 2005 Form 10-K on or about February 24, 2006.

     The estimated effects of all restatement adjustments, which are subject to audit, are included in the following table (in thousands, except per share data):

										December 31,
	Q3 2005			Q2 2005			Q1 2005			2004			2003			2002			2001
Net income (loss), as originally reported	$	1,584		$	1,168		$	(731	)	$	1,345		$	3,148		$	3,357		$	13,675
Amortization of intangible assets		(174	)		(174	)		(174	)		(608	)		(538	)		(451	)		(113	)
Income tax effects		61			61			61			177			210			171			44
Net income (loss), as restated	$	1,471		$	1,055		$	(844	)	$	914		$	2,820		$	3,077		$	13,606
Diluted earnings (loss) per share, as originally reported	$	0.12		$	0.09		$	(0.06	)	$	0.10		$	0.24		$	0.25		$	1.02
Impact of adjustment, net of taxes		(0.01	)		(0.01	)		—			(0.03	)		(0.03	)		(0.02	)		(0.01	)
Diluted earnings (loss) per share, restated	$	0.11		$	0.08		$	(0.06	)	$	0.07		$	0.21		$	0.23		$	1.01

     The estimated effects in the above table include an immaterial adjustment to amortize acquired Cheetah Maintenance Agreements, over 10 years, from the date of acquisition. As the Company classifies amortization expense within cost of sales, the restatement will also affect gross profit by the estimated amounts above. The cumulative effect of all restatement adjustments on retained earnings at January 1, 2002 is immaterial.

Internal Control over Financial Reporting

     In their Report on Internal Control over Financial Reporting included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, management had previously concluded that the Company’s internal control over financial reporting was effective. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has now concluded that the Company’s internal control over financial reporting as of December 31, 2004 was ineffective as a result of the following material weakness:

The Company did not have effective controls designed and in place to properly determine and review the estimates and judgments made relating to useful or indefinite lives assigned to intangible assets acquired in purchase business combinations. The accounts affected were certain intangible assets, goodwill and amortization expense. This control deficiency resulted in the need to restate the Company’s financial statements for the years ended December 31, 2003 and 2004, for each of the quarters of the year ended December 31, 2004, and for each of the first three quarters for the year ended December 31, 2005. Accordingly, management has determined that this control deficiency constituted a material weakness.

     As a result, Management’s Report on Internal Control over Financial Reporting as originally filed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, should no longer be relied upon.

     Management has not yet finalized its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, including the impact, if any, of the material weakness described above. The Company plans to provide a description of the related remediation and its impact on its internal control over financial reporting as of December 31, 2005 in the 2005 Form 10-K filing.

     Management and the Audit Committee have discussed the accounting matters disclosed in this current report on Form 8-K with PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm.

ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS

Exhibit
Number	Description
99.1	Press Release*

     *This exhibit is furnished with this Current Report on Form 8-K and shall not be deemed “filed” under Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section or Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended, and is not incorporated by reference into any of the Company’s filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, whether made before or after the date of this report and irrespective of any general incorporation language in such filing, unless the Company expressly states in such filing that such information is to be considered “filed” or incorporated by reference therein.

SIGNATURE

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

	TOLLGRADE COMMUNICATIONS, INC.
Dated: February 1, 2006	By:	/s/ Sara M. Antol
		Sara M. Antol
		General Counsel and Secretary

Exhibit Index

Exhibit No.	Description of Exhibit
99.1	Press Release

EX-99.1

Exhibit 99.1

NEWS RELEASE

Contact: Bob Butter, Corporate Communications / Office: 412-820-1347 / Cell: 412-736-6186 / bbutter@tollgrade.com

• TOLLGRADE ANNOUNCES FOURTH QUARTER 2005 PRELIMINARY UNAUDITED RESULTS

• REVENUE AND E.P.S. EXCEED GUIDANCE

• TO RESTATE FOR CERTAIN INTANGIBLE ASSETS TO BE ASSIGNED FINITE LIVES

PITTSBURGH, PA – February 1, 2006 –

Preliminary Unaudited Results
Tollgrade Communications, Inc. (NASDAQ: TLGD) today announced that its preliminary unaudited fourth quarter 2005 revenue is $18.2 million and the preliminary unaudited earnings per share are expected to be approximately $0.14, including the effect of all non-cash amortization related to the matters discussed below. The previous guidance issued on October 19, 2005 was $13 million to $17 million in revenue with earnings per share of $(0.04) to $0.09. The Company’s cash and short-term investments increased $10.1 million during the quarter to $67.4 million at December 31, 2005. On February 8, 2006, a full earnings report for the fourth quarter and full year 2005 will be issued.

“Our fourth quarter was favorably impacted by higher than expected sales of our DigiTest® products and revenue associated with the completion of several projects at year-end,” said Mark B. Peterson, Tollgrade’s President and Chief Executive Officer. “I’m pleased with our operating performance this year and that we have ample resources to continue executing our strategy and re-orient our company to align with the IP-focused direction of our cable and telephone company customers.”

Our preliminary unaudited fourth quarter 2005 results reflect amortization, initiated on October 1, 2005, of the intangible asset related to our LoopCare^TM Software post-warranty maintenance agreements. This amortization is included in the unaudited preliminary results reflected above. The value of the LoopCare Software post-warranty maintenance agreements at October 1, 2005, is $32.0 million and it will be amortized over a 50 year life.

Restatement

TOLLGRADE COMMUNICATIONS, INC.
493 Nixon Road / Cheswick, PA 15024 / 412-820-1400 / 800-878-3399 / Fax: 412-820-1530
685 Route 202/206 South / Bridgewater, NJ 08807 / 908-243-3900 / Fax: 908-243-3300
7020 Professional Parkway East / Sarasota, FL 34240 / 941-373-6800 / 877-280-0030 / Fax: 941-373-6887
Telco Support: 800-777-5405 / Cable Support (TAC): 941-373-6850 or 888-486-3510
www.tollgrade.com

The Company has had discussions with the Staff of the Securities and Exchange Commission, and subsequent to those discussions the Company determined that it should apply finite lives to certain acquired intangible assets whose lives were previously considered indefinite upon acquisition. The intangible assets that will be amortized from the date of acquisition are the LoopCare Base Software and the Cheetah^TM Customer Base and were assigned a life of 10 and 15 years, respectively. The Company has determined that it will restate its financial statements for the effect of these adjustments and thus the previously issued financial statements for the years ended December 31, 2001, 2002, 2003, and 2004, including previously issued unaudited quarterly financial information for each of the three years ended December 31, 2004, and for each of the first three quarters for the year ended December 31, 2005, should not be relied upon.

The Company will reflect the impact of these adjustments in its financial statements to include the amortization of the LoopCare Base Software and Cheetah Customer Base from the dates of acquisition of the LoopCare and Cheetah businesses in 2001 and 2003, respectively. The adjustments indicated are non-cash in nature and have no effect on the Company’s operating cash flow or business operations. The estimated effects of these adjustments on past periods, which are subject to audit, are included in the following table (in thousands, except per share data):

										December 31,
	Q3 2005			Q2 2005			Q1 2005			2004			2003			2002			2001
Net income (loss), as originally reported	$	1,584		$	1,168		$	(731	)	$	1,345		$	3,148		$	3,357		$	13,675
Amortization of intangible assets		(174	)		(174	)		(174	)		(608	)		(538	)		(451	)		(113	)
Income tax effects		61			61			61			177			210			171			44
Net income (loss), as restated	$	1,471		$	1,055		$	(844	)	$	914		$	2,820		$	3,077		$	13,606
Diluted earnings (loss) per share, as originally reported	$	0.12		$	0.09		$	(0.06	)	$	0.10		$	0.24		$	0.25		$	1.02
Impact of adjustment, net of taxes		(0.01	)		(0.01	)		—			(0.03	)		(0.03	)		(0.02	)		(0.01	)
Diluted earnings (loss) per share, restated	$	0.11		$	0.08		$	(0.06	)	$	0.07		$	0.21		$	0.23		$	1.01

The Company has filed on Current Report Form 8-K on February 1, 2006 a complete description of the aforementioned restatement matter. Please refer to that report for further details. The Company intends to reflect the effect of the above adjustments in its 2005 Form 10-K and related Form 10-Q/As to be filed on or about February 24, 2006.

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Forward-Looking Statements

The foregoing release contains “forward looking statements” regarding future events or results 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, including statements concerning the Company’s current expectations regarding revenue and earnings results for the fourth quarter of 2005, the Company’s available capital and its ability to execute its strategy            and            estimated adjustments to and the impact on historical financial statements of the Company. The Company cautions readers that such “forward looking statements” are, in fact, predictions that are subject to risks and uncertainties and that actual events or results may differ materially from those anticipated events or results expressed or implied by such forward looking statements. The Company disclaims any current intention to update its “forward looking statements,” and the estimates and assumptions within them, at any time or for any reason.

In particular, the following factors, among others could cause actual results to differ materially from those described in the “forward looking statements:” (a) the risk of possible changes in the scope and nature of, and the time required to complete, the re-audit of the Company’s financial statements, (b) uncertainties regarding the extent to which the Company’s prior period financial statements will be restated upon completion of the re-audit, (c) uncertainties and risks as to the SEC’s review of these matters, (d) uncertainties as to the timing of the Company’s filing of its Form 10-K for the fiscal year ended December 31, 2005 and amendments to its Form 10-Qs for the first three quarters of the fiscal year ended December 31, 2005, (e) the unanticipated further decline of the capital budgets allocated to legacy network elements for certain of our major customers; (f) possible charges to income as a result of goodwill impairment, asset impairment or other matters in conjunction with our strategic focus as we shift spending away from legacy products toward growth initiatives; (g) the ability to make changes in business strategy, development plans and product offerings to respond to the needs of the significantly changing telecommunications markets; (h) possible delays in deployment of products under the Saudi Arabian and South African contracts due to project delays, political instability, inability to obtain proper acceptances or other unforeseen delays; (i) possible delays in, or the inability to, complete long term maintenance contracts with certain of our RBOC customers or to complete negotiation and execution of purchase agreements with new customers; (j) lower than expected demand for our cable testing products; (k) pricing pressures affecting our cable-related products as a result of increased competition, consolidation within the cable industry and the adoption of standards-based protocols; (l) our ability to close certain international opportunities, due to numerous risks and uncertainties inherent in international markets; (m) our dependence upon a limited number of third party subcontractors to manufacture certain aspects of the products we sell; (n) the ability to manage the risks associated with and to grow our business; and (o) the uncertain economic and political climate in the United States and throughout the rest of the world and the potential that such climate may deteriorate. Other factors that could cause actual events or results to differ materially from those contained in the “forward looking statements” are included in the Company’s filings with the U.S. Securities and Exchange Commission (the “SEC”) including, but not limited to, the Company’s Form 10-K for the year ended December 31, 2004 and any subsequently filed reports. All documents are also available through the SEC’s Electronic Data Gathering Analysis and Retrieval system at www.sec.gov or from the Company’s website at www.tollgrade.com.

äCheetah is a trademark of Tollgrade Communications, Inc.
^Ò DigiTest is a registered trademark of Tollgrade Communications, Inc.
™LoopCare is a trademark of Tollgrade Communications, Inc.

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