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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 0-27312

TOLLGRADE COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)

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

493 NIXON ROAD, CHESWICK, PENNSYLVANIA 15024
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: 412-274-2156

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK, PAR VALUE $.20 PER SHARE
(Title of Class)

Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registration was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
---

The Registrant estimates that as of March 7, 1997, the aggregate market value
of shares of the Registrant's Common Stock held by non-affiliates (excluding
for purposes of this calculation only, 968,540 shares of Common Stock held of
record or beneficially by the executive officers and directors of the
Registrant as a group) of the Registrant was $106,209,805.

As of March 7, 1997, the Registrant had outstanding 5,662,896 of its
Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of Form 10-K into which
Document Document is incorporated
- -------- -----------------------------

Portions of the Annual Report to Shareholders
for the year ended December 31, 1996 II and IV

Portions of the Proxy Statement to be distributed
in connection with the 1997 Annual
Meeting of Shareholders III

PART I

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

The statements contained in this Annual Report on Form 10-K, specifically those
contained in Item 1 "Business" and Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operation," and statements incorporated by
reference into this Form 10-K from the 1996 Annual Report to Shareholders, along
with statements in other reports filed with the Securities and Exchange
Commission, external documents and oral presentations, which are not historical
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. These forward-looking statements represent Tollgrade
Communications, Inc.'s (the "Company") present expectations or beliefs
concerning future events. The Company cautions that such statements are
qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statements. Results actually
achieved may differ materially from expected results included in these
statements. Those factors which specifically related to the Company's business
include the following: rapid technological change along with the need to
continually develop new products; dependence on a single product line;
competition; dependence on key employees; management of Company's growth;
dependence on certain customers; dependence on certain suppliers; proprietary
rights and risks of third party claims of infringement; and government
regulation.

ITEM 1. BUSINESS.

The Company was incorporated in Pennsylvania in 1986 and began
operations in 1988. Its principal offices are located at 493 Nixon Road,
Cheswick, Pennsylvania 15024 and its telephone number is (412) 274-2156.

The Company designs, engineers, markets and supports proprietary
products which enable telephone companies to use their existing line test
systems to remotely diagnose problems in "plain old telephone service" ("POTS")
lines containing both copper and fiber optics. POTS lines comprise the vast
majority of lines in service today throughout the world. In addition to
traditional voice service, POTS includes lines for popular devices such as
computer modems and fax machines. POTS excludes the more complex lines, such as
data communications service lines, commonly referred to as "special services."

POTS line test systems, located at telephone companies' central
offices, diagnose problems in the "local loop", which is the portion of the
telephone network which connects end users to a telephone company's central
office, and is comprised primarily of copper wireline. The ability to remotely
test reduces the time needed to identify and resolve problems and eliminates or
reduces the cost of dispatching a technician to the problem site. Most POTS
line test systems were designed for use over copper wireline only, so that the
introduction of fiber-optic technology into the local loop renders it
inaccessible to these test systems. The Company's metallic channel unit ("MCU")
products solve this problem by extending test-system access through the
fiber-optic portion into the copper portion of the local loop.

Products. The Company's MCU products plug into the digital loop
carrier ("DLC") systems that are large systems manufactured by equipment
vendors such as AT&T, that are used by telephone companies to link the copper
and fiber-optic portions of the local loop. DLC systems are located at the
telephone company central offices and at remote sites within a local user area,
and effectively multiplex the services of the copper lines into a single
fiber-optic line. In many instances, several DLC systems are located at a
single remote site to serve several thousand different end-user homes and
offices. Generally, for every DLC remote site, two MCU line testing products
are deployed. To ensure compatibility with these DLC systems, the Company pays
royalties pursuant to license agreements for the use of

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proprietary design integrated circuits ("PIDCs"). The PIDCs are the design and
property of the DLC system manufacturer from which they are purchased. The
Company maintains license agreements with Advanced Fibre Communications, Lucent
Technologies, DSC Technologies Corporation, Fujitsu Network Transmission
Systems, Inc., NEC American, Inc., Northern Telecom Inc. and Reliance Comm/Tec
Corporation. In general, the current terms of these agreements expire at various
times between July 1997 and November 2004, with renewal provisions (unless
either party desires to terminate) for periods of between one and five years.
The Company paid $254,300, $1,075,800 and $1,779,700, respectively in 1994, 1995
and 1996 as royalties under the license agreements, which royalties are
calculated based on a percentage of the list price of MCU products which
incorporate the technology licensed under each such agreement. Certain of the
license agreements require the Company to maintain the confidentiality of the
licensor's proprietary information and/or the terms and conditions of the
agreement itself. Future license agreements entered into by the Company may
contain terms comparable to, or materially different than, the terms of existing
agreements as competitive and other conditions warrant. The loss of PDICs
license agreements or the inability of the Company to maintain an adequate
supply of PDICs could have a material adverse effect on the Company's business.
Other MCU technology is also used with home and business alarm systems. As with
home service line testing, home alarm systems must be monitored from the alarm
company's headquarters along a hybrid copper and fiber-optic line. The Company's
alarm-related MCU products are used to facilitate the transport of analog alarm
signals from subscriber homes to alarm company monitoring stations across the
hybrid telephone network. These units plug into equipment at both central office
and remote locations. MCU products accounted for more than 90%, 93% and 93% of
the Company's sales in 1994, 1995 and 1996, respectively.

Product and Technology Development. The Company's product
development personnel are organized into teams, each of which is effectively
dedicated to a specific product line or lines. Each product team also
implements the Company's ongoing "value engineering" programs which are
designed to replace the Company's products with successive generations having
additional features and/or lower costs. The Company continuously monitors
developing technologies and introduces products as defined standards and
markets emerge. In addition, the Company continues to investigate the
development of new applications for its MCU technology and other technologies
to service the telecommunications industry. During 1994, 1995 and 1996,
research and development expenses were approximately $1,585,000, $2,637,000 and
$3,921,000, respectively.

Proprietary Rights. The names "Tollgrade(R)", "MCU(R)" and
"Micro-Bank(R)", and the Company's corporate logo are registered trademarks of
the Company. "Team Tollgrade(SM)" is a service mark of the Company. The Company
has obtained three patents on the MCU products with expiration dates ranging
from 2010 to the year 2014 and has two provisional patent applications pending.
The Company will seek additional patents from time to time related to its
research and development activities. The Company protects its trademarks,
patents, inventions, trade secrets, and other proprietary rights by contract,
trademark, copyright and patent registration, and internal security.

Customers. The Company's primary customers are the seven regional
Bell operating companies ("RBOCs"), which are Ameritech Corporation, Bell
Atlantic Corporation, BellSouth Corporation, NYNEX Corporation, Pacific Telesis
Group, SBC Communications Inc., and US WEST Inc., as well as major independent
telephone companies such as GTE Corporation, Sprint and The Southern New
England Telephone Company. Historically, almost all of the Company's sales have
been made to the RBOCs (86% in 1996). BellSouth Corporation, NYNEX Corporation,
Bell Atlantic Corporation and US WEST Inc. accounted for 30%, 27%, 8% and 8%,
respectively, of the Company's total sales in 1996. The Company's relationships
with its customers are material to the Company's business, and the loss of any
such relationship could have a material adverse effect on the Company's
business.

Manufacturing. The Company's manufacturing operations consist
primarily of quality control, functional testing, final assembly, burn-in and
shipping. The Company uses independent third-party contract assembly and test
companies on primarily a consignment basis for circuit board

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assembly and in-circuit testing for all of its products. In particular, one
third-party contract assembler is utilized by the Company for a significant
portion of its circuit board assembly and in-circuit testing requirements. The
loss of this particular subcontractor could cause delays in the Company's
ability to meet production obligations and could have a material adverse effect
on the Company's results of operations. In addition, shortages of raw material
to, or production capacity constraints at, the Company's subcontractors could
negatively affect the Company's ability to meet its production obligations and
result in increased prices for affected parts. Any such reduction may result in
delays in shipments of the Company's products or increases in the price of
components, either of which could have a material adverse impact on the Company.

The Company currently procures all of its components from outside
suppliers. Generally, the Company uses industry standard components for its
products. Application specific integrated circuits ("ASICs") are a key
component to the manufacturing process and are custom made to the Company's
specifications. Currently the Company obtains all of its ASICs from National
Semiconductor Corp. Although the Company has generally been able to obtain
ASICs on a timely basis, a delay in the delivery of these components could have
a material adverse impact on the Company.

Backlog. The Company's backlog at December 31, 1996 was
approximately $0.9 million, as compared to approximately $2.1 million at
December 31, 1995. The decrease was due largely to a $1.3 million order
relating to a one-time project for a major customer that was included in the
December 31, 1995 backlog and was subsequently shipped in the first quarter of
1996. The Company includes in backlog all firm purchase orders for products
regardless of their ship date. Because of the quick turnaround that the
customers expect on their orders, which is sometimes one to two weeks, and
because of the possibility of customer changes in delivery schedules or
cancellation of orders, the Company's backlog as of any particular date may not
be indicative of actual revenues expected for any future period.

Competitive Conditions. The deciding competitive factors in the
Company's market include price, product features, performance, reliability,
service and support, breadth of product line, technical documentation and
prompt delivery. The Company believes that it competes favorably on all of
these factors, and certain of its products have proprietary or patented
features. The Company also attempts to enter into development agreements for
its MCU products with the manufacturers of DLC and other complex systems, which
serves to ensure compatibility for its products. Competition would increase if
new companies enter the Company's product markets or existing competitors
expand their product lines. For instance, the recently enacted
telecommunications reform legislation has lifted the restrictions which
previously prevented the RBOCs from manufacturing telecommunications equipment.
Pursuant to this legislative reform, the RBOCs, which are the Company's largest
customers, may become competitors of the Company in the markets served by the
Company.

For the Company's line-testing MCU devices, the primary
competitive products are the remote monitoring units made by Teradyne, Inc. and
the Harris Dracon division of Harris Corporation. The Company's MCU is simpler
and less costly to install and permits the full complement of centralized
testing to be performed as quickly and accurately as with copper by-pass
wiring. The Company believes that Wiltron Company, Inc. and the Tau-Tron
division of General Signal Corporation, providers of special services test
systems, could expand into POTS line testing. The alarm-related MCU product's
primary competitor is the Turbo 2000 unit made by Antec Corporation.

Employees. At December 31, 1996 the Company had 184 full-time
employees, all in the United States. None of the Company's employees is
represented by a collective bargaining agreement.

Government Regulation. The telecommunications industry is subject
to regulation in the United States and other countries. Federal and state
regulatory agencies, including the FCC and various state public utility
commissions and public service commissions, regulate most of the Company's
domestic customers. While such regulation does not typically affect the Company
directly, the effects of such regulations on the Company's customers may, in
turn,

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adversely impact the Company's business and operating results. Governmental
authorities also have promulgated regulations which, among other things, set
installation and equipment standards for private telecommunications systems and
require that all newly installed hardware be registered and meet certain
government standards.

ITEM 2. PROPERTIES.

The Company's headquarters and principal administrative,
engineering and assembly facilities are located in Cheswick, Pennsylvania and
occupy approximately 58,000 square feet. The Company occupies its current
facilities under a lease that expires in December, 1998 with successive options
to renew through 2010. The Company believes that its current facilities are
adequate to support its present level of operations and there is ample room to
support continued sales growth for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS.

There are currently no outstanding or pending material legal
proceedings with respect to the Company or its business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

During the fourth quarter of 1996, there were no matters submitted
to a vote of security holders through solicitation of proxies or otherwise.

EXECUTIVE OFFICERS OF THE COMPANY
---------------------------------

Information relating to the executive officers of the Company as of January 31,
1997 is set forth below:

R. Craig Allison Chairman of the Board since April 1990;
also Chief Executive Officer from April
1990 until September 1995; Director since
1986; father of Christian L. Allison, Chief
Executive Officer; Age 56.

Christian L. Allison Chief Executive Officer since September
1995; Treasurer since May 1992; President
from October 1993 until September 1995;
prior thereto, Chief Operating Officer;
Director since 1992; son of R. Craig
Allison, Chairman of the Board; Age 36.

Sara M. Antol Chief Counsel and Secretary since April
1996; prior thereto, employed by the law
firm of Babst, Calland, Clements and
Zomnir; Age 35.

John Benedict Assistant Director of Engineering since
November 1995; Design Engineer from July
1992 until November 1995; prior thereto,
employed as a test engineer by Modicon Inc.
(manufacturer of industrial automation
systems); Age 35.

Robert Cornelia Executive Vice President, Operations since
May 1996; Vice President, Manufacturing
from October 1993 until May 1996; prior
thereto, Production Manager; Age 34.

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Ruth Dilts Director of Communications since May 1994;
prior thereto, Art Director at DDF&M Inc.
(advertising, marketing and public
relations firm); Age 36.

Bradley N. Dinger Controller since September 1996; prior
thereto Assistant Controller of AMSCO
International, Inc. (manufacturer of health
care equipment) from May 1993 until
September 1996; prior thereto, Corporate
Accounting Manager of AMSCO; Age 34.

Herman Flaminio Senior Vice President, Marketing and
Strategic Products since October 1993;
Director of Marketing, Technical Support
and Planning from January 1992 until
October 1993; prior thereto, Manager of
Long-Range Planning and Director of
Marketing, Technical Support and Planning;
brother of Rocco L. Flaminio, Vice
Chairman, Chief Technology Officer and a
Director; Age 57.

Rocco L. Flaminio Vice Chairman and Chief Technology Officer
since October 1993; prior thereto,
President; Director since December 1995;
brother of Herman Flaminio, Senior Vice
President; Age 72.

Mark C. Frey Senior Vice President, Engineering since
1993; Vice President, Engineering from 1992
until 1993; prior thereto employed by Pulse
Communications, Inc. (a DLC system vendor
and subsidiary of Hubbel, Inc.) as
Director, PSC 6000 Development (a
proprietary DLC system); Age 43.

Joseph Giannetti Vice President, Human Resources, Safety and
Security since June 1995; Director of
Safety and Environmental on a part-time
basis from June 1993 until June 1995; prior
thereto, worked on a contract basis for
Pittsburgh Applied Research Corporation (a
contractor in research and development
services); Age 60.

Frederick J. Kiko Senior Vice President, Design Engineering;
Age 53.

Samuel C. Knoch Chief Financial Officer since August 1996;
Controller of AMSCO International, Inc.
(manufacturer of health care equipment)
from October 1994 until August 1996;
Director of Internal Audit at AMSCO from
June 1993 until October 1994; prior
thereto, employed by the accounting firm of
Arthur Andersen & Co.; Age 41.

Geoffrey Lea Vice President, Marketing & Special
Assignment Sales Administration since
August 1996; Vice President, Sales from
September 1995 until August 1996; Vice
President, Marketing from January 1995
until September 1995; prior thereto,
Regional Sales Manager for ADC
Telecommunications Inc.(a manufacturer of
telecommunications equipment); Age 38.

Gregory Nulty Vice President, Marketing since December
1994; prior thereto, Senior Product Manager
for Pulse Communications, Inc. ( a DLC
system vendor and subsidiary of Hubbel,
Inc.); Age 43.

Matthew Rosgone Vice President, Purchasing since July 1996;
Director of Purchasing from July 1995 until
July 1996; prior thereto, a Buyer; Age 28.

Kristee Williams Director of Quality Assurance since July
1995; prior thereto, Quality Assurance
Manager for American Meter Co. (a
manufacturer of flow correctors for the
natural gas industry); Age 48.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.

Information relating to the market for the Company's Common Stock and
other matters related to the holders thereof is set forth under the caption
"Common Stock Market Prices" on page 29 of the Company's 1996 Annual Report to
Shareholders and is incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA.

A summary of selected financial data for the Company, including each
of the last five fiscal years in the period ended December 31, 1996, is set
forth under the caption "Selected Consolidated Financial Data" on page 8 of the
Company's 1996 Annual Report to Shareholders and is incorporated herein by
reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

A discussion of the Company's financial condition and results of
operations is set forth under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 9 through 13 of the
Company's 1996 Annual Report to Shareholders and is incorporated herein by
reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Company's consolidated financial statements, together with the
report thereon of Coopers & Lybrand L.L.P., are set forth on pages 15 through
28 of the Company's 1996 Annual Report to Shareholders and are incorporated
herein by reference. Such financial statements and supplementary data are
listed in Item 14(a) (1), "Exhibits, Financial Statement Schedules, and Reports
on Form 8-K."

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

In addition to the information reported in Part I of this Form 10-K,
under the caption "Executive Officers of the Company", the information required
by this item appears beneath the captions "Election of Directors" and
"Executive Compensation -- Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive proxy statement for its 1997 Annual
Meeting of Shareholders and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

Information relating to executive compensation is set forth beneath
the caption "Executive Compensation" in the Company's definitive proxy
statement for its 1997 Annual Meeting of Shareholders and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Information relating to the security ownership of beneficial owners of
5% or more of the Common Stock and of the executive officers and directors of
the Company is set forth under the caption "Stock Ownership of Management and
Certain Beneficial Owners" in the Company's definitive proxy statement for its
1997 Annual Meeting of Shareholders and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information relating to certain relationships and related transactions
is set forth beneath the caption "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for its 1997 Annual
Meeting of Shareholders and is incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)(1) The following financial statements and supplementary data are
incorporated in Item 8 of Part II of this Form 10-K by reference to pages 14
through 29 of the Company's 1996 Annual Report to Shareholders, which are
incorporated herein by reference:

Statement of Management's Responsibility for Financial Reporting,
dated January 29, 1997
Report of Independent Accountants, dated January 29, 1997
Consolidated Balance Sheets at December 31, 1995 and 1996
Consolidated Statements of Operations for the three years ended
December 31, 1996
Consolidated Statements of Shareholders' Equity for the three years
ended December 31, 1996
Consolidated Statements of Cash Flows for the three years ended
December 31, 1996
Notes to Consolidated Financial Statements
Statements of Operations Data by Quarter

(a)(2) The following financial statement schedule is included herewith on page
14 and made a part hereof:

Schedule II (Valuation and Qualifying Accounts)

(a)(3) The following exhibits are included herewith and made a part hereof:

Exhibit
Number Description
- ------- -----------

3.1 Amended and Restated Articles of Incorporation of the
Company, filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-98322) (as amended, the
"S-1") and incorporated herein by reference thereto.

3.2 Bylaws of the Company, filed as Exhibit 3.2 to the S-1 and
incorporated herein by reference thereto.

4.1 Rights Agreement, dated as of July 23, 1996 between the
Company and Chase Mellon Shareholder Services, L.L.C., filed
as Exhibit 1 to the Company's Registration Statement on Form
8-A and incorporated herein by reference thereto.

10.1 Common Stock Purchase Agreement dated November 7, 1994,
between the Company and the investors listed on Schedule A
thereto (attachments and exhibits omitted), filed as Exhibit
10.1 to the S-1 and incorporated herein by reference
thereto.

10.2 Credit Agreement, dated as of July 1, 1995, by and between
the Company and Creditanstalt Corporate Finance, Inc.
(schedules and exhibits omitted), filed as Exhibit 10.2 to
the S-1 and incorporated herein by reference thereto.

10.3* 1995 Long-Term Incentive Compensation Plan, filed as
Exhibit 10.3 to the S-1 and incorporated herein by reference
thereto.

10.4 License Agreement, dated August 24, 1993 between Fujitsu
Network Transmission Systems, Inc. and the Company, filed as
Exhibit 10.4 to the S-1 and incorporated herein by reference
thereto.

10.5 License Agreement, dated September 26, 1994 between NEC
America, Inc. and the Company, filed as Exhibit 10.5 to the
S-1 and incorporated herein by reference thereto.

10.6 Interface License Agreement, dated March 22, 1995 between
Northern Telecom Inc. and the Company, filed as Exhibit 10.7
to the S-1 and incorporated herein by reference thereto.

10.7 Technical Information Agreement, dated February 1, 1993
between American Telephone and Telegraph Company and the
Company, filed as Exhibit 10.8 to the S-1 and incorporated
herein by reference thereto.

10.8 Technology License Agreement, dated November 16, 1994
between DSC Technologies Corporation and the Company, filed
as Exhibit 10.12 to the S-1 and incorporated herein by
reference thereto.

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10.9 License Agreement, dated August 24, 1993 between Reliance
Comm/Tec Corporation and the Company, filed as Exhibit 10.13
to the S-1 and incorporated herein by reference thereto.

10.10* Employment Agreement, dated as of December 13, 1995, between
the Company and R. Craig Allison, filed as Exhibit 10.10 of
the Annual Report of Tollgrade Communications, Inc. on Form
10-K for the year ended December 31, 1995 (the "1995 Form
10-K").

10.11* Employment Agreement, dated as of December 13, 1995, between
the Company and Christian L. Allison, filed as Exhibit
10.11 of the 1995 Form 10-K.

10.12* Stock Option Agreement entered into January 1, 1994 between
the Company and Frederick Kiko, together with a schedule
listing substantially identical agreements with Christian L.
Allison and Rocco L. Flaminio, filed as Exhibit 10.12 of the
1995 Form 10-K.

10.13* Stock Option Agreement entered into July 7, 1994 between the
Company and R. Craig Allison, together with a schedule
listing substantially identical agreements with Gordon P.
Anderson, John H. Guelcher, Richard H. Heibel and Joseph T.
Messina, filed as Exhibit 10.13 of the 1995 Form 10-K.

10.14* Stock Option Agreement entered into December 14, 1995
between the Company and R. Craig Allison, together with a
schedule listing substantially identical agreements with
Gordon P. Anderson, Jeffrey Blake, John H. Guelcher, Richard
H. Heibel, Joseph T. Messina and Douglas T. Halliday, filed
as Exhibit 10.14 of the 1995 Form 10-K.

10.15* Form of Stock Option Agreement dated December 14, 1995 and
December 29, 1995 for Non-Statutory Stock Options granted
under the 1995 Long-Term Incentive Compensation Plan, filed
herewith.

10.16* Change in Control Agreement, entered into May 30, 1996
between the Company and Sara M. Antol, together with a
schedule listing substantially identical agreements with
Robert Cornelia, Ruth Dilts, Herman Flaminio, Rocco
Flaminio, Mark Frey, Joseph Giannetti, Fred Kiko, Samuel
Knoch, Goeffrey Lea, Gregory Nulty, Matthew Rosgone and
Kristee Williams, filed as Exhibit 10.1 of the Report on
Form 10-Q of the Company filed on August 13, 1996.

10.17* Change in Control Agreement, entered into September 9, 1996
between the Company and Bradley N. Dinger, filed as Exhibit
10.1 of the Report on Form 10-Q of the Company filed on
November 12, 1996.

10.18* Form of Stock Option Agreement for Non-Statutory Stock
Options granted under the 1995 Long-Term Incentive
Compensation Plan, filed as Exhibit 10.2 of the Report on
Form 10-Q of the Company filed on November 12, 1996.

10.19* Non-employee Stock Option Agreement entered into December
13, 1996 between the Company and Lawrence Arduini, together
with a schedule listing substantially identical agreements
with Daniel Barry, Dr. Thomas Dugan, Robert Kampmeinert and
Dr. Richard Heibel, filed herewith.

10.20* Amendment to Employment Agreements, dated as of December 13,
1996, between the Company and R. Craig Allison and Christian
L. Allison, filed herewith.

11.1 Statement re: Computation of Per Share Earnings, filed
herewith.

13.1 Company's 1996 Annual Report to Shareholders, filed herewith.

21.1 List of subsidiaries of the Company, filed as Exhibit 21.1
to the S-1 and incorporated herein by reference thereto.

23.1 Consent of Coopers & Lybrand L.L.P., filed herewith.

27 Financial Data Schedule

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

The Company agrees to furnish to the Commission upon request copies
of all instruments not listed above which define the rights of holders of
long-term debt of the Company.

Copies of the exhibits filed as part of this Form 10-K are available
at a cost of $.20 per page to any shareholder of record upon written request to
the Secretary, Tollgrade Communications, Inc., 493 Nixon Road, Cheswick,
Pennsylvania 15024.

(b) Reports on Form 8-K filed during the quarter ended December 31, 1996.

None

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized as of March 19, 1997.

TOLLGRADE COMMUNICATIONS, INC.

By /s/ Christian L. Allison
----------------------------
Christian L. Allison
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Company and in the capacities indicated as of March 19, 1997.

SIGNATURE TITLE
--------- -----

/s/ R. Craig Allison Chairman of the Board
- ------------------------------------------
R. Craig Allison

/s/ Christian L. Allison Director, Chief Executive Officer,
- ------------------------------------------ Treasurer (Principal Executive Officer)
Christian L. Allison

/s/ Lawrence A. Arduini Director
- ------------------------------------------
Lawrence A. Arduini

/s/ Daniel P. Barry Director
- ------------------------------------------
Daniel P. Barry

/s/ Rocco L. Flaminio Director, Vice Chairman
- ------------------------------------------ and Chief Technology Officer
Rocco L. Flaminio

/s/ Richard H. Heibel, M.D. Director
- ------------------------------------------
Richard H. Heibel, M.D.

/s/ Robert W. Kampmeinert Director
- ------------------------------------------
Robert W. Kampmeinert

/s/ Samuel C. Knoch Chief Financial Officer
- ------------------------------------------ (Principal Financial Officer)
Samuel C. Knoch

/s/ Bradley N. Dinger Controller
- ------------------------------------------ (Principal Accounting Officer)
Bradley N. Dinger

Report of Independent Accountants

To the Board of Directors
Tollgrade Communications, Inc.:

Our report on the consolidated financial statements of Tollgrade
Communications, Inc. and subsidiaries has been incorporated by reference in
this Form 10-K from page 15 of the 1996 Annual Report to Shareholders of
Tollgrade Communications, Inc. and subsidiaries. In connection with our audits
of such financial statements, we have also audited the related financial
statement schedule listed in the index on page 9 of this Form 10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presently fairly, in all material respects, the information required to be
included therein.

/s/ COOPERS & LYBRAND L.L.P.

Pittsburgh, Pennsylvania
January 29, 1997

14
SCHEDULE II

TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1994, 1995 and 1996
(In thousands)

Col. A Col. B Col. C Col. D Col. E
- ------ ------ ------ ------ ------
Additions
Balance at ---------------------------
Beginning Charged to Charged to Balance at
of Year Expense Other Accounts Deductions End of Year
------- ------- -------------- ---------- -----------

Inventory Reserve:
Year ended December 31, 1994 $ 50 $107 $ -- $(97) $60
Year ended December 31, 1995 60 60 -- -- 120
Year ended December 31, 1995 120 95 -- -- 215

Deferred Tax Asset Valuation:
Year ended December 31, 1994 $1,060 $ -- $ -- $(1,060) $ --
Year ended December 31, 1995 -- -- -- -- --
Year ended December 31, 1996 -- -- -- -- --

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

Exhibit
Number Description
- ------ -----------

3.1 Amended and Restated Articles of Incorporation of
the Company, filed as Exhibit 3.1 to the
Company's Registration Statement on Form
S-1 (Reg. No. 33-98322) (as amended, the "S-1")
and incorporated herein by reference thereto. *

3.2 Bylaws of the Company, filed as Exhibit 3.2 to
the S-1 and incorporated herein by reference
thereto. *

4.1 Rights Agreement dated as of July 23, 1996 between the
Company and Chase Mellon Shareholder Services, L.L.C., filed
as Exhibit 1 to the Company's Registration Statement on Form 8-A
and incorporated herein by reference thereto. *

10.3 1995 Long-Term Incentive Compensation Plan, filed
as Exhibit 10.3 to the S-1 and incorporated herein
by reference thereto. *

10.4 License Agreement, dated August 24, 1993 between
Fujitsu Network Transmission Systems, Inc. and
the Company, filed as Exhibit 10.4 to the S-1
and incorporated herein by reference thereto. *

10.5 License Agreement, dated September 26, 1994 between
NEC America, Inc. and the Company, filed as
Exhibit 10.5 to the S-1 and incorporated herein by
reference thereto. *

10.6 Interface License Agreement, dated March 22, 1995
between Northern Telecom Inc. and the Company,
filed as Exhibit 10.7 to the S-1 and incorporated
herein by reference thereto. *

10.8 Technology License Agreement, dated November 16, 1994
between DSC Technologies Corporation and the Company, filed
as Exhibit 10.12 to the S-1 and incorporated herein by reference thereto. *

10.9 License Agreement, dated August 24, 1993 between Reliance
Comm/Tec Corporation and the Company, filed as Exhibit 10.13
to the S-1 and incorporated herein by reference thereto. *

10.10 Employment Agreement, dated as of December 13, 1995, between
the Company and R. Craig Allison, filed as Exhibit 10.10 of
the Annual Report of Tollgrade Communications, Inc.
on Form 10-K for the year ended December 31, 1995
(the "1995 Form 10-K"). *

10.11 Employment Agreement, dated as of December 13, 1995,
between the Company and Christian L. Allison, filed as
Exhibit 10.11 of the 1995 Form 10-K. *

10.12 Stock Option Agreement entered into January 1, 1994 between
the Company and Frederick Kiko, together with a schedule
listing substantially identical agreements with Christian L.
Allison and Rocco L. Flaminio, filed as Exhibit 10.12 of the
1995 Form 10-K. *

10.13 Stock Option Agreement entered into July 7, 1994
between the Company and R. Craig Allison, together
with a schedule listing substantially identical
agreements with Gordon P. Anderson, John H. Guelcher,
Richard H. Heibel and Joseph T. Messina, filed
as Exhibit 10.13 of the 1995 Form 10-K. *

10.14 Stock Option Agreement entered into December 14, 1995
between the Company and R. Craig Allison, together
with a schedule listing substantially identical
agreements with Gordon P. Anderson, Jeffrey Blake,
John H. Guelcher, Richard H. Heibel, Joseph T.
Messina and Douglas T. Halliday, filed as
Exhibit 10.14 of the 1995 Form 10-K. *

10.15 Form of Stock Option Agreement dated December 14, 1995
and December 29, 1995 for Non-Statutory Stock Options granted
under the 1995 Long-Term Incentive Compensation Plan, filed herewith.

10.16 Change in Control Agreement, entered into May 30, 1996
between the Company and Sara M. Antol, together with a
schedule listing substantially identical agreements with Robert Cornelia,
Ruth Dilts, Herman Flaminio, Rocco Flaminio, Mark Frey,
Joseph Giannetti, Fred Kiko, Samuel Knoch, Goeffrey Lea,
Gregory Nulty, Matthew Rosgone and Kristee Williams,
filed as Exhibit 10.1 of the Report on Form 10-Q of the
Company filed on August 13, 1996. *

10.17 Change in Control Agreement, entered into September 9, 1996
between the Company and Bradley N. Dinger, filed as
Exhibit 10.1 of the Report on Form 10-Q of the Company
filed on November 12, 1996. *

10.18 Form of Stock Option Agreement for Non-Statutory Stock Options
granted under the 1995 Long-Term Incentive Compensation Plan,
filed as Exhibit 10.2 of the Report on Form 10-Q of the Company
filed on November 12, 1996. *

10.19 Non-employee Stock Option Agreement entered into
December 13, 1996 between the Company and Lawrence Arduini,
together with a schedule listing substantially identical agreements
with Daniel Barry, Dr. Thomas Dugan, Robert Kampmeinert and
Dr. Richard Heibel, filed herewith.

10.20 Amendment to Employment Agreements, dated as of
December 13, 1996, between the Company and R. Craig Allison
and Christian L. Allison, filed herewith.

11.1 Statement re: Computation of Per Share Earnings, filed herewith.

13.1 Company's 1996 Annual Report to Shareholders, filed herewith.

21.1 List of subsidiaries of the Company, filed as
Exhibit 21.1 to the S-1 and incorporated herein
by reference thereto. *

23.1 Consent of Coopers & Lybrand L.L.P., filed herewith.

27 Financial Data Schedule

- --------------
* Incorporated by reference.