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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, 1998
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 12, 1999, the aggregate market value
of shares of the Registrant's Common Stock held by non-affiliates (excluding for
purposes of this calculation only, 369,664 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 $87,963,024.

As of March 12, 1999, the Registrant had outstanding 5,932,543 shares 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, 1998 II and IV

Portions of the Proxy Statement to be distributed
in connection with the 1999 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 1998 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 relate 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 test access and
test extension products for the telecommunications and cable television
industries. The Company's telecommunication proprietary products 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
Lucent (formerly part of 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

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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 1999 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 $1,893,000, $2,014,000 and $2,069,000 respectively
in 1996, 1997 and 1998 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., Next Level Communications and SAGEM SA (a French
corporation). The expiration dates of these agreements range at various times
between May 1999 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%, 94% and 90% of the Company's sales in 1996, 1997
and 1998, respectively.

The Company's cable products consist of a complete cable status
monitoring system that provides a comprehensive testing solution for the
Broadband Hybrid Fiber Coax distribution system. The status monitoring system
consists of a host for user interface, control and configuration; a headend
controller for managing network communications; and transponders that are
strategically located within the cable network to gather status reports from
power supplies, line amplifiers and fiber-optic nodes. The Company has entered
into a license agreement with C-Cor Electronics, Inc. (a cable television
systems developer) in which the Company provides its status monitoring
transponder technology that is incorporated into C-Cor's cable network
management system. In 1998, the Company, under certain other business
arrangements, also shipped cable products to ANTEC and General Instrument.

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 1996, 1997 and 1998, research and development expenses were approximately
$3,921,000, $5,945,000 and $6,880,000, 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 also applied for trademark registration for "Lighthouse(TM)", "Digitest(TM)"
and "Telaccord(TM)". 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 two U.S. provisional, two United States, one Canada and three
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.

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Customers. The Company's primary telecommunication 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. Historically, almost all of the Company's sales have
been made to the RBOCs (79% in 1998). Bell Atlantic Corporation and BellSouth
Corporation accounted for 29% and 25%, respectively, of the Company's total
sales in 1998. The Company's primary cable product customers are Original
Equipment Manufacturers ("OEM") cable equipment manufacturers such as C-Cor
Electronics, Inc., ANTEC and General Instruments. Sales of the Company's cable
products in 1998 were less than [2%] of total revenues. 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 is ISO 9001 registered from the 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 develops and maintains internal
documentation and processes to support the production of quality products to
ensure customer satisfaction.

The Company utilizes two key independent subcontractors to perform a
majority of the circuit board assembly and in-circuit testing work on its
products. The Company also utilizes other subassembly contractors on a more
limited basis. 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, 1998 was approximately
$0.6 million, as compared to approximately $1.6 million at December 31, 1997. At
December 31, 1998, the composition of the backlog related primarily to one
customer order, while backlog at December 31, 1997 consisted of several customer
orders. Periodic fluctuations in customer orders and backlog result from a
variety of factors, including but not limited to the timing of significant
orders and shipments. 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 telecommunications reform legislation has lifted the
restrictions which previously prevented the RBOCs from manufacturing
telecommunications equipment. Pursuant to this legislative

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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. In addition, the Wiltron Company, Inc.
offers the Wiltron LoopMATE(R), a modular remote test head, which competes with
the Company's POTS testing capabilities. 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 the Tau-Tron division of General Signal Corporation, which
provides special services test systems, could also expand into POTS line
testing. The alarm-related MCU product's primary competitor is the Turbo 2000
unit made by ANTEC Corporation. For the Company's cable products, the primary
competitors for status monitoring are Cheetah Technologies and AM
Communications, Inc.

Employees. At December 31, 1998, the Company had 230 full-time
employees, all in the United States. None of the Company's employees are
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 104,400 square feet. The Company occupies its current facilities
under a lease that expires in December, 2001 with an option to renew the term of
the lease for one additional period of three years. 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 1998, there were no matters submitted to a
vote of security holders through solicitation of proxies or otherwise.

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EXECUTIVE OFFICERS OF THE COMPANY

Information relating to the executive officers of the Company as of January 31,
1999 is set forth below:

Christian L. Allison Chairman of the Board, since April 1998; Chief
Executive Officer since September 1995; Treasurer from
May 1992 until April 1997; President since October
1993; prior thereto, Chief Operating Officer; Director
since 1992; Age 38.

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 37.

Robert L. Cornelia Executive Vice President, Operations since May 1996;
prior thereto; Vice President, Manufacturing; Age 36.

Bradley N. Dinger Controller since September 1996; prior thereto,
Assistant Controller of AMSCO International, Inc.
(manufacturer of health care equipment); Age 36.

Herman Flaminio Executive Vice President, Marketing Services, Planning
and Technical Support since July 1997; prior thereto,
Senior Vice President, Marketing and Strategic
Products; brother of Rocco L. Flaminio, Vice Chairman,
Chief Technology Officer and a Director; Age 59.

Rocco L. Flaminio Vice Chairman and Chief Technology Officer since
October 1993; Director since December 1995; brother of
Herman Flaminio, Executive Vice President; Age 74.

Mark C. Frey Senior Vice President, Engineering since 1993; Age 45.

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; prior thereto,
Director of Internal Audit at AMSCO; Age 43.

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 39.

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 38.

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

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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 management; Age 38.

Matthew J. Rosgone Senior Vice President, Purchasing/Manufacturing since
July 1998; Vice President, Purchasing from July 1996
until July 1998; Director of Purchasing from July 1995
until July 1996; prior thereto, Buyer; Age 30.

Roger A. Smith Senior Vice President, Test Systems since July 1998;
Engineering Manager from June 1997 until July 1998;
Senior Software Engineer from June 1996 until June
1997; prior thereto, Senior Software Development
Engineer of Caldon Inc., (a manufacturer of ultrasonic
flow meters for nuclear power industry); Age 38.

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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 27 of the Company's 1998 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, 1998, is set forth
under the caption "Selected Consolidated Financial Data" on page 7 of the
Company's 1998 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 13 of the
Company's 1998 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 PricewaterhouseCoopers LLP, are set forth on pages 15 through
26 of the Company's 1998 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 1999 Annual Meeting of Shareholders
and is incorporated herein by reference.

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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 1999 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
1999 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 1999 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 27 of the Company's 1998 Annual Report to Shareholders, which are
incorporated herein by reference:

Statement of Management's Responsibility for Financial Reporting, dated
January 25, 1999
Report of Independent Accountants, dated January 25, 1999
Consolidated Balance Sheets at December 31, 1997 and 1998
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1998
Consolidated Statements of Shareholders' Equity for the three years
ended December 31, 1998
Consolidated Statements of Cash Flows for the three years ended
December 31, 1998
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)

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(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, as
amended through May 6, 1998 (conformed copy), filed herewith.

3.1a Statement with Respect to Shares dated July 23, 1996 (conformed copy),
filed herewith.

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 A to the
Company's 1997 Proxy Statement 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 to the Annual
Report of Tollgrade Communications, Inc. on Form

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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 to 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 to 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 to 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, Herman
Flaminio, Rocco Flaminio, Mark Frey, Samuel Knoch, and Matthew Rosgone,
filed as Exhibit 10.1 to 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 to 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 to 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 to 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 to 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 as Exhibit 10.21 to the Annual Report of the Company on Form 10-K
for the year ended December 31, 1997 (the "1997 Form 10-K").

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 to the Report on Form 10-Q of the Company
filed on November 10, 1997.

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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 to 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 as Exhibit 10.24 to the 1997 Form
10-K.

10.25* Form of Non-employee Director Stock Option Agreement with respect to
the Company's 1995 Long-Term Incentive Compensation Plan, filed as
Exhibit 10.25 to the 1997 Form 10-K.

10.26* Change of Control Agreement, entered into July 17, 1997 between the
Company and Roger A. Smith, filed herewith.

10.27* 1998 Employee Incentive Compensation Plan, filed herewith.

10.28* Amendment to Employment Agreement, dated as of December 30, 1998,
between the Company and Christian L. Allison, filed herewith.

13.1 Company's 1998 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 PricewaterhouseCoopers LLP, 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, 1998.

None

12
13

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 24, 1999.

TOLLGRADE COMMUNICATIONS, INC.

By /s/ Christian L. Allison
---------------------------------------
Christian L. Allison
Chairman, President and 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 24, 1999.

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

/s/Christian L. Allison Director, Chairman, President and Chief
- -------------------------------------- Executive Officer,
Christian L. Allison (Principal Executive Officer)

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

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

/s/David S. Egan Director
- --------------------------------------
David S. Egan

/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

13
14

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 1998 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/ PRICEWATERHOUSECOOPERS LLP

Pittsburgh, Pennsylvania
January 25, 1999

14
15

SCHEDULE II

TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1996, 1997 and 1998
(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, 1996 $120 $ 95 $ -- $ -- $215
Year ended December 31, 1997 215 -- -- (36) 179
Year ended December 31, 1998 179 88 -- -- 267

Allowance for doubtful accounts:
Year ended December 31, 1996 $ -- $ -- $ -- $ -- $ --
Year ended December 31, 1997 -- 50 -- -- 50
Year ended December 31, 1998 50 50 -- -- 100

Warranty reserve:
Year ended December 31, 1996 $ 45 $155 $ -- $ -- $200
Year ended December 31, 1997 200 100 -- -- 300
Year ended December 31, 1998 300 135 -- -- 435

15
16

EXHIBIT INDEX

(Pursuant to Item 601 of Regulation S-K)

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

3.1 Amended and Restated Articles of Incorporation of the Company, as
amended through May 6, 1998 (conformed copy), filed herewith.

3.1a Statement with Respect to Shares dated July 23, 1996 (conformed copy),
filed herewith.

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 A to the
Company's 1997 Proxy statement 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. *

16
17

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 to 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 to the 1995
Form 10-K. *

17
18

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 to 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 to 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, Herman
Flaminio, Rocco Flaminio, Mark Frey, Samuel Knoch, and Matthew Rosgone,
filed as Exhibit 10.1 to the Report 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 to 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 to 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 to 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 as Exhibit 10.21 to the Annual Report of the Company on Form 10-K
for the year ended December 31, 1997 (the "1997 Form 10-K"). *

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 to the Report on Form 10-Q of the Company
filed on November 10, 1997. *

18
19

10.24 Change of Control Agreement, entered into October 15, 1997 between the
Company and Mark B. Peterson, filed as Exhibit 10.24 to the 1997 Form
10-K. *

10.25 Form of Non-employee Director Stock Option Agreement with respect to
the Company's Long-Term Incentive Compensation Plan, filed as Exhibit
10.25 to the 1997 Form 10-K. *

10.26 Change of Control Agreement, entered into July 17, 1997 between the
Company and Roger A. Smith, filed herewith.

10.27 1998 Employee Incentive Compensation Plan, filed herewith.

10.28 Amendment to Employment Agreement, dated as of December 30, 1998,
between the Company and Christian L. Allison, filed herewith.

13.1 Company's 1998 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 PricewaterhouseCoopers LLP, filed herewith.

27 Financial Data Schedule

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