Tollgrade Communications 10Q 2008 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended March 29, 2008


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

For the transition period from to

Commission File Number: 000-27312

TOLLGRADE COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)


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

493 Nixon Rd.
Cheswick, PA 15024
(Address of principal executive offices, including zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by 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 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 filero	Accelerated filerþ	Non-accelerated filero	Smaller reporting companyo
		(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

As of March 29, 2008, there were 13,158,108 shares of the Registrant’s Common Stock, $0.20 par value per share, outstanding, and no shares of the Registrant’s Preferred Stock, $1.00 par value per share, outstanding.

TOLLGRADE COMMUNICATIONS, INC.

Quarterly Report on Form 10-Q
For the Quarter Ended March 29, 2008
Table of Contents


	PAGE
	NO.
PART I. FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 29, 2008 and December 31, 2007		3
Condensed Consolidated Statements of Operations for the three month periods ended March 29, 2008 and March 31, 2007 (Unaudited)		4
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three month period ended March 29, 2008 (Unaudited)		5
Condensed Consolidated Statements of Cash Flows for the three month periods ended March 29, 2008 and March 31, 2007 (Unaudited)		6
Notes to Condensed Consolidated Financial Statements		7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3 Quantitative and Qualitative Disclosures about Market Risk		39
Item 4 Controls and Procedures		40
PART II. OTHER INFORMATION
Item 1A Risk Factors		40
Item 6 Exhibits		53
SIGNATURES		55
EXHIBIT INDEX		56
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 31.1
Exhibit 31.2
Exhibit 32
EX-31.1
EX-31.2
EX-32

PART I. FINANCIAL INFORMATION

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except par value) (Unaudited)


	March 29, 2008			December 31, 2007*

ASSETS
Current assets:
Cash and cash equivalents	$	53,525		$	58,222
Short-term investments		2,354			632
Accounts receivable:
Trade, net of allowance for doubtful accounts of $479 in 2008 and $478 in 2007		15,580			14,625
Other		1,083			1,601
Inventories		13,363			13,687
Prepaid expenses and deposits		1,202			1,120
Deferred and refundable income taxes		337			503
Assets held for sale		52			272

Total current assets		87,496			90,662
Property and equipment, net		4,103			4,279
Intangibles		40,148			44,215
Other assets		279			333

Total assets	$	132,026		$	139,489

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	2,985		$	4,214
Accrued warranty		1,641			1,937
Accrued expenses		2,723			3,148
Accrued salaries and wages		273			891
Accrued royalties payable		111			707
Income taxes payable		859			572
Deferred income		3,357			2,113

Total current liabilities		11,949			13,582

Pension obligation		1,021			908
Deferred tax liabilities		2,060			1,999

Total liabilities		15,030			16,489

Contingencies and commitments
Shareholders’ equity:
Common stock, $0.20 par value; authorized shares, 50,000; issued shares, 13,733 in 2008 and 13,731 in 2007		2,744			2,744
Additional paid-in capital		73,366			73,389
Treasury stock, at cost, 575 shares in 2008 and 2007		(5,900	)		(5,900	)
Retained earnings		46,359			52,863
Accumulated other comprehensive income (loss)		427			(96	)

Total shareholders’ equity		116,996			123,000

Total liabilities and shareholders’ equity	$	132,026		$	139,489


*		Amounts derived from audited financial statements presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007

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

TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES

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


	Three Months Ended
	March 29, 2008			March 31, 2007

Revenues:
Products	$	7,139		$	9,997
Services		6,045			3,045

Total revenues:		13,184			13,042

Cost of sales:
Products		3,616			4,527
Services		1,986			929
Amortization		1,014			568
Intangible impairment		3,291			—
Inventory impairment/restructuring		759			—

Total cost of sales		10,666			6,024

Gross profit		2,518			7,018

Operating expenses:
Selling and marketing		2,435			2,185
General and administrative		2,579			2,108
Research and development		3,616			2,953
Restructuring expense		435			382

Total operating expense		9,065			7,628

Loss from operations		(6,547	)		(610	)
Interest income		492			776

(Loss) income before taxes		(6,055	)		166
Provision for income taxes		449			55

Net (loss) income	$	(6,504	)	$	111

(Loss) income per share information:
Weighted average shares of common stock and equivalents:
Basic		13,158			13,254

Diluted		13,158			13,442

Net (loss) income per common share:
Basic	$	(0.49	)	$	0.01

Diluted	$	(0.49	)	$	0.01

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

Tollgrade Communications, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ Equity
(In thousands) (Unaudited)


														Accumulated						Other
					Additional									Other						Comprehensive
	Common Stock				Paid-In			Treasury			Retained			Comprehensive						Income
	Shares		Amount		Earnings			Stock			Income			Income			Total			(loss)
Balance at December 31, 2007		13,731	$	2,744	$	73,389		$	(5,900	)	$	52,863		$	(96	)	$	123,000


FAS 123R options and restricted stock, net		2		—		(23	)		—			—			—			(23	)

Foreign currency translation		—		—		—			—			—			523			523		$	523

Net loss		—		—		—			—			(6,504	)		—			(6,504	)		(6,504	)


Other comprehensive loss																				$	(5,981	)


Balance at March 29, 2008		13,733	$	2,744	$	73,366		$	(5,900	)	$	46,359		$	427		$	116,996

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

TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES

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


	Three Months Ended
	March 29, 2008			March 31, 2007

Cash flows from operating activities:
Net (loss) income	$	(6,504	)	$	111
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Impairment loss		3,291			—
Depreciation and amortization		1,480			982
Compensation expense related to stock plans		(23	)		354
Valuation allowance		187			109
Deferred income taxes		28			(52	)
Restructuring and inventory write down		761			174
Excess tax benefits from stock-based compensation		—			(1	)
Provision for losses on inventory		61			214
Provision (benefit) for allowance for doubtful accounts		37			(23	)
Changes in assets and liabilities:
Accounts receivable-trade		(602	)		3,513
Accounts receivable-other		401			1,072
Inventories		(475	)		(3,186	)
Prepaid expenses and other assets		(25	)		(348	)
Accounts payable		(1,542	)		836
Accrued warranty		(295	)		9
Accrued expenses and deferred income		426			(1,396	)
Accrued royalties payable		(596	)		102
Income taxes payable		228			—

Net cash (used in) provided by operating activities		(3,162	)		2,470

Cash flows from investing activities:
Purchase of short-term investments		(2,186	)		(1,956	)
Redemption/maturity of short-term investments		464			3,184
Capital expenditures, including capitalized software		(275	)		(281	)
Sale of assets held for sale		198			—

Net cash (used in) provided by investing activities		(1,799	)		947

Cash flows from financing activities:
Proceeds from exercise of stock options		—			5
Excess tax benefit from stock-based compensation		—			1

Net cash provided by financing activities		—			6

Net (decrease) increase in cash and cash equivalents		(4,961	)		3,423

Effect of exchange rate changes on cash and cash equivalents		264			—

Cash and cash equivalents at beginning of period		58,222			57,378
Cash and cash equivalents at end of period	$	53,525		$	60,801

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

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

We report our quarterly results for the first three interim periods based on fiscal quarters ending on Saturdays and for the fourth interim period ending on December 31. For the periods presented herein, our fiscal quarters ended March 29, 2008 (13 weeks) and March 31, 2007 (13 weeks). The accompanying unaudited condensed consolidated financial statements included herein have been prepared by Tollgrade Communications, Inc. (the “Company” or “Tollgrade”) in accordance with accounting principles generally accepted in the United States of America for interim financial information and Article 10 of Regulation S-X. The unaudited condensed consolidated financial statements as of and for the three month period ended March 29, 2008 should be read in conjunction with the Company’s consolidated financial statements (and notes thereto) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of Company management, all adjustments considered necessary for a fair statement of the accompanying unaudited condensed consolidated financial statements have been included, and all adjustments are of a normal and recurring nature. Operating results for the three month period ended March 29, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

RECLASSIFICATIONS

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

NEW ACCOUNTING STANDARDS

On January 1, 2008, Tollgrade adopted SFAS No. 157, “Fair Value Measurements,” (SFAS 157) as it relates to financial assets and financial liabilities. In February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which delayed the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis, until January 1, 2009 for calendar year-end entities. Also in February 2008, the FASB issued FSP No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13,” which states that SFAS No. 13, “Accounting for Leases,” (SFAS 13) and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS 13 are excluded from the provisions of SFAS 157, except for assets and liabilities related to leases assumed in a business combination that are required to be measured at fair value under SFAS No. 141, “Business Combinations,” (SFAS 141) or SFAS No. 141 (revised 2007), “Business Combinations,” (SFAS 141(R)).

SFAS 157 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (GAAP), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions. The adoption of SFAS 157, as it relates to financial assets, except for pension plan assets in regards to the funded status of pension plans recorded on the unaudited condensed consolidated balance sheet, and financial liabilities, had no significant impact on the Company’s financial statements. As permitted, management has deferred the adoption of FAS 157, as it relates to nonfinancial assets and nonfinancial liabilities and is currently evaluating the impact of deferral on the Company’s financial statements.

SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard is now the single source in GAAP for the definition of fair value, except for the fair value of leased property as defined in SFAS 13. SFAS 157 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under SFAS 157 are described below:

	•		Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.


	•		Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.


	•		Level 3—Inputs that are both significant to the fair value measurement and unobservable.

The fair value of cash equivalents was $43.7 million and $44.8 million at March 28, 2008 and December 31, 2007, respectively. These financial instruments are classified in Level 1 of the fair value hierarchy.

On January 1, 2008, Tollgrade adopted Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115,” (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option) with changes in fair value reported in earnings. The adoption of SFAS 159 had no impact on the Company’s financial statements as management did not elect the fair value option for any other financial instruments or certain other assets and liabilities.

In December 2007, the FASB issued SFAS No. 141 (Revised), “Business Combinations” (“SFAS No. 141 (R)”), replacing SFAS No. 141, “Business Combinations” (“SFAS No. 141”), and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 141(R) retains the fundamental requirements of SFAS No. 141, broadens its scope by applying the acquisition method to all transactions and other events in which one entity obtains control over one or more other businesses, and requires, among other things, that assets acquired and liabilities assumed be measured at fair value as of the acquisition date, that liabilities related to contingent consideration be recognized at the acquisition date and remeasured at fair value in each subsequent reporting period, that acquisition-related costs be expensed as incurred, and that income be recognized if the fair value of the net assets acquired exceeds the fair value of the consideration transferred. SFAS No. 160 establishes accounting and reporting standards for noncontrolling interests (i.e., minority interests) in a subsidiary, including changes in a parent’s ownership interest in a subsidiary and requires, among other things, that noncontrolling interests in subsidiaries be classified as a separate component of equity. Except for the presentation and disclosure requirements of SFAS No. 160, which are to be applied retrospectively for all periods presented, SFAS No. 141 (R) and SFAS No. 160 are to be applied prospectively in financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of adopting these statements.

2. STOCK COMPENSATION PLANS AND ACCOUNTING FOR STOCK-BASED COMPENSATION EXPENSE

The Plans

The Company currently sponsors one active stock compensation plan. In March 2006, the Company adopted the 2006 Long-Term Incentive Compensation Plan (the “2006 Plan”), which was approved by the shareholders on May 9, 2006 and effectively replaced the 1995 Long-Term Incentive Plan, which by its terms does not allow grants to be made after October 15, 2005. The 2006 Plan provides that participants may be directors, officers, and other employees. The 2006 Plan authorized up to 1,300,000 shares available for grant. The 1998 Employee Incentive Plan (the “1998 Plan”) by its terms does not allow grants to be made after January 29, 2008.

Under the 2006 Plan, participants may be granted various types of equity awards, including restricted shares and/or options to purchase shares of the Company’s common stock. The grant price on any such shares or options is equal to the quoted fair market value of the Company’s shares at the date of the grant, as defined in the 2006 Plan. Restricted shares will vest in accordance with the terms of the applicable award agreement and the plan. The 2006 Plan requires that non-performance-based restricted stock grants to employees vest in not less than three years, while performance-based restricted stock grants may vest after one year. Grants of restricted stock to directors may vest after one year. Options granted generally vest over time. Historically, such period has typically been two years with one-third vested at the date of grant, one-third at the end of one year, and one-third at the end of two years. Beginning in December 2007, stock option grants have been made with vesting over three years, with one-third of such grants vesting at the end of each year following the date of grant.

Grants Under the Plans

During the first quarter of 2007, the Company granted 10,000 options under the 2006 Plan to an employee in connection with the employee’s addition to the Company’s Senior Leadership Team.

During the first quarter of 2007, the Board of Directors also approved the issuance of a total of 120,548 restricted shares under the 2006 Plan. Of these, 11,662 restricted shares were issued to non-employee directors and 108,886 restricted shares were issued to certain senior officers. The restricted share awards granted to non-employee directors on February 8, 2007 give 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 was removed from the Board for cause during that time. During the one year restriction period, directors could vote but were not permitted to trade restricted shares. Of the restricted shares granted to certain senior officers on February 15, 2007, one-third of such grant was made subject to a three year vesting period and continuous employment, while the remaining two-thirds of such grant was made subject to the Company’s achievement of certain operating performance targets established by the Company and approved by the Compensation Committee of the Board of Directors. The conditions of grant to certain senior officers also provided for accelerated vesting of one-half of the performance-based restricted shares on February 15, 2008 if certain defined performance targets were met or exceeded; however, such performance targets were not met and this accelerated vesting did not occur. During the first quarter of 2008, the Company reversed the cumulative stock compensation expense in the amount of $0.4 million recorded since February 15, 2007 related to the performance-based portion of the restricted shares awarded to senior officers. Based on an evaluation of the Company’s cumulative operating performance against established adjusted EBITDA targets for the two-year period ended December 31, 2008, management has concluded that it is no longer more likely than not that these targets can be achieved.

In December 2007, the Chief Executive Officer was awarded 150,000 stock options under the 2006 Plan following his appointment to that position. These options vest over a three year period, with one-third vesting on each anniversary of the date of grant.

During the first quarter of 2008, the Board of Directors approved the grant of a total of 556,400 stock options and 3,202 restricted shares under the 2006 Plan. Of these, 30,000 stock options and 2,463 restricted shares were issued to non-employee directors and 526,400 stock options and 739 restricted shares were issued to employees, including certain key executive officers, but excluding the CEO. The stock options granted to non-employee directors vested immediately upon issuance. The grant of restricted shares to one non-employee director carried terms and restrictions identical to restricted shares issued to non-employee directors in 2007 as discussed above. The stock options granted to employees vest over a three year period, with one-third vesting on each anniversary of the grant date.

The Company granted no options or other equity awards pursuant to the 1998 Plan in the first quarters of 2008 prior to January 28, 2008 or during the first quarter of 2007.

Stock-Based Compensation Expense

Total stock-based compensation expense recognized under SFAS 123(R) for the three months ended March 29, 2008 and March 31, 2007 was a credit of less than $(0.1) million and expense of $0.4 million, respectively. The credit in expense in the first quarter of 2008 reflects the reversal during the quarter of all stock-based compensation expense related to the performance-based component of restricted shares awarded to certain senior officers, discussed above. The unamortized stock-based

compensation expense related to stock options and restricted stock totaled $1.9 million at March 29, 2008.


	Shares Authorized But Not Granted
	March 29, 2008		December 31, 2007

1998 Employee Incentive Compensation Plan		—		164,141
2006 Long Term Incentive Compensation Plan		439,683		1,169,452

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

Range of

Weighted Average

Number of Shares

Option Prices

Exercise Price

Outstanding, December 31, 2007

1,440,562

7.28 - 159.19

27.28

Granted

556,400

6.57

Exercised

—

Cancelled/Forfeited/Expired

(40,800

)

6.57 - 31.44

11.70

Outstanding, March 29, 2008

1,956,162

6.57 - 159.19

21.71

3. RESTRUCTURING

During the first quarter of 2008, the Company announced a restructuring program which included the realignment of existing resources to new projects, reductions in the Company’s engineering staff, changes in field service and sales staffing and a reduction in the number of senior management positions. As a result, during the first quarter of 2008, we recorded certain restructuring costs primarily associated with employee severance of approximately $0.4 million.

Additionally, as part of the Company’s ongoing strategic review, the Company incurred a $0.7 million charge for inventory associated with products that are no longer part of the Company’s future strategic focus.

The components of the charge and accrual at March 29, 2008 for this program are as follows (in thousands):


	Balance at										Balance at
	December		Restructuring		Cash			Asset write-			March 29,
	31, 2007		charge/expense		payments			downs			2008

Severance	$	—	$	434	$	(423	)	$	—		$	11
Inventory writedown		—		738		—			(738	)		—

Total	$	—	$	1,172	$	(423	)	$	(738	)	$	11

During the third quarter of 2006, the Company announced a restructuring program which included the consolidation of the Company’s operations at its leased Sarasota facility, discontinuance of various products and the write-down of certain fixed assets and real estate. During the first quarter of 2008, we continued to record certain additional restructuring costs and refine estimates related to employee

relocation and lease termination costs. The total expense incurred as a result of this program was $7.1 million through March 29, 2008. Additional expense could be incurred based on changes in estimates related to employee relocation costs.

The components of the charges and accruals at March 29, 2008 for this program were as follows (in thousands):


	Balance at										Balance at
	December				Cash			Asset write-			March 29,
	31, 2007		Expense		payments			downs			2008

Facility rationalization including employee costs	$	103	$	2	$	(105	)	$	—		$	—
Real estate impairment		—		20		—			(20	)		—

Total	$	103	$	22	$	(105	)	$	(20	)	$	—

As a result of the 2006 restructuring program, the Company is in the process of selling certain real estate that will not be used by the Company. The value of the assets held for sale was based on management’s estimates of market value. We expect the sale of this real estate to be completed in 2008.

The majority of the cash payments made under the 2006 restructuring program pertained to the remaining obligation for lease termination costs related to the Company’s former Sarasota, Florida facility. With the payment of these costs, this lease has been terminated.

In conjunction with the Broadband Test Division acquisition, the Company committed to a plan to close the acquired Deerfield, Illinois facility and to relocate from the then-existing Bracknell, England location to another facility within Bracknell, England. We have offered selected employees benefits to relocate them to our corporate headquarters in Cheswick, Pennsylvania. We estimated the employee relocation and facility closure costs to be approximately $0.5 million. As of March 29, 2008, cash payments have been made in the amount of $0.4 million. We will incur remaining lease payments at least through the first half of 2008. These costs were accounted for under Emerging Issue Task Force No. 95-3 (EITF 95-3) “Recognition of Liabilities in Connection with a Purchase Business Combination.”

4. ACQUISITION

On August 1, 2007, Tollgrade completed the acquisition of the Broadband Test Division of Teradyne, Inc. Tollgrade acquired substantially all of the assets and assumed certain liabilities for approximately $11.3 million in cash, and there were approximately $0.6 million in transaction fees for a total purchase price of $11.9 million. The acquisition was recorded under the purchase method of accounting in accordance with the provisions of SFAS 141, “Business Combinations”, and SFAS 142, “Goodwill and Other Intangible Assets”. Accordingly, the results of operations of the acquired Broadband Test Division from August 1, 2007 are included in the consolidated financial statements of the Company. The Company has allocated the purchase price to the fair value of assets acquired and liabilities assumed based on third party valuations and appraisals. All intangible assets including goodwill are deductible for tax purposes over the appropriate tax life as determined by each country and are not expected to have any residual value.

The following summarizes the estimated fair values as of the date of the acquisition (in thousands):


Accounts receivable	$	4,579
Inventories		1,428
Property and equipment		454
Intangible assets		7,937
Goodwill		1,122
Other		26

Total assets acquired		15,546

Deferred income		1,588
Accounts payable		709
Pension obligations		870
Relocation and lease termination accrual		524

Total liabilities		3,691

Net assets acquired	$	11,855

The following condensed pro forma results of operations reflect the pro forma combination of the Company and the acquired Broadband Test Division business as if the combination occurred as of January 1, 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 achieved had the Broadband Test Division acquisition been consummated on January 1, 2007. In addition, these pro forma results are not intended to be projections of future results.


	(In Thousands, Except Per Share Data)
	Unaudited Pro Forma
	Three Months Ended
	March 31, 2007
Revenues	$	17,408
Loss from operations		(841	)
Net loss		(43	)
Basic and diluted earnings (loss) per share	$	0.00

The three months ended March 31, 2007 includes certain non-recurring charges primarily associated with employee severance. The total restructuring charges for the Company for the three months ended March 31, 2007 were $0.4 million.

5. INTANGIBLE ASSETS

The following information is provided regarding the Company’s intangible assets and goodwill (in thousands):

March 29, 2008

Useful

(Unaudited)

Life

Accumulated

(Years)

Gross

Amortization

Impairments

Net

Amortizing Intangible Assets:

Post warranty service agreements

6-50

38,441

2,529

—

35,912

Technology

2-10

18,813

14,199

1,396

3,218

Customer relationships

5-15

3,647

1,318

1,676

653

Tradenames and other

0.5-10

823

239

219

365

Total Intangible Assets

61,724

18,285

3,291

40,148


	Useful		December 31, 2007
	Life				Accumulated
	(Years)		Gross		Amortization		Impairments		Net

Amortizing Intangible Assets:

Post warranty service agreements		6-50	$	38,204	$	2,019	$	—	$	36,185
Technology		3-10		19,249		13,858		448		4,943
Customer relationships		5-15		3,626		1,190		—		2,436
Tradenames and other		0.5-10		2,635		169		1,815		651


Total Intangible Assets			$	63,714	$	17,236	$	2,263	$	44,215

During the fourth quarter of 2007, the Company recorded an impairment loss totaling $25.0 million which represented the full balance of goodwill.

Impairments

Long-Lived Assets

The Company performs impairment reviews of its long-lived assets upon a change in business conditions or upon the occurrence of a triggering event. Due to the Company’s lower than expected operating results for the first quarter of 2008, subsequent to quarter-end, management undertook a review of its revenue and earnings expectations for the remainder of the year. As a result of this review, in April, 2008, management made significant revisions to its 2008 financial outlook. These revisions were based on lower than expected first quarter results and deepening concerns about the impact of further deteriorations in general economic conditions and its effect on our markets. As a result, the Company performed an analysis of its long-lived assets in accordance with SFAS 144 “Accounting for the Impairment or Disposal of Long-lived Assets.” As a result of this analysis, we determined that certain customer and technology assets primarily related to our cable and certain other products were impaired, and an impairment loss of $3.3 million was recorded to reflect these assets at their fair market value.

The Company currently estimates its total amortization expense, including the intangible assets associated with the Broadband Test Division, to be $2.6 million for the remainder of 2008 and $2.9 million, $2.3 million, $1.8 million, and $1.3 million for the years ended December 31, 2009, 2010, 2011 and 2012, respectively, and $29.2 million for periods thereafter.

6. PENSION

As a result of our acquisition of the Broadband Test Division, the Company assumed defined benefit pension plans for three employees based in the Company’s German location, four employees based in

Belgium and two employees based in the Netherlands. The German pension obligation assumed as of August 1, 2007 was approximately $0.7 million. The acquired net pension obligations for the Belgian and Netherlands plans were less than $0.1 million each. Net periodic pension expense recorded during the first quarter of 2008 was insignificant. The total pension obligation as of March 29, 2008 was approximately $1.0 million. The increase in pension obligation from December 31, 2007 through March 29, 2008 was related primarily to changes in foreign exchange rates.

7. INVENTORY

Inventory consisted of the following (in thousands):


	March 29, 2008
	(Unaudited)			December 31, 2007

Raw materials	$	8,621		$	8,393
Work in process		3,041			3,582
Finished goods		4,583			4,321

		16,245			16,296


Reserves for slow moving and obsolete inventory		(2,882	)		(2,609	)

	$	13,363		$	13,687

8. PER SHARE INFORMATION

Net (loss) income per share has been computed in accordance with the provisions of SFAS No. 128, “Earnings Per Share” for all periods presented. SFAS No. 128 requires companies with complex capital structures to report earnings per share on a basic and diluted basis. Basic earnings per share is computed using the weighted average number of shares outstanding during the period, while diluted earnings per share is calculated to reflect the potential dilution that occurs related to issuance of capital stock option grants. The three month period ended March 29, 2008 does not include the effect of dilutive securities due to the net loss reported in the period, which would make those securities anti-dilutive to the earnings per share calculation. For the three month period ended March 29, 2008 there were no anti-dilutive equivalent shares.

A reconciliation of net (loss) income per share is as follows (in thousands, except per share data):


	Three Months Ended
	March 28, 2008			Three Months Ended
	(Unaudited)			March 31, 2007
Net (loss) income	$	(6,504	)	$	111
Common and common equivalent shares:
Weighted average common shares outstanding		13,158			13,254
Effect of dilutive securities – stock options and restricted stock		—			188

		13,158			13,442


Earnings per share:
Basic	$	(0.49	)	$	0.01

Diluted	$	(0.49	)	$	0.01

9. PRODUCT WARRANTY

The Company records estimated warranty costs on the accrual basis of accounting. These reserves are based on applying historical returns to the current level of product shipments and the cost experience associated therewith. In the case of software, the reserves are based on the expected cost of providing services within the agreed-upon warranty period.

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


	Three Months Ended
	March 29, 2008			Year Ended
	(Unaudited)			December 31, 2007
Balance at the beginning of the period	$	1,937		$	2,135

Accruals for warranties issued during the period		358			1,680
Settlements during the period		(654	)		(1,878	)

Balance at the end of the period	$	1,641		$	1,937

10. CONTINGENCIES AND COMMITMENTS

The Company leases office space and equipment under agreements which are accounted for as operating leases. The office lease for our Cheswick, Pennsylvania facility expires on June 30, 2009. The office lease for the Sarasota, Florida facility was terminated on February 29, 2008. Through February 28, 2007, we leased office space in Bridgewater, New Jersey. On November 27, 2006, we entered into a lease agreement for space in Piscataway, New Jersey, which replaced the lease for the Bridgewater location. The lease for our Piscataway location expires on April 30, 2012. As a result of our Broadband Test Division acquisition, we acquired a lease for space in Deerfield, Illinois, for property which is no longer utilized. The lease for this space expires on July 31, 2008. During 2007, we also had temporary leased space in Deerfield, Illinois, the lease for which expires on June 30, 2008. Also as a result of the Broadband Test Division acquisition, we have leases in Bracknell, United Kingdom; Kontich, Belgium; and Wuppertal, Germany, which expire on December 24, 2012, April 1, 2012, and January 31, 2009 respectively. The Company is also involved in various month-to-month leases for research and development and office equipment at all three locations. In addition, all three of the 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; however, none of these commitments are material.

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


	At March 29, 2008
2008 (remaining period)	$	638
2009		840
2010		691
2011		661
2012		488
Thereafter		—

	$	3,318

The lease expense was $0.3 million for each of the periods ended March 29, 2008 and March 30, 2007.

Additionally, the Company has arrangements with certain manufacturing subcontractors under which the Company is contingently obligated to purchase up to $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 the Company has a legal obligation to purchase this inventory as of March 29, 2008. 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, the Company is, 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, the Company does 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.

11. INCOME TAXES

For the first quarter of 2008, income tax expense primarily related to foreign income tax obligations generated by profitable operations in foreign jurisdictions, as well as adjustments to reserves for uncertain tax positions. Additionally, the Company established a valuation allowance against federal, foreign and certain state net operating losses incurred in the first quarter of 2008 as the tax benefit was deemed more likely than not to be unrealizable in future periods. The foreign deferred tax benefit recorded in the first quarter of 2008 relates primarily to temporary differences arising as a result of differentials between book and tax lives on intangible assets.

On January 1, 2007, the Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”), an interpretation of FASB Statement No. 109 (“SFAS 109”). As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized income tax benefits. At the adoption date of January 1, 2007, unrecognized tax benefits were $0.1 million all of which would affect the Company’s effective tax rate if recognized. At March 29, 2008, unrecognized tax benefits were approximately $0.3 million. We do not expect any significant changes to this liability.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of March 29, 2008, the Company has an insignificant amount of accrued interest related to uncertain tax positions.

The tax years 2004 through 2007 remain open to examination by the major taxing jurisdictions to which we are subject.

The Company intends to permanently reinvest accumulated earnings in foreign subsidiaries as of March 29, 2008. As a result, deferred taxes have not been provided on foreign earnings at March 29,

2008. If the Company’s intention changes and such amounts are expected to be repatriated, deferred taxes will be provided.

12. MAJOR CUSTOMERS AND INTERNATIONAL SALES

The Company’s primary customers for its products and services are the Regional Bell Operating Companies (“RBOCs”), certain large international telephone service providers in Europe, specifically including British Telecom, Royal KPN N.V., Belgacom S.A., Deutsche Telecom AG (T-Com) and Telefónica O2 Czech Republic, a.s. (collectively referred to herein as the “PTTs”), certain major independent telephone companies and most of the major cable operators. Of these major customer groups, the RBOCs and the PTTs are the most significant. For the first quarter of 2008, sales to the RBOCs accounted for approximately 30.4% of the Company’s total revenue, compared to approximately 40.1% of total revenue for the first quarter of 2007. Sales to AT&T individually exceeded 10% of the Company’s total revenue and comprised 20.0% of the Company’s total revenue for the first quarter of 2008. Sales to AT&T individually exceeded 10% of the Company’s total revenue and comprised 31.8% of the Company’s total revenue for the first quarter of 2007. As of March 29, 2008, the Company had approximately $6.7 million of accounts receivable with two customers, each of which individually exceeded 10% of our March 29, 2008 receivable balances. As of December 31, 2007, the Company had approximately $4.1 million of accounts receivable with two customers, each of which individually exceeded 10% of our December 31, 2007 receivable balances.

Sales in the first quarter of 2008 to the PTTs accounted for approximately 29.1% of total revenue. Sales to one PTT individually exceeded 10% of the Company’s total revenue for the first quarter of 2008.

International sales represented approximately $6.1 million or 46.2% of the Company’s total revenue for the quarter ended March 29, 2008, compared to $3.0 million or 23.1%, in the first quarter of 2007. Our international sales were primarily in three geographic areas based upon customer location for the quarters ended March 29, 2008 and March 31, 2007: the Americas (excluding the United States); Europe, the Middle East and Africa (“EMEA”); and Asia. Sales for the Americas were approximately $0.7 million and $0.6 million, sales for EMEA were $5.3 million and $2.3 million, and sales in Asia were $0.1 million for each of the quarters ended March 29, 2008 and March 31, 2007.

13. SHARE REPURCHASE PROGRAM

On July 25, 2007, the Board of Directors approved a share repurchase program, pursuant to which the Company could repurchase up to one million shares of the Company’s Common Stock through December 31, 2007. Such purchases could have been made through open market transactions and privately negotiated transactions at the Company’s discretion, subject to market conditions and other factors. This program expired by its terms on December 31, 2007.

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

The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this report.

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

This MD&A should be read in conjunction with our annual report on Form 10-K, for the year ended December 31, 2007. 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 Part II, Item 1.A below under “Risk Factors.”

Overview

Our continuing strategy is to focus on our core test and measurement competencies to grow and develop our position in new and existing markets by:

	•		Providing innovative products, services, solutions and new technologies to current, adjacent and new markets;

	•		Realigning our investments to support our core business;

	•		Improving existing channel partnerships and pursuing new ones;

	•		Capitalizing on our worldwide customer footprint and relationships;

	•		Achieving higher levels of execution and performance in all business areas; and

	•		Enhancing shareholder value through investment, organic growth and potential acquisitions that promote our strategic objectives.

Subsequent to the end of the first quarter of 2008, the Company announced is was expanding its internal analysis of strategic opportunities and had hired a financial advisor to assist in the process of evaluating our strategic alternatives. Given the recent decline in our share value, challenges within our business, and weakness in the overall economy, the Company’s Board determined that it was necessary and in the best interests of our shareholders to expand our review and evaluate all strategic alternatives. The Board intends to consider a full range of possible directions with the intent to enhance the value of the Company for the benefit of our shareholders.

General Business Trends

First quarter of 2008 results reflected revenues from Services of approximately 46%, compared to approximately 23% in the first quarter of 2007. The increase in revenues from Services in the first quarter of 2008 is attributed to revenues related to our Broadband Test Division acquisition, which had

largely a service-oriented revenue base. Further, we expect that including Broadband Test Division revenues for the entire year in our consolidated revenues should cause the percentage of Services revenue as a portion of total revenue to increase even further in the future. Therefore, since our Services revenue is typically associated with existing purchase orders, contracts or a combination of both, we expect predictability of revenues from this portion of the business to improve. During the first quarter of 2008, the remainder of our revenue, or 54% of the consolidated total, was comprised of sales of software and hardware products to new or existing customers.

The first quarter of 2008 lacked significant revenue that was generated under two previously discussed contracts for project-related business, which largely concluded at the end of 2007. At the present time, there is no significant continuation of those projects reflected in the Company’s backlog that would replace those 2007 revenue streams and we have not entered into agreements for any such new projects that could contribute to revenue for the remainder of 2008.

In addition, sales of cable products in the first quarter of 2008 decreased significantly compared to the first quarter of 2007, and we expect these market conditions to continue for the remainder of the year.

As a result of these factors, we expect revenues from our core test system products to continue to decline. Management presently expects that this revenue decline can be offset to some extent for the remainder of 2008 by the addition of Services revenue from the Broadband Test Division acquisition, but it is unlikely that these revenues will offset the entire decline, or that the decline might not accelerate more quickly than expected. However, in any event, revenues from non-project related sources is very likely to become even more difficult to predict during 2008, and could possibly result in swings or declines in revenue levels on a quarterly basis, and such swings or declines may be material.

Our Customers

The Company’s primary customers for its products and services are the Regional Bell Operating Companies (“RBOCs”), certain large international telephone service providers in Europe, specifically including British Telecom, Royal KPN N.V., Telefonica O2, Belgacom S.A., Deutsche Telecom AG (T-Com) and Telefónica O2 Czech Republic, a.s. (collectively referred to herein as the “PTTs”), certain major independent telephone companies, and most of the major domestic cable operators. Of these major customer groups, the RBOCs and the PTTs are the most significant. For the first quarter ended March 29, 2008, sales to the RBOCs accounted for approximately 30.4% of the Company’s total revenue, compared to approximately 40.1% of total revenue for the first quarter of 2007. Sales to AT&T comprised approximately 20.0% of the Company’s total revenue for the first quarter of 2008, compared to approximately 31.8% of total revenue for the first quarter of 2007. Sales in the first quarter of 2008 to the PTTs accounted for approximately 29.1% of total revenue. Sales to one PTT individually exceeded 10% of the Company’s total revenue for the first quarter of 2008.

Our Product Solutions

Telecommunications Solutions

The Company’s telecommunications System Test products, specifically the LoopCare™, 4TEL^®, Celerity^®, and LTSC™ centralized test Operation Support Systems (“OSS”), together with the associated remote measurement platforms of DigiTest^®, LDU, and N(x)Test™, 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. Although these solutions remain the primary test solutions for copper line networks, we are actively engaged in research and development of new software and hardware for these hybrid fiber network solutions.

With the LoopCare software in combination with the DigiTest hardware, including the EDGE^® and HUB™, we offer a complete integrated testing system to customers. The latest addition to the DigiTest family of products is the DigiTest ICE™ product, which was introduced on a limited basis internationally in the first quarter of 2008. We continue development efforts on this product and still expect it to become generally available during the second quarter of 2008. ICE was designed to provide both metallic and multi-layered DSL testing to help service providers install and maintain broadband triple play services within traditional and hybrid fiber copper networks.

Although the DigiTest EDGE and DigiTest HUB have seen some success in certain international customers, and have been approved in certain domestic networks, we have only had limited success selling them into the domestic service providers, and it is not clear whether the international customers who have deployed these products will continue to do so, as the original projects driving these product sales are substantially complete. However, we continue to actively market and attempt to sell these products into both domestic and international markets.

During the first quarter of 2008, our DigiTest product sales performed better than expected, due to the purchases from one domestic and one international telecom operator. As the DSL subscriber base of the RBOCs’ network reaches a level of maturity that should support higher measures of centralized testing, certain portions of the DigiTest product family, including DigiTest ICE, are positioned to compete favorably with similar offerings in that market.

Similarly, we offer integrated testing through our 4TEL and Celerity software, sold in conjunction with the LDU hardware. Sales of these products, acquired as part of the Broadband Test Division acquisition in 2007, contributed significantly to revenues for the first quarter of 2008. Contributions from sales of LDU hardware and 4TEL and Celerity software helped to offset some of the declines experienced in sales of some of the Company’s mature product lines. We expect to see this trend continue at least for the near term, but new product solutions, including the ICE product, need to rapidly gain market share in order to continue to offset these declines.

As the life cycle for MCU^® products continues to mature, and certain RBOCs and other customers focus their capital spending on major network initiatives such as “fiber to the home” rather than hybrid networks, demand for our MCU and existing testing products will likely diminish. During the first quarter of 2008, we experienced significant declines in sales of our legacy MCU products to telecom customers. Although we expected a decline in MCU sales due to the completion of a large customer program in 2007 that would not repeat in 2008, the decline ultimately extended beyond that customer and was larger than anticipated. We expect some recovery from the levels of sales seen in the first quarter of 2008 during the remainder of the year.

During the first quarter of 2008, we experienced delays for projects including LoopCare software separate from DigiTest products, which were anticipated for the first half that were either deferred or delayed indefinitely. Also, during 2007, licenses of custom software features developed under two international projects contributed to this revenue stream, and as discussed earlier, these projects have not contributed to 2008 sales. We have historically provided financial information for sales of our stand-alone LoopCare software features on the basis that these sales were previously significant in amount and differed from those LoopCare license arrangements made in conjunction with the DigiTest hardware. However, as this product has continued to mature, and as we have continued to experience declines in sales of these stand-alone LoopCare software features, we have determined that beginning with this report and in future reports and filings, the LoopCare stand-alone software feature results will only be discussed in conjunction with our System Test products. This is consistent with the manner in which we have treated custom software feature sales for 4TEL and Celerity since our acquisition of the Broadband Test Division. The declines in sales of LoopCare features are driven in large part by service providers continuing to carefully evaluate expenditures in this area as they focus their capital expenditures on new network elements, and the level of sales of these features is not expected to recover in the foreseeable future.

We continue with our strategic emphasis on new product development and positioning of certain legacy telecommunications products in an attempt to replace the declining revenue from these legacy products.

Cable Solutions

The Company’s Cheetah™ performance and status monitoring products provide a broad network assurance solution for the broadband HFC distribution system found in the cable television industry. Our Cheetah products gather status information and report on critical components within the cable network.

During the first quarter of 2008, we experienced significant declines in sales of our Cheetah products, primarily from lower market demand through our OEM distribution agreement with Alpha Technologies, Inc. Although we expected to see declines in sales during the quarter, we believe that the greater decline of sales of cable products to Alpha was at least partially due to the difficult economic environment. We also continue to face competition from Alpha, as they introduced a competitive DOCSIS^®-based transponder in 2005, which has adversely impacted our sales of our Cheetah products. We do not expect to see significant recovery in this market, at least in the near future.

Due to our lower than expected operating results for the first quarter of 2008, subsequent to quarter-end, management undertook a review of our revenue and earnings expectations for the remainder of the year. As a result of this review, in April, 2008, management made significant revisions to its 2008 financial outlook. These revisions were based on lower than expected first quarter results and deepening concerns about the impact of further deteriorations in general economic conditions and its effect on our markets. As a result, management determined that certain intangible assets related primarily to our cable product lines were impaired, resulting in certain non-cash charges, as discussed in “Goodwill and Indefinite Lived Assets,” below. Our revised financial outlook remains subject to changes in market conditions and other factors, and such changes may indicate further impairment of

value in long-lived assets that could require us to record additional material non-cash charges.

Consolidations within the cable industry and the adoption of the DOCSIS standards have caused and will continue to cause pricing and margin pressure as competitors continue to reduce pricing. As a result, our revenues and net income have been and may continue to be adversely affected. We continue to develop strategies to offset these lower margins by lowering manufacturing costs while offering additional feature sets to our DOCSIS-based products, such as our downloadable software modules for VoIP and IP testing, that are intended to build upon an embedded base of core technology.

In response, we continue to attempt to further reduce our costs for this product line through a restructuring and re-alignment effort implemented in the first quarter of 2008. Further discussion pertaining to this restructuring is above in Note 3 to our Condensed Consolidated Financial Statements and below under “Goodwill and Indefinite Lived Assets.”

Services

Our Services offerings include software maintenance as well as our professional services, which are designed to ensure that all of the components of our customers’ test systems operate properly. It also includes hardware maintenance services, for both our mature and acquired product lines.

During the first quarter of 2008, our Services revenues increased, primarily due to the additional service agreements acquired as part of the Broadband Test Division acquisition. These service agreements, some of which are with the PTTs described above, cover both hardware and software maintenance for products sold by the Broadband Test Division prior to the acquisition. These service agreements are similar to those entered into with the Company’s traditional RBOC customers as it relates to software maintenance. The revenue contributions from these service agreements have helped to offset some of the declines in the Company’s mature product lines in other areas.

BACKLOG

Our backlog consists of firm customer purchase orders and signed software maintenance agreements. As of March 29, 2008, the Company had backlog of approximately $20.6 million compared to $19.2 million as of December 31, 2007 and $10.2 million as of March 31, 2007. The increase in the backlog from March 31, 2007 to March 29, 2008 is primarily attributable to the acquired BTD products and services. The backlog at March 29, 2008, December 31, 2007 and March 31, 2007 include approximately $15.7 million, $13.6 million, and $6.5 million, respectively, related to software maintenance contracts, which are earned and recognized as income on a straight-line basis during the remaining term of the underlying agreements. The Company’s policy is to include a maximum of twelve months revenue from multi-year maintenance agreements in reported backlog.

We currently have software maintenance agreements with all of the RBOCs and with the PTTs. Most of these agreements are multi-year, with expiration dates ranging from December 31, 2008 through 2011. We also have several maintenance arrangements in place for our cable software products. As discussed above, our backlog at March 29, 2008 and March 31, 2007 included approximately $15.7 million and $6.5 million, respectively, related to software maintenance agreements. We have adopted a policy to include a maximum of twelve months revenue from multi-year software maintenance

agreements in reported backlog. Software maintenance revenue is deemed to be earned and recognized as income on a straight-line basis over the terms of the underlying agreements.

Management expects that approximately 35% of the current backlog will be recognized as revenue in the second quarter of 2008. 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. These fluctuations are most evident as it relates to revenue streams from sales of products other than our software maintenance agreements, which tend to be more predictable. Although these fluctuations could impact short-term results, they are not necessarily indicative of long-term trends in sales of our products.

OPERATING SEGMENT

We have determined that our business has one operating segment, test assurance. All product sales relate to the business of testing infrastructure and networks for the telecommunications and cable industries. 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 telecommunications and cable businesses. Operating results as a whole are regularly reviewed by the Company’s Chief Operating decision maker regarding decisions about the allocation of resources and to assess performance.

INTERNATIONAL SALES

International sales represented approximately $6.1 million, or 46.2% of the Company’s total revenue for the quarter ended March 29, 2008, compared to $3.0 million, or 23.1%, for the quarter ended March 31, 2007. Our international sales were primarily in three geographic areas based upon customer location for the quarter ended March 29, 2008: the Americas (excluding the United States); Europe, the Middle East and Africa (EMEA); and Asia. Sales for the Americas were approximately $0.7 million and $0.6 million, sales in EMEA were approximately $5.3 million and $2.3 million, and sales in Asia were approximately $0.1 million for the quarters ended March 29, 2008 and March 31, 2007, respectively. The addition of the Broadband Test Division has significantly enhanced the Company’s international footprint.

As of March 29, 2008, the Company had approximately $6.7 million of accounts receivable with two customers, each of which individually exceeded 10% of our March 29, 2008 receivable balances. As of December 31, 2007, the Company had approximately $4.1 million of accounts receivable with two customers, each of which individually exceeded 10% of our December 31, 2007 receivable balances.

In addition, the timing of completion of the two large international projects that contributed to 2007 sales has extended beyond what was originally expected. We originally expected to follow these large projects with additional new product sales beginning in late 2007 and continuing in 2008. However, our new product sales have been slow to materialize in both customer accounts, initially as a result of the slower progress on the large projects in 2007, but also due to our own development delays, as well as customer delays in both accounts and a reorganization in one customer. We now have successfully completed a product trial in one customer and are actively pursuing a new product trial in the other customer, but significant sales have been delayed.

RECENT ACCOUNTING PRONOUNCEMENTS

SFAS 157 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (GAAP), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions. The adoption of SFAS 157, as it relates to financial assets, except for pension plan assets in regards to the funded status of pension plans recorded on the Unaudited Consolidated Balance Sheet, and financial liabilities, had no impact on the Financial Statements. Management is currently evaluating the potential impact of SFAS 157, as it relates to nonfinancial assets and nonfinancial liabilities on the Financial Statements.

	•		Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

	•		Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability

(e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•

Level 3—Inputs that are both significant to the fair value measurement and unobservable.

The fair value of cash equivalents was $43.7 million and $44.8 million at March 29, 2008 and December 31, 2007, respectively. These financial instruments are classified in Level 1 of the value hierarchy.

On January 1, 2008, Tollgrade adopted Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115,” (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option) with changes in fair value reported in earnings. The adoption of SFAS 159 had no impact on the Financial Statements as management did not elect the fair value option for any other financial instruments or certain other assets and liabilities.

APPLICATION OF 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 and cable industries. The Company follows Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition,” for

hardware and software sales. This bulletin 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 of the Company related to the sale. The bulk of our hardware sales are made to RBOCs and other large customers. Delivery terms of hardware sales are predominantly FOB origin. 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 the Company can objectively determine delivery occurred before the end of the applicable reporting period. Revenue is recognized for these customers upon shipment against a valid purchase order. We reduce collection risk by requiring letters of credit or other payment guarantees for significant sales to new customers and/or those in weak financial condition.

For perpetual software license fee and maintenance revenue, we follow the AICPA’s Statement of Position (“SOP”) 97-2, “Software Revenue Recognition.” This statement 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 the part of the Company 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 isolated cases for orders of custom software, or orders that require significant software customization, such as that associated with our contact with Lucent for test gear deployment in Saudi Arabia, 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 SOP 81-1, “Accounting for Performance of 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 provisions of Emerging Issues Task Force (“EITF”) Issue 00-21, “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 under EITF 00-21 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. Our internal policy requires that we obtain a written acceptance from our customers for each specific customer situation where new products are sold. Revenue will not be recorded until written acceptance is received from the customer. 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. The Company’s general practice is to defer revenue recognition unless these contingencies are inconsequential.

Our LoopCare and other 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 enhancement 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.

Goodwill and Intangible Assets

At March 29, 2008, we had net intangible assets of $40.1 million resulting from the acquisitions of the LoopCare product line in September 2001, the Cheetah product line in February 2003, the test business of Emerson in February 2006 and the Broadband Test Division of Teradyne, Inc. 2007. In connection with these acquisitions, we utilized the guidance of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets,” which were issued in July 2001. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 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 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.

In connection with the assets acquired in the 2001 LoopCare transaction, intangible assets of $45.1 million were identified with residual goodwill of $16.6 million. These include Developed Product Software valued at $7.3 million and LoopCare Base Software valued at $4.5 million. Both were determined to have finite useful lives of five years and ten years, respectively, and are being amortized over those periods. Also identified were intangible assets related to the LoopCare trade name of $1.3 million and Post-Warranty Service Agreements of $32.0 million. Because of the longevity of the LoopCare trade name and the stability, level of embedment, and unique dependence of the RBOCs on the post warranty maintenance services, these intangible assets were determined to have indefinite useful lives at the acquisition date. With regard to the Post-Warranty Maintenance Service Agreements, during the fourth quarter of 2005, management determined that events and circumstances which supported the indefinite life of this asset had changed. More specifically one of the Company’s key customers continues to implement a Fiber to the Premise (“FTTP”) initiative which indicates that the intangible asset related to the Post-Warranty Service Agreements may not have an indefinite useful life. This development as well as circumstances surrounding recent post-warranty contract renewals led the Company to conclude that in accordance with SFAS No. 142, a finite useful life should be assigned and the intangible asset should be amortized beginning October 1, 2005. Management currently believes that the hybrid fiber/copper network currently deployed by the RBOCs, which is tested by the underlying LoopCare Base Software, will exist for at least an additional fifty years. Therefore, management assigned a useful life to this asset of fifty years. At March 29, 2008, the asset had a remaining useful life of 47.5 years.

In connection with the assets acquired in the 2003 Cheetah transaction, intangible assets of $7.8 million were identified with residual goodwill of $4.9 million. The intangible assets consisted of the Cheetah Base Software valued at $2.9 million, the Cheetah Customer Base valued at $2.7 million, Proprietary Technology valued at $1.0 million and Cheetah Maintenance Agreements valued at $0.2 million. The Cheetah Base Software, Proprietary Technology and Cheetah Maintenance Agreements were determined to have useful lives of ten years, while the Cheetah Customer Base whose value is based on discounted cash flows generated on hardware sales which typically continue five years beyond the sale of the corresponding Base Software, was assigned a useful life of fifteen years. A Cheetah trademark asset valued at $1.0 million was identified and determined to have an indefinite useful life.

On February 24, 2006, Tollgrade acquired certain assets and assumed certain liabilities associated with the test systems business unit of Emerson for $5.5 million in cash. In connection with the assets acquired, we have identified $0.2 million of customer relationship intangible assets and $0.8 million in technology related intangible assets both having an estimated life of five years. We also have identified $0.1 million associated with a tradename that is expected to have a useful life of three years. Finally, we allocated $0.1 million of the purchase price to the sales order backlog that was acquired, which was consumed during 2006. The remainder of the purchase price resulted in goodwill of $2.3 million.

On August 1, 2007, Tollgrade acquired certain assets and assumed certain liabilities associated with the Broadband Test Division of Teradyne, Inc. for a purchase price of approximately $11.3 million in cash and there were acquisition costs of $0.6 million for a total purchase price of $11.9 million. The purchase price allocation was finalized in the fourth quarter of 2007. Based on our purchase price allocation, we have identified $0.8 million of customer relationship intangible assets and $0.8 million in technology related intangible assets. We also have identified $6.1 million associated with customer maintenance contracts and $0.2 million to other intangible assets acquired. Based on the purchase price allocation, we have recorded goodwill of approximately $1.1 million.

Sensitivity Analysis:

Certain portions of the telecom market serviced by the Company’s products are evolving and, when appropriate, management reviews the impact of such changes on the key assumptions underlying the valuation of each of its intangible assets. Technological advances, as well as potential changes in strategic direction by any of the Company’s key telecom or cable customers, could result in an impairment or substantial reduction in one or more of the estimated lives over which the respective intangible asset(s) is/are currently being amortized. The following table lists intangible assets with a remaining life at March 29, 2008:


	Years
							Twelve-month
			Remaining		Carrying		Rolling
Asset Description	Original		Life at		Value at		Projected
	Life		3/29/08		3/29/08		Amortization
					(in millions)
LoopCare
Base Software		10		3.5		1.6		0.5
Post-Warranty
Maintenance Service Agreements		50		47.50		30.4		0.6
Cheetah
Proprietary Technology		10		1.75		0.1		—
Emerson
Proprietary Technology		5		3.00		0.4		0.1
Broadband Test Division
Post Warranty
Maintenance Service Agreements		48		47.35		1.3		0.4
Post Warranty
Maintenance Service Agreements		20		19.35		3.4		0.7
Post Warranty
Maintenance Service Agreements		10		9.35		0.7		0.2
Post Warranty
Maintenance Service Agreements		6		5.35		0.2		—
Technology		3-10		2.35-9.35		0.7		0.1
Customer Relationship		10		9.35		0.7		0.2
Other		0.5-10		0.75-9.75		0.6		0.5

						40.1		3.3

In the event that the Company would reevaluate the above estimated useful lives in the future due to changed events and circumstances, annual amortization would increase based on the respective intangible asset’s carrying value and revised remaining useful life.

Goodwill and Indefinite Lived Assets:

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.

Due to a decline in the trading price of the Company’s shares during the fourth quarter of 2007, in addition to a revision in revenue projections, the results of our review indicated that our goodwill was entirely impaired, and in connection therewith we recorded a non-cash charge in the fourth quarter of 2007 of approximately $25.0 million. Certain other indefinite lived assets were reviewed and impairment charges of $2.3 million were recorded in the fourth quarter of 2007. We also assigned a definite life to these assets at December 31, 2007.

Due to our lower than expected operating results for the first quarter of 2008, subsequent to quarter-end, management undertook a review of our revenue and earnings expectations for the remainder of the year. As a result of this review, in April, 2008, management made significant revisions to its 2008 financial outlook. These revisions were based on lower than expected first quarter results and deepening concerns about the impact of further deteriorations in general economic conditions and its effect on our markets. As a result, management determined that certain long-lived assets primarily in our cable business were impaired, and as a result we recorded non-cash charges during the quarter of approximately $3.3 million. Our revised financial outlook remains subject to changes in market conditions and other factors, and such changes may indicate further impairment of value in long-lived assets that could require us to record additional material non-cash charges.

Inventory Valuation

We utilize a standard cost system that approximates first-in, first-out costing of the products. Standards are monitored monthly and changes are made on individual parts if warranted; otherwise standard costs are updated on all parts annually, normally in November of each year. Excess capacity is not included in the standard cost of inventory. 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, which has been consistently followed, 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.

During the first quarter of 2008, as part of the Company’s ongoing strategic review, the Company incurred a $0.7 million charge related to inventory associated with products that are no longer part of the Company’s strategic focus.

Inventory realization 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.

Allowance for Doubtful Accounts

The allowance is based on our assessment of the collectibility 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 conditions that may affect a customer’s ability to pay.

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 an adverse impact on our revenue.

Income Taxes

We follow the provisions of SFAS No. 109, “Accounting 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 March 29, 2008, all 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 Financial Standards Accounting Board Interpretation No, 48 “Accounting for Uncertainty in Income Taxes (“FIN 48”). The adoption of this interpretation required no material cumulative effect adjustment to be recorded.

Warranty

We provide warranty coverage on our various products. Terms of coverage range from up to one year on software to two to five years for hardware products. We review products returned for repair under warranty on a quarterly basis and adjust the accrual for future warranty costs based upon cumulative returns experience. We also evaluate special warranty problems for products with high return rates to correct the underlying causes and, where deemed necessary, to provide additional warranty expense for expected higher returns of these products. Warranty costs associated with software sales are also accrued based on the projected hours to be incurred during the warranty period (normally three months). The accounting for warranty costs involves critical estimates and judgments that can have a material effect on net income.

Long-Lived Assets Held for Sale

We classify long-lived assets as held for sale when certain criteria are met, including: Management’s commitment to a plan to sell the assets; the availability of the assets for immediate sale in their present condition; whether an active program to locate buyers and other actions to sell the assets has been initiated; whether the sale of the assets is probable and their transfer is expected to qualify for recognition as a completed sale within one year; whether the assets are being marketed at reasonable prices in relation to their fair value; and how unlikely it is that significant changes will be made to the plan to sell the assets. Long-lived assets held for sale are classified as other current asset in the Condensed Consolidated Balance Sheet.

We measure long-lived assets to be disposed of by sale at the lower of carrying amounts or fair value less cost to sell. Fair value for the assets currently held for sale is determined based on management’s estimates of market value.

Restructuring Accrual

In July 2006, we began to implement a formalized restructuring program based on our business strategies and economic outlook to increase efficiency and reduce costs. In connection with these

strategic initiatives, we have recorded estimated expenses associated with employee severance, relocation and lease termination costs. In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), generally costs associated with restructuring activities initiate after December 31, 2002 have been recognized when they are incurred rather than at the date of commitment to an exit or disposal plan. However, in the case of leases, the expense is estimated and accrued when the property is vacated. Given the significance and the timing of execution of such activities, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made, including evaluating real estate market conditions for expected vacancy periods and sub-lease rents. We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Although we believe that these estimates accurately reflect the costs of our restructuring plans, actual results may differ, thereby requiring us to record additional provisions or reverse a portion of such provisions.

In the first quarter of 2008, the Company began to implement initiatives as part of our strategic plan aimed at increasing efficiency and reducing costs. These initiatives are intended to realign existing resources to new projects, reduce the Company’s engineering staff for better alignment of resources with opportunities, make changes in field service and sales staffing to reflect continuing consolidations among our customer base and full integration of prior acquisitions, and reduce the number of senior management positions as a result of integrating talent from acquisitions along with a review of the management structure. The Company eliminated approximately 30 positions and an additional 15 positions were reassigned to new projects. In addition, a comprehensive review of all consolidated incentives was completed, and certain product lines were discontinued as they were not considered strategic to the Company’s marketing plan going forward. The total reserve recorded at March 29, 2008, to cover these strategic actions, amounted to $1.2 million, of which $0.5 million pertained to severance and related benefits and $0.7 million pertained to inventory writedowns.

Pension Benefits

We sponsor a defined benefit pension plan for three employees based in Germany and four employees based in Belgium and two employees based in Netherlands. Accounting for the cost of this plan 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 this plan. 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 option 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 estimates 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. (United States) dollars using 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.

RESULTS OF OPERATIONS

FIRST QUARTER OF 2008 COMPARED TO FIRST QUARTER OF 2007

Revenues

The Company’s revenues for the first quarter of 2008 were $13.2 million compared to revenues of $13.0 million reported for the first quarter of 2007.

Sales of the Company’s Systems Test product line (including sales of stand-alone LoopCare software products, 4TEL and Celerity) were $4.7 million in the first quarter of 2008, an increase of $1.4 million, compared to sales in the first quarter of 2007 of $3.3 million. Systems Test product line revenues increased primarily as a result of greater DigiTest and Broadband Test Division product sales, offset by significantly lower sales of N(x)Test product offerings resulting from the conclusion of a testability project in Eastern Europe and lower sales of stand-alone LoopCare software products. The Systems Test product line revenue accounted for 35.7% and 25.2% of total revenues for the first quarter of 2008 and 2007, respectively. During the first quarter of 2008, we continued to experience lower sales to CLECs and other independent carriers due to changes in network deployment architecture. We do not expect revenues in these markets to return to historical levels until modifications to our current product offerings produce lower cost points, assuming customers choose to adopt this new product technology. In particular, we are addressing these market conditions with the pending general availability of our DigiTest ICE product. General domestic market delays and our larger service provider customers upgrading their access network service assurance solutions have also adversely impacted expected DigiTest and ICE revenues for the first quarter of 2008.

We have historically provided financial information for sales of our stand-alone LoopCare software features, on the basis that previously, these sales were significant in amount and differed from those LoopCare license arrangements made in conjunction with the DigiTest hardware. However, as this product has continued to mature, and as we have continued to experience declines in sales of these

stand-alone LoopCare software features, we have determined that beginning with this report and in future reports and filings, the LoopCare stand-alone software feature results will only be discussed in conjunction with our System Test products. This is consistent with the manner in which we have treated custom software feature sales for 4TEL and Celerity since our acquisition of the Broadband Test Division. The declines in sales of LoopCare features are driven in large part by service providers continuing to carefully evaluate expenditures in this area as they focus their capital expenditures on new network elements, and the level of sales of these features is not expected to recover in the foreseeable future.

Sales of cable hardware and software products were $1.6 million in the first quarter of 2008, compared with $3.3 million in the first quarter of 2008. Cable hardware and software product sales amounted to 11.9% and 25.3% of total first quarter 2008 and 2007 revenue, respectively. The decline was primarily a result of reduced market demand through our OEM Channel, which we believe is partially connected to general economic conditions.

Sales of MCUs during the first quarter of 2008 were $0.9 million, compared to $3.4 million reported in first quarter of 2007. The decline was primarily the result of the completion of a major customers testability project and a lower then anticipated market demand for MCUs. MCU sales represented 6.5% of total first quarter 2008 revenues, compared to 26.2% for the first quarter of 2007.

We expect MCU sales to continue to contribute to the Company’s revenue for the foreseeable future, and such sales may fluctuate somewhat unpredictably on a quarterly basis. However, as a result of the continuing maturation of this product line, the RBOCs’ trend of limiting capital spending in their traditional POTS networks and the evolution of the transmission network toward end to end fiber, the Company believes revenues from this product line will continue to decline over time.

Services revenue consists of installation oversight and product management services provided to customers and fees from software maintenance agreements and service applications. Service revenues were approximately $6.0 million in the first quarter of 2008 compared to $3.0 million for the first quarter of 2007. Service revenues amounted to 45.9% and 23.3% of total first quarter 2008 and 2007 revenue, respectively. The increase in services revenues was due primarily to the contribution from international customers of the acquired Broadband Test Division.

Gross Profit

Gross profit for the first quarter of 2008 was $2.5 million compared to $7.0 million in the first quarter of 2007. The first quarter of 2008 included non-cash charges totaling $4.1 million resulting from impairment of certain intangible assets related primarily to our cable testing products and an inventory write-down. Additionally, amortization expense increased $0.4 million associated with our purchase of the Broadband Test Division. As a percentage of sales, gross profit for the first quarter of 2008 was 19.1% versus 53.8% for the prior year quarter.

Selling and Marketing Expense

Selling and marketing expense, which consists primarily of payroll related costs, consulting expense and travel costs, increased $0.3 million, or 11.4%, to $2.4 million for the first quarter of 2008. The increase is related to the Company’s consulting costs and increased salaries and wages due to the Broadband Test Division acquisition, offset by a decrease in SFAS 123(R) expense. As a percentage

of revenues, selling and marketing expenses increased to 18.5% in the first quarter of 2008 from 16.8% in the first quarter of 2007.

General and Administrative Expense

General and administrative expense, which consists primarily of payroll related costs, insurance expense and professional services fees, increased by $0.5 million, or 22.3%, to $2.6 million for the first quarter of 2008. The increase is primarily attributed to an increase in professional services fees offset in part by a decrease in SFAS 123(R) expense. As a percentage of revenues, general and administrative expenses increased to 19.6% in the first quarter of 2008 from 16.2% in the first quarter of 2007.

Research and Development Expense

Research and development expense, which consists primarily of payroll related costs and depreciation expense, increased by $0.7 million, or 22.5%, to $3.6 million in the first quarter of 2008. The increase in research and development expense is due to the increase in consulting expense, professional services fees and increased salaries and wages due to the Broadband Test Division acquisition. As a percentage of revenues, research and development expense for the first quarter of 2008 was 27.4% compared to 22.6% for the first quarter of 2007.

Restructuring Expense

Restructuring expense related to our 2008 restructuring program was $1.2 million in the first quarter of 2008. The restructuring program included a reduction in our engineering staff, changes in field service and sales staffing and a reduction in the number of senior management positions. During the first quarter of 2008, the Company recorded restructuring expense for employee severance of $0.5 million and inventory impairment charges of $0.7 million.

Ongoing restructuring expense related to the 2006 restructuring program was insignificant.

Interest Income

Interest income for the first quarter of 2008 was $0.5 million compared to $0.8 million for the first quarter of 2007. The decrease is related to lower cash and short-term investment balances during the quarter due to the cash purchase of the Broadband Test Division and the repurchase of shares under our share repurchase program. Additionally, interest rates have declined compared to the first quarter of 2007.

Income Taxes

Income taxes for the first quarter of 2008 were $0.5 million. The effective income tax rate for the first quarter of 2008 was 7.4% compared to a benefit in the first quarter of 2007 of 33.1%. The first quarter of 2008 income tax expense primarily relates to foreign income tax obligations generated by profitable operations in foreign jurisdictions, as well as adjustments to reserves for uncertain tax positions. Additionally, the Company established a valuation allowance against federal, foreign and certain state

net operating losses incurred in the first quarter of 2008 as the tax benefit was deemed more likely than not to be unrealizable in future periods. The foreign deferred tax benefit recorded in the first quarter of 2008 relates primarily to temporary differences arising as a result of differentials between book and tax lives on intangible assets.

Net (Loss) Income and (Loss) Income Per Share

For the first quarter of 2008, our basic and diluted earnings per common share net loss was $(0.49), compared to a net income of $0.01 per basic common share and diluted common share recorded in the first quarter of 2007. Basic and diluted weighted average common and common equivalent shares outstanding were 13.2 million for the first quarter of 2008. The 13.2 million common and common equivalent shares outstanding at March 29, 2008 did not include the effect of dilutive securities due to the net loss which would have made those securities anti-dilutive to the earnings per share calculation.

LIQUIDITY AND CAPITAL RESOURCES

We have historically met our working capital and capital expenditure requirements, including funding for expansion of operations, through net cash flows provided by operating activities. Our principal source of liquidity is our operating cash flows. There are no material restrictions on the ability to transfer and remit funds among our international affiliated companies.

The Company had working capital of $75.5 million at March 29, 2008, a decrease of $1.6 million from $77.1 million of working capital as of December 31, 2007. As of March 29, 2008, we had approximately $55.9 million in cash, cash equivalent and short term investments, which are available for corporate purposes, including acquisitions and other general working capital requirements.

Net cash used in operating activities for the three months ended March 29, 2008 was $3.2 million compared to net cash provided of $2.5 million for the same period in the prior year. The change in net cash related to operating activities is largely attributable to revenue declines resulting in operating losses.

Cash used in investing activities was $1.8 million for the three months ended March 29, 2008 compared to cash provided by investing activities of $0.9 million for the three months ended March 31, 2007. The cash use is related to purchases of short-term investments.

The Company is party with a bank to a three-year $25.0 million Unsecured Revolving Credit Facility (the “Facility”), which includes a $2.0 million letter of credit sub-facility, expiring on December 19, 2009. In accordance with the terms of the Facility, the proceeds must be used for general corporate purposes, working capital needs, and in connection with certain acquisitions, as defined. The Facility contains certain standard covenants with which the Company must comply, including a minimum fixed charge coverage ratio, a minimum defined level of tangible net worth and a restriction on the amount of capital expenditures that can be made on an annual basis, among others. Our borrowings are limited by the calculation of our maximum leverage ratio, which is calculated on a quarterly basis. Interest is payable on any revolving credit amounts utilized under the Facility at prime, or the prevailing Euro rate plus 0.75% to 1.5% depending on the ratio of consolidated total indebtedness of the Borrower and

its subsidiaries to consolidated EBITDA. Letter of credit fees are payable on letters of credit outstanding quarterly at the rate of 0.75% to 1.5% depending on the ratio of consolidated total indebtedness of the Borrower and its subsidiaries to consolidated EBITDA, and annually at the rate of 1/8% beginning with letter of credit issuance. Commitment fees are payable quarterly at the rate of 0.25% per annum on the average unused commitment. As of March 29, 2008 and currently, there are no outstanding borrowings under the Facility, and we are in compliance with all debt covenants. We do not anticipate any short-term borrowings for working capital as we believe our cash reserves and internally generated funds will be sufficient to sustain working capital requirements for the foreseeable future.

Our financial position enables us to meet our cash requirements for operations and capital expansion programs for the next twelve months.

KEY RATIOS

The Company’s days sales outstanding (DSO) in accounts receivable trade, based on the past twelve months rolling revenue, was 88 and 73 days as of March 29, 2008 and March 31, 2007, respectively. The change was attributable to the timing of cash collection primarily related to large international projects. The Company’s inventory turnover ratio was 3.1 and 3.0 turns at March 29, 2008 and March 31, 2007, respectively. The increase in inventory turnover is related to the writedown of obsolete inventory in the first quarter of 2008.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

The Company leases office space and equipment under agreements which are accounted for as operating leases. The office lease for the Cheswick facility expires on June 30, 2009. The office leases for the Piscataway facility and the Sarasota facility expire on April 30, 2012 and April 28, 2008, respectively. The office leases for the Bracknell facility, Wuppertal facility, and Kontich facility expire on April 24, 2008, January 31, 2009, and April 1, 2012, respectively. The Company is also involved in various month-to-month leases for research and development and office equipment at all locations. In addition, all of the 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 which are material.

Included in the commitment schedule below are certain purchase obligations primarily arising from non-cancelable, non-returnable agreements with materials vendors. Additionally, the Company has arrangements with certain manufacturing subcontractors under which the Company is contingently obligated to purchase up to $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 unaudited condensed consolidated balance sheets as the Company has a legal obligation to purchase this inventory as of March 29, 2008. The recording of this obligation in the financial statements did not result in a charge to the Unaudited Condensed 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.

Included in the commitment schedule below are certain FIN 48 obligations. On January 1, 2007, the Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”), an interpretation of FASB Statement No. 109 (“SFAS 109”). As a result of the implementation of FIN 48, we recognized no material adjustment in the liability for unrecognized income tax benefits. At the adoption date of January 1, 2007, unrecognized tax benefits were $0.1 million all of which would affect our effective tax rate if recognized. At March 29, 2008, unrecognized tax benefits were approximately $0.3 million. We do not expect any significant changes to this liability.

Included in the commitment schedule below are certain pension obligations. As a result of our acquisition of the Broadband Test Division we assumed a defined benefit pension plan for three employees based in our German location. The German pension obligation acquired as of August 1, 2007 was approximately $0.7 million. Net periodic pension expense recorded from the date of the acquisition through March 29, 2008 was insignificant. The pension obligation as of March 29, 2008 was approximately $1.0 million. The increase in pension obligation from August 1, 2007 through March 29, 2008 was related primarily to changes in foreign exchange rates.

Minimum annual future commitments as of March 29, 2008 are (in thousands):


	Payments due by period
	Total		2008		2009		2010		2011		2012		Thereafter

Operating Lease Obligations	$	3,026	$	704	$	751	$	602	$	571	$	398	$	—

Purchase Obligations		104		58		38		8		—		—		—

FIN 48 Obligations		319		—		—		319		—		—		—

Pension Obligations		1,021		—		—		—		—		—		1,021

Total	$	4,470	$	762	$	789	$	929	$	571	$	398	$	1,021

The lease expense was $0.3 million for the three months ended March 29, 2008.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s current investment policy limits its investments in financial instruments to cash and cash equivalents, individual municipal bonds, and corporate and government bonds. Investments in financial derivatives and preferred and common stocks are strictly prohibited. The Company believes it

minimizes its risk 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. The Company holds its investment securities to maturity and believes that earnings and cash flows will not be materially affected by changes in interest rates, due to the nature and short-term investment horizon for which these securities are invested.

Item 4. CONTROLS AND PROCEDURES

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

There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the fiscal quarter ended March 29, 2008 that have materially affected or are reasonably likely to materially affect these controls.

PART II. OTHER INFORMATION

Item 1.A. RISK FACTORS

We wish to caution each reader of this Form 10-Q 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.

Our strategic focus on our core test and measurement competencies and cost reduction plans may be ineffective or may limit our ability to compete.

In the first quarter of 2008, we began to implement 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 recent acquisitions, including Emerson and Broadband Test Division. While we believe that these actions will 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. 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.

We have commenced a review of strategic business alternatives, which may or may not result in changes to our business and our profitability.

In April of 2008, we announced that we had engaged an outside financial advisor to assist with our review of strategic alternatives in which the Company will evaluate a full range of possible directions. In connection with this evaluation, the Company will review and, where appropriate, adjust our business model with a view toward achieving near-term profitability. Changes in our business model may require us to incur additional restructuring expenses and other write-downs and impairment charges in the near-term. We cannot assure that the evaluation process will result in any specific transaction or outcome or that it will improve profitability of the Company. Consideration of these options may cause us to incur additional expenses, disruption to and distractions in our business, and impact our ability to attract new business and to attract and retain key personnel.

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 and CFO, 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 present key employees were to cease to be associated with the Company, our future results could be adversely affected. Furthermore, we have recently 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, there is the risk that such changes could impact our business, which could negatively affect operating results.

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

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 that they purchase from us 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 RBOC 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:

•		the conditions of the communications market and the economy in general;

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

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

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

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

•		competition among the RBOCs, competitive exchange carriers and wireless telecommunications and cable providers; and

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

If the financial condition of one or more of our major customers should deteriorate, or if they have difficulty acquiring investment capital 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 will continue, and may increase in magnitude, in future periods. Demand for our products is driven by many factors, including the availability of funding for our products in customers’ capital budgets. As a result, projects that are anticipated may be deferred or delayed indefinitely, as service providers carefully evaluate expenditures. In addition, there is a trend for some of our customers to 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. Further, 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 public market analysts or investors. In such events, or in the event adverse conditions prevail, the market price of our common stock may decline significantly.

We may experience reduced product sales caused by customers transitioning their access network service assurance solutions.

Certain of our larger customers are in the process of upgrading their access networks, and continue transitioning and upgrading 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 Services business is subject to a trend of reduced capital spending for our products by our major customers.

Our Services business, which includes software maintenance as well as professional services, is sensitive to the decline in our larger customers’ capital investment in their traditional voice services. Furthermore, the timing of the extension or renewal of certain of the more significant software maintenance agreements can have a major impact on the Company’s Services revenues for any particular fiscal quarter or year. We are also experiencing intense pricing pressure from many of our larger software maintenance customers, as they continue to attempt to reduce their own internal costs. 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 continue to decrease.

We have completed, and may pursue additional acquisitions, which could result in the disruption of our current business, increased near-term expenses, 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. 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 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.

On August 1, 2007, we acquired the Broadband Test Division of Teradyne, Inc. In addition to the general risks discussed above, the successful completion of the integration of this business remains subject to the risks that we may be unable to secure key relationships with key suppliers and customers of the Broadband Test Division, execute agreements with new customers or close international opportunities due to the risks and uncertainties inherent in international markets which are important to the acquired business. In addition, we may experience difficulties in gaining market acceptance of our products in the international customer base of the acquired business.

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 additional impairment charges.

The carrying value of certain of our intangible assets could become impaired by changing market conditions. Statement of Financial Accounting Standards No. 142 (“SFAS 142”) requires goodwill and intangible assets with indefinite lives to be measured for impairment at least annually or more

frequently if events and circumstances indicate that the carrying value of such assets may not be recoverable. We perform annual impairment tests as of December 31 of each year. We have determined that we have one reporting unit and test goodwill for impairment by comparing the fair value of the Company’s equity, which we estimate based on the quoted market price of our common stock and an estimated control premium, to the Company’s book value. The testing completed at December 31, 2007 resulted in the total impairment of goodwill and partial impairment of certain indefinite lived intangible assets.

Statement of Financial Accounting Standards No. 144 (“SFAS 144”) 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. Based on our assessment that a triggering event had occurred, we performed the required recoverability tests of SFAS 144 at December 31, 2007 and determined that certain long-lived assets were impaired. In addition, an adjustment of the Company’s financial outlook upon the conclusion of the first quarter of 2008 caused further impairments of certain intangible assets, primarily those related to our cable product lines. The occurrence of further triggering events could result in additional impairment charges.

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, the introduction of certain products was previously delayed into the second quarter of 2008. The introduction of such products in the second quarter of 2008 and their rate of acceptance could be further delayed by, 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, including evolving industry-wide standards, 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.

Rapid technological change, including evolving industry standards, could render our products obsolete. Sales of our legacy cable products are declining, and demand for these products may further decline or be eliminated, as the market for these products transitions to industry-wide standards, such as the HMS and DOCSIS cable standards. Furthermore, standards for new services and technologies continue to evolve, requiring us to continually modify our products or to develop new versions to meet these new standards. Certain of these certifications are limited in scope, which may require that the product be recertified if any modifications to hardware or firmware are made. If we are unable to forecast the demand for, or develop new products or adapt our existing products to meet, these evolving standards and other technological innovations, or if our products and services do not gain the acceptance of our customers, our overall revenues and profitability will be adversely affected.

In addition, the introduction of certain products which we had anticipated introducing in the first quarter of 2008 has been delayed. The introduction of such products in the second quarter of 2008 and their rate of acceptance could be further delayed by, among other factors, extended testing or acceptance periods, requests for custom or modified engineering of such products to conform to customer requirements.

Further, changes in network architecture experienced by our customers in the Tier 2 and 3 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.

In addition, 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.

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.

We depend upon a limited number of third party contract manufacturers to manufacture certain elements of our products, and will transition to two new contract manufacturers in 2008. Furthermore, the components of our hardware products are procured from a limited number of outside suppliers. Although our products generally use industry standard products, some parts, such as ASICs, are custom-made to our specifications. Our reliance upon such 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, integration issues related to our acquisition of the Broadband Test Division, the loss of key assembly subcontractors, difficulties associated with the transition to our new contract manufacturers 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.

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

As a result of our recent Broadband Test Division acquisition and domestic market conditions, 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. Competition is particularly intense in the cable markets, due to the introduction of the DOCSIS standard, which allows customers to purchase system components from multiple vendors. We are also 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. Recent 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 RBOC 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 and cable television 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.

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 Cheetah product lines and certain of the newly acquired Broadband Test Division 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. We continue to face competition from Alpha which introduced a competitive DOCSIS-based transponder in 2005 and which has adversely impacted our sales of our Cheetah products.

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 the Company’s 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 the Company, and the Company 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 the Company’s 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 the Company’s 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 the Company’s existing products to become obsolete.

We depend on sales of our MCU products for a meaningful portion of our revenues, but this product is mature and its sales will continue to decline.

A large portion of our sales have historically been attributable to our MCU products. During the first quarter of 2008, we experienced significant declines in sales of our legacy MCU products to telecommunications customers and such decline was larger than anticipated. We expect that our MCU products will continue to contribute to revenues for the foreseeable future, but there can no assurance that our revenue from these products will recover during the remainder of the year or at any time in the future or that we will be able to accurately predict the rate at which these sales will continue to decline. 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. Our customers have begun to implement next generation network improvements such as Fiber-to-the-Premises (“FTTP”), which 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.

Although we are unable to predict future prices for our MCU products, we expect that prices for these products will continue to be subject to significant downward pressure in certain markets for the reasons described above. Accordingly, our ability to maintain or increase revenues will be dependent on our ability to expand our customer base, increase unit sales volumes of these products and to successfully, develop, introduce and sell new products such as our cable and software products. We cannot assure you that we will be able to expand our customer base, increase unit sales volumes of existing products or develop, introduce and/or sell new products or that we will accurately predict future trends in the demand for our MCU products.

Our continued emphasis on our network assurance and testing solutions and cable status monitoring products, and on software products in particular, could have a material adverse effect on our profitability.

We are actively engaged in research to improve and expand our cable products, including research and development to reduce product costs while providing enhancements; however, with the rise of industry-wide standards, among other factors, our cable products have lower margins than our telephony test system products. If sales of our network assurance and testing solutions and cable status monitoring products 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. During the first quarter of 2008, we experienced significant declines in sales of our Cheetah products. We do not expect to see significant recovery in this market, at least in the near future.

In addition, although software products generally generate higher margin returns for us than our hardware products, the initial development costs of software applications, coupled with the inherent problems with pricing software, can make it difficult to assess the potential profitability of new software products. Unless we acquire software, we must internally develop any new software products, which can be a relatively expensive and lengthy process, particularly for proprietary software products. In addition, because it is customary in our industry to sell perpetual enterprise licenses that cover an entire customer’s operations, it can be difficult to assess at the time of sale the exact price that we should charge for a particular license.

Another 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.

If our new development efforts fail to result in products which meet our customers’ needs, or if our customers fail to accept our new products, our revenues will be adversely affected.

We have recently introduced on a limited basis our LightHouse centralized remote monitoring system for the electric utility industry. The product is currently in beta trials and is expected to be generally available in the fourth quarter of 2008. The successful development, introduction and commercial success of this new technology will depend on a number of factors, including our ability to meet customer requirements, the existence of competitive products in the market, our timely and efficient completion of product design, timely and efficient implementation of manufacturing and manufacturing processes, our ability to meet product cost targets generating acceptable margins, timely remediation of product performance issues, if any, identified during testing, product performance at customer locations, differentiation of our product from our competitors’ products, and management of customer expectations concerning product capabilities and life cycles. Revenue from new products is necessary to offset declining revenue from other products.

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

Our 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 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.

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.

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 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 both the Company and 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.

We may incur significant liabilities if we fail to comply with environmental regulations.

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.

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. The telecommunications industry has experienced significant growth and consolidation in the past few years, although, over recent years, trends indicate that capital spending by this industry has decreased and may continue to decrease in the future as a result of a general decline in economic growth in local and international markets. In particular, RBOC and large ILEC 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 further significant slowdown 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, facilities and sales and marketing. 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 have licensed 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.

We are affected by a pattern of product price decline in certain markets, which can harm our business.

Because our cable products generate lower margins for us than our proprietary telephony offerings, an increase in the percentage of our sales of cable-related products relative to our traditional products will result in lower profit margins. Furthermore, consolidations within the cable industry and the adoption of the DOCSIS standards have caused and could continue to cause pricing pressure as our competitors lower product pricing. As a result of these factors, our revenues have been and may continue to be adversely affected. In addition, although we have developed DOCSIS-based hardware, this part of our business has been adversely affected by general economic conditions and competition from Alpha, our OEM distributor that introduced a competitive DOCSIS-based transponder in 2005, which has adversely impacted our sales of our Cheetah products. As a result of these factors, our revenues have been and may continue to be adversely affected. We do not expect to see significant recovery in this market, at least in the near future.

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;

•		Changes in financial estimates or recommendations or failure to continue research coverage by stock market analysts regarding us or our competitors;

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

•		Announcements by us related to our consideration of strategic business opportunities;

•		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.

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.

Item 6. EXHIBITS

(a)

Exhibits:

The following exhibits are being filed with this report:


Exhibit
Number		Description
10.1		Separation and Mutual Release dated January 7, 2009 by and between Tollgrade Communications, Inc. and Carol M. Franklin, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed with the SEC on January 10, 2008.

10.2		Severance Policy, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 31, 2008.

10.3		Employment Agreement dated April 10, 2008 between the Company and Joseph A. Ferrara, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed with the SEC on April 16, 2008.

31.1		Certification of Chief Executive Officer, filed herewith.

31.2		Certification of Chief Financial Officer, filed herewith.

32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18.U.S.C. Section 350, filed herewith.

™LoopCare is a trademark of Tollgrade Communications, Inc.
™Cheetah is a trademark of Tollgrade Communications, Inc.
™HUB is a trademark of Tollgrade Communications, Inc.
™ICE 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 trademark of Tollgrade Communications, Inc.
^®Celerity is a trademark of Tollgrade Communications, Inc.
^®DOCSIS is a registered trademark of Cable Television Laboratories, Inc.
All other trademarks are the property of their respective owners.

SIGNATURES

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


	Tollgrade Communications, Inc. (Registrant)
Dated: May 8, 2008	/s/ Joseph A. Ferrara
	Joseph A. Ferrara
	Chief Executive Officer and President



Dated: May 8, 2008	/s/ Samuel C. Knoch
	Samuel C. Knoch
	Chief Financial Officer and Treasurer



Dated: May 8, 2008	/s/ R. Joseph Fink
	R. Joseph Fink
	Controller

EXHIBIT INDEX

(Pursuant to Item 601 of Regulation S-K)


Exhibit
Number		Description
10.1		Separation and Mutual Release dated January 7, 2009 by and between Tollgrade Communications, Inc. and Carol M. Franklin, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed with the SEC on January 10, 2008.

10.2		Severance Policy, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 31, 2008.

10.3		Employment Agreement dated April 10, 2008 between the Company and Joseph A. Ferrara, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed with the SEC on April 16, 2008.

31.1		Certification of the 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

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Tollgrade Communications (TLGD) Inactive 10-Q2008 Q1 Quarterly report

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