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Tollgrade Communications, Inc.    Correspondence

Larry
Spirgel

Assistant Director

Securities and Exchange Commission

Washington D.C. 20549

    Re:

    Tollgrade Communications, Inc.

    Form 10-K for Fiscal Year Ended December 31, 2004

    Filed on March 3, 2005

    Form 10-Q for Fiscal Quarter Ended March 26, 2005

    File No. 0-27312

Dear Mr. Spiregal,

This letter sets forth the responses of Tollgrade Communications, Inc. (the “Company”) to the
comments made in your September 23, 2005 letter. Each of these comments are set forth below,
organized in the same manner and order and format as your letter, with the staff comments in
italics and our responses immediately following.

     Background and Fact Pattern

     In order to establish a fundamental baseline for the discussion regarding goodwill, we believe
it necessary to review certain aspects of financial reporting in our December 31, 2004 financial
statements, as well as our selected accounting policies related to the test for impairment of this
asset. We will then answer each of your questions utilizing the baseline data in the order in
which they are presented in your comment letter to us dated September 23, 2005.

     Subsequent to adoption and transition, Tollgrade selected December 31 as the date upon which
we will perform our annual tests for potential impairment as required under paragraph 17 of FAS
#142. This is the date upon which we perform our annual tests for potential impairment, and have
done this using a consistent methodology at each December 31, including that which was used at
December 31, 2004.

     We specifically follow the guidance as indicated in paragraphs 19 and 20 of FAS #142 in
performing our tests for impairment. These paragraphs indicate a two step test should be
performed. The first step is to determine potential impairment by comparing the estimated fair
value of the reporting unit with its carrying amount. The second step, should potential impairment
be indicated in step one, would require additional analysis to determine the implied fair value of
goodwill.

     Paragraph 23 of FAS #142 indicates “quoted market prices in active markets” as the best
evidence of fair value, but further indicates the “market price of an individual equity security
may not be representative of the estimated fair value of the reporting unit

as a whole.”
Furthermore, paragraph 23 indicates the “quoted market price...need not be the sole measurement basis
of the estimated fair value of a reporting unit.” Although our shares are traded on an active
exchange, we have several very large shareholders (i.e. 10 shareholders own nearly 50% of the
Company) which create a thinly traded environment and contributes to volatility in our share price.
Additionally, other factors including general conditions in the telecommunications industry also
impacts the volatility of our stock. As a result, it is management’s opinion that an average of
the quoted market prices for our shares over generally one business cycle (or one year) is more
reflective of the estimated fair value to be used in performing the annual test for potential
impairment of goodwill than the market price on a single day.

     It should be noted that at December 31, 2004, our net book value was $147.5 million. Our
estimated fair value based on a twelve-month average of our quoted share price was $158.2 million.
Utilizing the quoted market price for all Tollgrade shares outstanding on December 31, 2004, our
estimated fair value was $161.1 million. Therefore, at December 31, 2004, Step 2 was not required.

     Paragraph 28 of FAS #142 requires that impairment testing of goodwill be performed between
annual tests if “triggering events” would occur “that would more likely than not reduce the fair
value of a reporting unit below its carrying amount.” In management’s opinion, there have been no
such triggering events, either those listed in paragraph 28 or any others that would have caused a
permanent decline in our fair market value since December 31, 2004. Therefore, unless triggering
events occur between now and December 31, 2005, we intend to perform our annual test of potential
impairment as of that date. If the fair value of our equity, excluding any control premium,
indicates a shortfall to its current carrying value, we intend to seek the assistance of an expert
third party advisor to assist us in determining the estimated fair value of our equity on a
controlling interest basis as permitted under paragraph 23 of FAS #142.

Intangible Assets and Goodwill, page 26

    1.

    Please refer to prior comment #2. We have reviewed your response and have the
following comments:

    Tell us why it is appropriate to use the average stock price for a 12 month period to
estimate the fair value of your reporting unit. Also, tell us why it is not appropriate
to use the stock price at the date of your impairment test. Further, tell us the total
fair value calculated based on your average stock price.

Tollgrade Response:

We believe paragraph 23 of FAS #142 permits alternative methods, other than the utilization of
quoted market prices, for determining an estimate of the fair value of a reporting unit. As
discussed above, the thinly traded nature of our shares, as well as

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potential impact of
macroeconomic events, can at times result in significant volatility of our share price. To
compensate for this volatility, we have consistently used a twelve-month average share price in
estimating the fair value of our equity for the purpose of determining potential impairment. We do
not use the quoted share price at the impairment measurement dates because we believe the
aforementioned volatility creates a high degree of likelihood that those prices would not be
indicative of fair value on those dates.

You state that the average stock price for a 12 month period is not representative of your
reporting unit’s fair value because your stock price has been higher than your book value
in a number of individual dates in 2005. Tell us why it is appropriate for your impairment
analysis to consider a “temporary decline” in your fair value. Also, tell us how a number
of individual dates where the price is higher than your book value weighs more heavily
than when the number of individual dates where the stock price is lower then your book
value.

Tollgrade Response:

Your questions are drawn from the text of our proposed MD&A disclosure presented in our prior
correspondence that should have been labeled as “interim period” as opposed to December 31, 2005
(our measurement date). In an “interim period” context, our discussion was meant to point out that
our share price has been volatile (i.e. fluctuating above and below book value), and that we
have not had a triggering event since the last measurement date, and as a result, we believe the
decline in share value to be temporary based on all factors considered. We trust the questions we
elicited from you which are detailed above are now satisfied, given that the context of this
proposed quarterly disclosure was designed for an interim period rather than at a December 31
impairment measurement date.

Tell us how you considered any control premium in determining your fair value. Also, tell
us the amount assigned to the control premium.

Tollgrade Response:

We needed to look no further than the quoted share prices to support the carrying value of our
equity at the December 31, 2004 measurement date. Since a determination of a control premium would
serve to increase the excess of the estimated fair value over the book value, we did not undertake
the effort to quantify the value of the control premium.

You state you will obtain a third party valuation if the lower market value conditions
continue to exist. Tell us why it is appropriate to change your impairment testing
methodology.

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Tollgrade Response:

As previously discussed, paragraph 23 of FAS #142 permits the estimate of fair value used in the
tests for potential impairment to include consideration of a change in control premium. Our
intention would be to seek third party expertise in assisting management in this evaluation. For
reasons discussed above, we do not consider this to be a change in our impairment testing
methodology.

The annual test for goodwill impairment is required and must be done exclusive of a
triggering event. Your statement that the temporary decline is not a triggering event is
inconsistent with your discussion of annual testing.

Tollgrade Response:

Our response to your previous comment letter which elicited these questions was mislabeled. This
proposed disclosure should have been labeled “interim period” not December 31, 2005. Taken in the
context of an “interim period” disclosure we believe our comments are appropriate. We agree that
the annual test for goodwill impairment must be done exclusive of a triggering event and that
annual measurement of impairment, as indicated in FAS #142, does not consider temporary declines in
stock price.

Note 2. Intangible Assets, page 46

    Please refer to prior comment #9. We have reviewed your response and have the
following comments.

    2.

    Please tell us how you have considered the competitive, economic and technological factors
in evaluating your LoopCare Base Software as an indefinite-lived intangible asset as
discussed in your filing. More specifically address, the downturn in the
telecommunications industry, the RBOCs considerable slowing of capital investment on POTS
lines, and the new focus on fiber-optic technology, wireless and VoIP communications.
Also, tell us how you considered the term of any patents related to the LoopCare Base
Software. Refer to paragraphs 11(d) and 11(e) of FAS 142.

Tollgrade Response:

LoopCare is an integral part of the embedded test system for every major Regional Bell Operating
Company (RBOC). It is their primary method used to centrally test

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approximately
120 million POTS
lines. Therefore, competition exists primarily through changes in network architecture rather than
through direct competition. It is well documented that the majority of RBOCs must continue to
maintain their existing landline network even as they roll-out high speed data, VoIP, video and
wireless services. We firmly believe the increase in competition within our customer base
(specifically the increase in competition between telephony providers and cable providers) will put
additional pressure on RBOCs to maximize the utilization of their
existing infrastructure in order to
maximize their return on investment. Therefore, we believe the embedded LoopCare test system will
continue to play a role in the architectures of the RBOCs well into the future. Additionally, in
order to further drive LoopCare into the RBOCs network operations, we continue to invest in
research and development to provide additional capabilities of the LoopCare system to address the
changes in the network architecture. Although sales of certain products, primarily the MCU, are
greatly impacted by the downturn in the industry, slowing capital investment in POTS lines and new
technology like VoIP, we believe that these factors do not impact the LoopCare software to the same
extent and we also believe the core LoopCare software is critical to the ongoing quality of service
of their evolving networks. Lastly, we do not own any patents pertaining to the LoopCare software.

    3.

    Please tell us whether there have been any modifications to the original LoopCare Base
Software Code prior to and after the acquisition of the software. Also, tell us the nature
of these modifications.

Tollgrade Response:

We have made no significant modifications of the LoopCare Base Software Code subsequent to our
acquisition of the product and, to the best of our knowledge, we are not aware of any significant
modifications prior to our acquisition. We do engineer new features. However, these features
overlay the base software and do not alter or replace the base software. These new features
provide additional functionality to our customers.

    4.

    Please tell us the amount of your annual maintenance costs for the LoopCare Base software
in relation to its carrying value. If you have concluded that such costs are minimal, tell
us your basis for your conclusion. Refer to paragraph 11(f) of FAS 142.

Tollgrade Response:

We keep our software change-control records related to revisions of LoopCare in such a manner that
permits us to review such software changes by type. These records reflect that 5% of the changes
made since the acquisition were related to the Base Software, which is equivalent to less than 1%
of the efforts expended. This equates to approximately 0.1% in relation to its carrying value.

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Post Warranty Maintenance Agreements

    5.

    We note that you entered into two software maintenance agreements in 2004 with two
RBOCs for a one year term that expires on December 31, 2005. Your previous three year
software maintenance agreement with another RBOC expires on December 31, 2005. Further,
you entered into a software maintenance agreement in early 2005 with the remaining RBOC
for a two year term. It appears to us that these maintenance agreements are not
automatically renewed and are relatively short-term in nature. Also, it appears that
there are economic changes taking place with the RBOCs. Please tell us in more detail how
you considered these factors in concluding that your software maintenance agreements are
an indefinite-lived asset. We understand that these agreements were renewed over the past
30 years. Refer to paragraphs 11(c), 11(d) and 11(e) of FAS 142.

Tollgrade Response:

We concluded that our LoopCare software maintenance contract agreements are an indefinite lived
asset for the following reasons:

    •

    Tollgrade owns the source code for LoopCare and our customers have no
capability to maintain the code on their own.

    •

    LoopCare is considered a “Critical” management system by all RBOCs and, as
such, requires maintenance.

    •

    LoopCare is deeply embedded in all RBOC’s network operations systems such that
removal is cost prohibitive.

    •

    There are no legal, regulatory or contractual provisions which limit the
agreements useful lives.

    •

    The agreements are renewed without substantial cost in comparison to their
value.

    •

    There are no known effects from obsolescence, demand, competition or other
economic stability factors that would limit this assets useful life.

Based upon the aforementioned facts and circumstances, we have concluded that cash flows for the
underlying services will continue indefinitely into the future, as such this asset has an
indefinite life until material changes in such underlying facts and circumstances would indicate
otherwise. Finally, we performed our annual test for potential impairment at December 31, 2004
related to the Loopcare software maintenance contracts and based on this process determined that no
impairment existed.

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    6.

    Please tell us whether there have been any material modifications to the original
terms and conditions of your software maintenance agreements. We understand that each
party has the right or ability to make changes to these agreements through the renewal
negotiation process. Include in your response a discussion of the changes made during
each renewal process and the modifications made over several renewal periods, the types of
changes made to the original terms and conditions, and whether you expect future changes
or modifications in these agreements.

Tollgrade Response:

There have been no material modifications to the original terms and conditions of our software
maintenance agreements since the acquisition of LoopCare in 2001. Changes that occur during the
renewal process typically include adding to the master maintenance agreement any new features
purchased by the customer, change