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, 1997
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: 724-274-2156

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 13, 1998, the aggregate market value
of shares of the Registrant's Common Stock held by non-affiliates (excluding for
purposes of this calculation only, 751,355 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 $107,473,112.

As of March 13, 1998, the Registrant had outstanding 5,853,936 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, 1997 II and IV

Portions of the Proxy Statement to be distributed
in connection with the 1998 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 1997 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 (724) 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(R)") 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 proprietary design integrated circuits
("PDICs"). The PDICs are the design and property of the DLC system manufacturer
from which they are purchased. The Company maintains license agreements with and
pays royalties to

Lucent Technologies, Fujitsu Network Transmission Systems, Inc., NEC American,
Inc. and Reliance Comm/Tec Corporation. In general, the current terms for
expiration of these agreements range at various times between August 1998 and an
indefinite duration, with renewal provisions (unless earlier terminated) for
periods of between one and five years. In addition, certain of these agreements
can be terminated prior to renewal. The Company incurred $1,075,800, $1,893,000
and $2,014,000, respectively in 1995, 1996 and 1997 as royalties under the
license agreements, which royalties are calculated either based on a percentage
of the list price of MCU products or a fixed amount per unit 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.
In addition, the Company maintains license agreements which do not contain
royalty provisions with Advanced Fibre Communications, DSC Technologies
Corporation, Northern Telecom Inc., UTSTARCOM, Inc., and most recently entered
into license agreements with Next Level Communications and SAT Division Reseaux
et Telecommunications (a French Corporation) for which products are still in the
early phase of development. The expiration dates of these agreements range at
various times between July 1998 and November 2004, with renewal provisions
(unless earlier terminated) for periods of one or more years. 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 93%, 93% and 94% of the Company's sales in
1995, 1996 and 1997, respectively. In addition, the Company has recently entered
into a license agreement with C-Cor Electronics, Inc. (a cable television
systems developer) in which the Company will develop and subsequently provide
its status monitoring transponder technology that will be incorporated into
C-Cor's cable network management system.

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(s) or technology. 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 1995, 1996 and 1997, research and
development expenses were approximately $2,637,000, $3,921,000 and $5,945,000,
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 TollgradeSM" is a service mark of the Company and
"Lighthouse(TM)", "Digitest(TM)" and "Telaccord(TM)" are trademarks for which
registration has been applied. The Company has obtained three patents on the MCU
products with expiration dates ranging from 2010 to the year 2014. In addition,
the Company has five U.S. provisional and two international patent cooperation
treaty ("PCT") 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 five regional
Bell operating companies ("RBOCs"), which are Ameritech Corporation, Bell
Atlantic Corporation, BellSouth Corporation, SBC Communications Inc., and US
WEST Inc., as well as major independent telephone companies such as Sprint and
Southern New England Telephone Company. Historically, almost all of the
Company's sales have been made to the RBOCs (86% in 1997). Bell Atlantic
Corporation and BellSouth Corporation accounted for 30% and 24%, respectively,
of the Company's total sales in 1997. 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. During 1997, the Company received ISO 9001 registration from British
Standards Institution, Inc. ISO 9000 is a harmonized set of standards that
define quality assurance management. Written by the International Organization
for Standardization ("ISO"), it is recognized throughout the United States,
Canada, the European Union and Japan. To be registered, the Company developed
and maintains internal documentation and processes to support the production of
quality products to ensure customer satisfaction.

For a portion of 1997 and prior years, the Company utilized one key
independent subcontractor to perform a majority of the circuit board assembly
and in-circuit testing work on its products. The Company also utilized other
subassembly contractors on a more limited basis. During the third quarter, 1997,
the key subcontractor notified the Company that its services would be phased
out, at the latest, during early 1998. The Company is in the process of phasing
out the use of that subcontractor, and is now utilizing two other subassembly
subcontractors that had been utilized by the Company on a more limited basis in
the past. The loss of the subcontractors 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. 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, 1997 was
approximately $1.6 million, as compared to approximately $0.9 million at
December 31, 1996. The increase was due largely to the receipt of certain orders
under Original Equipment Manufacturer ("OEM") arrangements scheduled for
shipment in the first quarter of 1998 and beyond. 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, 1997 the Company had 205 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, 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 67,000 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 1997, 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,
1998 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 57.

Christian L. Allison Chief Executive Officer since September
1995; Treasurer from May 1992 until April
1997; 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 37.

Sara M. Antol Chief Counsel and Secretary since April
1996; prior thereto, employed by the law
firm of Babst, Calland, Clements and Zomnir
P.C.; Age 36.

Robert L. Cornelia Executive Vice President, Operations since
May 1996; Vice President, Manufacturing
from October 1993 until May 1996; prior
thereto, Production Manager; Age 35.

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 35.

Herman Flaminio Executive Vice President, Marketing
Services, Planning and Technical Support
since July 1997; Senior Vice President,
Marketing and Strategic Products from
October 1993 to June 1997; prior thereto,
Director of Marketing, Technical Support
and Planning; brother of Rocco L. Flaminio,
Vice Chairman, Chief Technology Officer and
a Director; Age 58.

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 73.

Mark C. Frey Senior Vice President, Engineering since
1993; prior thereto, Vice President,
Engineering; Age 44.

Joseph P. 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 61.

Frederick J. Kiko Senior Vice President, Design Engineering
since 1988; Age 54.

Samuel C. Knoch Chief Financial Officer since August 1996;
Treasurer since April 1997; 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 42.

Geoffrey W. Lea Vice President, Sales N.A./L.A. since July
1997;Vice President, Marketing & Special
Assignment Sales Administration from August
1996 to June 1997; 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 39.

Gregory M. 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 44.

Joseph G. O'Brien Senior Vice President, Organizational
Development since October 1997; Director of
Employee Development from April 1997 until
October 1997; Coordinator, Elderberry
Junction, Goodwill Industries (a charitable
organization) from May 1995 until April
1997; Director of Public Relations of
Goodwill Industries from June 1994 until
May 1995; prior thereto, Roman Catholic
Priest, Diocese of Greensburg,
Pennsylvania; Age 38.

Timothy D. O'Brien Director of Communications since August
1997; Vice President of Ketchum Public
Relations ( a public relations firm) from
November 1995 until August 1997; prior
thereto, Account Supervisor at Ketchum; Age
37.

Mark B. Peterson Executive Vice President, Sales since
October 1997; prior thereto, Testing
Application Group product manager (MLT and
Switched Access Remote Test Systems (SARTS)
product lines) of Lucent Technologies (a
manufacturer of communication systems,
software and products and formerly AT&T
Bell Laboratories) from October 1995 until
October 1997; prior thereto, various other
management level positions at Lucent in
systems engineering, hardware design,
system test and product manaagement; Age
37.

Matthew J. Rosgone Vice President, Purchasing since July 1996;
Director of Purchasing from July 1995 until
July 1996; prior thereto, Buyer; Age 29.

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 26 of the Company's 1997 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, 1997, is set forth
under the caption "Selected Consolidated Financial Data" on page 6 of the
Company's 1997 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 7 through 11 of the
Company's 1997 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 13 through 25
of the Company's 1997 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 1998 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 1998 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
1998 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 1998 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 12
through 26 of the Company's 1997 Annual Report to Shareholders, which are
incorporated herein by reference:

Statement of Management's Responsibility for Financial Reporting, dated
January 27, 1998
Report of Independent Accountants, dated January 27, 1998
Consolidated Balance Sheets at December 31, 1996 and 1997
Consolidated Statements of Operations for the three years ended
December 31, 1997
Consolidated Statements of Shareholders' Equity for the three years
ended December 31, 1997
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997
Notes to Consolidated Financial Statements
Statements of Operations Data by Quarter

(a)(2) The following financial statement schedule is included herewith on page
15 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
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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.

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 as
Exhibit 10.15 of Form 10-K for the year ended December 31, 1996 ("the 1996 Form 10-K").

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, Samuel Knoch, Goeffrey
Lea, Gregory Nulty and Matthew Rosgone, 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* Form of Non-employee Stock Option Agreement entered into December 13, 1996 and December
30, 1997 between the Company and Lawrence Arduini, filed as Exhibit 10.19 of the 1996 Form 10-
K.

10.20* Amendment to Employment Agreements, dated as of December 13, 1996, between the Company and
R. Craig Allison and Christian L. Allison, filed as Exhibit 10.20 of the 1996 Form 10-K.

10.21* Amendment to Employment Agreements, dated as of December 13, 1997, between the Company and
R. Craig Allison and Christian L. Allison, filed herewith.

10.22* Change of Control Agreement, entered into July 17, 1997 between the Company and Timothy
O'Brien, together with a schedule listing substantially a similar agreement with Joseph O'Brien
incorporated by reference to Exhibit 10.1 of the Report on Form 10-Q of the Company filed on
November 10, 1997.

10.23 Amendment, dated February 21, 1997, to Technical Information Agreement relating to Metallic
Channel Units Types A and B, dated February 1, 1993, between American Telephone and Telegraph
Company ("AT&T") (licensor) and the Company (licensee) incorporated by reference to Exhibit
10.3 of the Report on Form 10-Q of the Company filed on November 10, 1997.

10.24* Change of Control Agreement, entered into October 15, 1997 between the Company and Mark B.
Peterson, filed herewith.

10.25* Form of Non-employee Director Stock Option Agreement with respect to the Company's 1995
Long-Term Incentive Compensation Plan, filed herewith.

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

13.1 Company's 1997 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, 1997.

None

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized as of March 23, 1998.

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 23, 1998.

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

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

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

/s/JAMES J. BARNES Director
- -------------------------------------------------
James J. Barnes

/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 and Treasurer
- ------------------------------------------------- (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 13 of the 1997 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 27, 1998

SCHEDULE II

TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1995, 1996 and 1997
(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, 1995 $ 60 $ 60 $ -- $-- $120
Year ended December 31, 1996 120 95 -- -- 215
Year ended December 31, 1997 215 -- -- (36) 179

Allowance for doubtful accounts:
Year ended December 31, 1995 $ -- $ -- $ -- $-- $ --
Year ended December 31, 1996 -- -- -- -- --
Year ended December 31, 1997 -- 50 -- -- 50

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. *

10.1 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. *

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 as
Exhibit 10.15 of Form 10-K for the year ended December 31, 1996
("the 1996 Form 10-K"). *

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, Samuel Knoch, Goeffrey Lea,
Gregory Nulty and Matthew Rosgone, 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 Form of Non-employee Stock Option Agreement entered into
December 13, 1996 and December 30, 1997 between the Company
and Lawrence Arduini, filed as Exhibit 10.19 of the 1996 Form 10-K. *

10.20 Amendment to Employment Agreements, dated as of
December 13, 1996, between the Company and R. Craig Allison
and Christian L. Allison, filed as Exhibit 10.20 of the 1996 Form 10-K. *

10.21 Amendment to Employment Agreements, dated as of December 13,
1997, between the Company and R. Craig Allison and Christian
L. Allison, filed herewith.

10.22 Change of Control Agreement, entered into July 17, 1997
between the Company and Timothy O'Brien, together with a
schedule listing substantially a similar agreement with
Joseph O'Brien incorporated by reference to Exhibit 10.1 of
the Report on Form 10-Q of the Company filed on November 10, 1997. *

10.23 Amendment, dated February 21, 1997, to Technical Information Agreement

relating to Metallic Channel Units Types A and B, dated
February 1, 1993, between American Telephone and Telegraph
Company ("AT&T") (licensor) and the Company (licensee) incorporated
by reference to Exhibit 10.3 of the Report on Form 10-Q of the Company
filed on November 10, 1997. *

10.24 Change of Control Agreement, entered into October 15, 1997 between the
Company and Mark B. Peterson, filed herewith.

10.25 Form of Non-employee Director Stock Option Agreement with
respect to the Company's Long-Term Incentive Compensation
Plan, filed herewith.

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

13.1 Company's 1997 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.