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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

For the fiscal year ended December 31, 2004

OR

For the transition period from                    to                     

Commission File Number 0-13716

North Pittsburgh Systems, Inc.

(Exact name of registrant as specified in its charter)

4008 Gibsonia Road, Gibsonia, Pennsylvania 15044-9311

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: 724/443-9600

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.15625 per share

(and associated Preferred Stock Purchase Rights)

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  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.  x

The number of shares of the registrant’s Common Stock (par value $.15625 per share) outstanding as of March 14, 2005 was 15,005,000.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES  x    NO  ¨

Based on the average of the bid and asked prices at the close of the market on June 30, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the common stock held by non-affiliates of the registrant was $269,937,000. For purpose of making this calculation only, the registrant has defined affiliates to include all directors and officers (who directly or beneficially owned as a group 1,498,005 shares of Common Stock on June 30, 2004).

DOCUMENTS INCORPORATED BY REFERENCE

The information for Item 10, Directors and Executive Officers of the Registrant; Item 11, Executive Compensation; Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters; Item 13, Certain Relationships and Related Transactions; and Item 14, Principal Accountant Fees and Services, has been incorporated into Part III of this Form 10-K by reference to registrant’s Definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after December 31, 2004.

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Cautionary Language Concerning Forward-Looking Statements

In addition to historical information, this Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (Section 27A) and Section 21E of the Securities Exchange Act of 1934 (Section 21E) regarding events, financial trends and critical accounting policies that may affect our future operating results, financial position and cash flows. We intend that such forward-looking statements be subject to the safe harbors within Section 27A and Section 21E as provided by the Private Securities Litigation Act of 1995.

Forward-looking statements are generally accompanied by words such as “believes,” “anticipates,” “expects,” “estimates,” “intends” or similar words or expressions. Such statements are based on our assumptions and estimates and are subject to risks and uncertainties. You should understand that various factors, including (but not limited to) those items discussed below and elsewhere in this document, could cause our actual results to differ materially from the results expressed in or implied by these forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which are current only as of the date of this filing. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

While the below list of risks and uncertainties is not exhaustive, some factors, in addition to those contained throughout this document, that could affect future operating results, financial position and cash flows and could cause actual results to differ materially from those expressed in or implied by the forward-looking statements are:

We also refer you to the section titled “Factors Affecting Our Prospects” under Item 1 in this Form 10-K for additional discussions concerning items which pose risks and uncertainties that could affect our future results.

PART I

General

North Pittsburgh Systems, Inc. (the Registrant, the Company, we, us or our), organized May 31, 1985, is a holding company and has no operating function. Its predecessor, North Pittsburgh Telephone Company (North Pittsburgh or NPTC), a telephone public utility incorporated in 1906, became a wholly-owned subsidiary of the Registrant on May 31, 1985. Penn Telecom, Inc. (Penn Telecom or PTI) became a wholly-owned subsidiary of the Registrant on January 30, 1988. Prior to this date, Penn Telecom was a wholly-owned subsidiary of North Pittsburgh. Penn Telecom is certificated as a Competitive Access Provider (CAP), a Competitive Local Exchange Carrier (CLEC) and an Interexchange Carrier (IXC) and has entered into these businesses. Pinnatech, Inc. (Pinnatech), a wholly-owned subsidiary of the Registrant, was formed in 1995 and principally provides Internet and broadband related services. The Registrant, North Pittsburgh, Penn Telecom and Pinnatech operate under the provisions of the Pennsylvania Business Corporation Law. No significant changes in the mode of conducting

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business by the Registrant or its subsidiaries have occurred since the beginning of the fiscal year ended December 31, 2004.

North Pittsburgh Telephone Company

North Pittsburgh, our incumbent local exchange carrier (ILEC), was founded in 1906 and operates in an approximately 285 square mile territory in Western Pennsylvania, which includes portions of Allegheny, Armstrong, Butler and Westmoreland Counties. We provide service to approximately 72,300 business and residential access lines in our ILEC territory. Over the past decade, our ILEC territory has experienced very robust population growth due to the continued expansion of suburban communities into our serving area, with the southernmost point of our territory only 12 miles from the City of Pittsburgh. According to the most recent census, the population in our ILEC service territory grew 14.3% from 1990 to 2000. Although no formal census has been published since 2000, business and new home growth has remained robust in our territory over the last several years and census estimates, which are published on a yearly basis, continue to show population growth.

We operate a 100% digital switching network, comprised of nine central offices and 85 carrier serving areas (CSAs). The core of the network consists of two main host switches, a Nortel DMS 500 and a Nortel DMS 100. The current CSA architecture, in which nearly all loop lengths are kept to 12,000 feet or less, has enabled us to provide digital subscriber line (DSL) service to over 99% of our access lines. In addition, we have deployed fiber optic cable extensively throughout the network, resulting in a 100% Synchronous Optical Network (SONET) that supports all of the inter-office and host-remote links as well as the majority of business parks within our ILEC serving area. We believe that our network is built for the future, in which our ability to satisfy the growing customer demand for broadband and multi-megabit services will be a key critical success factor.

Penn Telecom

Penn Telecom furnishes telecommunication and broadband services south of North Pittsburgh’s territory to customers in Pittsburgh and its surrounding suburbs as well as north of North Pittsburgh’s territory in the City of Butler and its surrounding areas. Verizon is the ILEC in the Pittsburgh area, while Sprint is the ILEC in the City of Butler and its surrounding areas. Our CLEC operation follows a true “edge-out” strategy, in which it has leveraged North Pittsburgh’s network, human capital skills and reputation in the surrounding markets.

We operate an extensive SONET optical network with over 300 route miles of fiber optic facilities in the Pittsburgh metropolitan market. We have physical collocation in 27 Verizon central offices and one Sprint central office and primarily serve our customers using unbundled network element (UNE) loops. Twenty-seven of these collocations are connected to our SONET using a combination of leased and owned fiber optic facilities. We have also deployed a next-generation switching system to support our Integrated Services Digital Network (ISDN) primary rate interface (PRI) service, achieving significant cost reductions over traditional switching systems. In the Pittsburgh market, a carrier hotel that we operate serves as the hub for the fiber optic network. In addition, we also offer space in the carrier hotel to internet service providers (ISPs), IXCs, other CLECs and other customers who need a carrier-class location to house voice and data equipment as well as gain access to a number of networks, including ours. In the City of Butler, we have overbuilt a portion of the Sprint distribution plant in the central business district and continue to expand these facilities as we increase our penetration of the Butler area business market.

Our sales strategy in our edge-out markets has been to focus on small to mid-sized business customers (defined as 5 to 500 lines), educational institutions and healthcare facilities, offering local and long distance voice services as well as broadband services. Our fiber based network, comprised of multiple rings, enables us to compete against Verizon and other CAPs to offer high capacity special access circuits (from DS-1s up to OC-48s) to IXCs, ISPs and even other CLECs.

In addition to the CLEC operations, Penn Telecom also provides long distance services and maintains an enterprise equipment business providing traditional key and private branch exchange (PBX) systems to business

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customers. Prior to our CLEC operations, the majority of our long distance customers resided in our ILEC market. However, with the growth of our CLEC customer base and the effective bundling of toll with local dial tone services, we have been able to greatly expand this service offering throughout Western Pennsylvania.

Pinnatech

Pinnatech, an ISP doing business under the Nauticom name, furnishes Internet access and broadband services in Western Pennsylvania. We serve the majority of our DSL and other broadband customers over our ILEC and CLEC networks with Pinnatech serving as the ISP providing a gateway to the Internet. In addition, Pinnatech also provides virtual hosting services, web page design and e-commerce enabling technologies to customers.

Principal Services Rendered

The principal categories of service that we render are as follows:

Local Network Services. We provide local (dial tone), custom calling features and local private line services to residential and business customers in Western Pennsylvania.

Network Access Services. We provide IXCs, cellular mobile radio service (CMRS) providers and other local exchange carriers (LECs) with access to our switched access facilities for the completion of interstate and intrastate long distance toll calls and also extended area service (EAS) calls. In addition, we provide IXCs, CMRS providers, ISPs, other LECs and end-user customers access to private line network facilities for use in transporting voice and data services. These private line data services are referred to as special access and utilize a variety of technologies such as Digital Data Services, Frame Relay, Asynchronous Transfer Mode (ATM), SONET, DS-1, DS-3, OC-3, multi-megabit and gigabit Ethernet and others.

Long Distance Toll Service. We provide intraLATA, intrastate, interstate and international toll service to business and residential customers throughout Western Pennsylvania.

Internet Access Service. We provide broadband DSL and multi-megabit Ethernet services to end-user customers and ISPs on both a wholesale and retail basis, mostly through the use of our own facilities. We also provide access to the Internet to end-users utilizing dial-up and other broadband facilities such as Frame Relay and ATM. In addition, we provide virtual hosting services, web page design and creation and e-commerce enabling technologies to customers. Internet access service revenues, including revenues recognized for DSL service, are classified within Other Operating Revenues on our Consolidated Statement of Income.

Directory Advertising, Billing and Other Services. We receive revenues from the sale of advertising space in telephone directories and from billing and collection activities. Billing and collection services are provided to various IXCs.

Telecommunications Equipment. We sell and service telecommunications equipment to customers generally in the Western Pennsylvania area.

Operating Revenues. The respective amounts of operating revenues contributed by local network services, long distance and access services, telecommunications equipment sales, directory advertising and billing and collection services and other operating revenues during each of the last three fiscal years are set forth in the Financial Statements and Schedules provided in response to Item 8 and are incorporated herein by reference.

Other Services

North Pittsburgh and Alltel Cellular Association of South Carolina, L.P. are limited partners, with a partnership interest of 3.6 percent each, and Cellco Partnership, d.b.a. Verizon Wireless, is both a general and a

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limited partner with partnership interests of 40.0 and 52.8 percent, respectively, in the Pittsburgh SMSA Limited Partnership, which provides wireless service in and around the Pittsburgh Standard Metropolitan Statistical Area (SMSA) as authorized by the Federal Communications Commission (FCC).

North Pittsburgh, Centennial Cellular Telephone Company of Lawrence (Centennial) and Venus Cellular Telephone Company, Inc. (Venus) are limited partners, each with a partnership interest of 14.29 percent, and Cellco Partnership, d.b.a. Verizon Wireless, is the general partner with a partnership interest of 57.13 percent, in Pennsylvania RSA 6(I) Limited Partnership, which provides wireless service in a Rural Service Area (RSA) consisting of Clarion and Lawrence Counties and the Northern portions of Armstrong and Butler Counties. Verizon Wireless purchased its 57.13 percent interest from Alltel Communications, Inc. (Alltel) on December 31, 2002.

North Pittsburgh and Venus are limited partners with partnership interests of 23.67 and 16.67 percent, respectively, and Cellco Partnership, d.b.a. Verizon Wireless, is the general partner with a partnership interest of 59.66 percent, in Pennsylvania RSA 6(II) Limited Partnership, which provides wireless service in an RSA consisting of the Southern portions of Armstrong and Butler Counties.

Boulevard Communications, L.L.P. (Boulevard) is a Pennsylvania limited liability partnership CAP equally owned by the Company and a company in the Armstrong Holdings, Inc. group of companies (Armstrong Group). Boulevard provides point-to-point data services to businesses in Western Pennsylvania, including access to ISPs, connections to IXCs and high-speed data transmission.

Competitive Environment

Since the passage of the Telecommunications Act of 1996 (the 1996 Act), the telecommunications industry has undergone significant change. The goal of the 1996 Act was to encourage the rapid development of new telecommunications technologies and to promote new competition in the hope that customers would benefit from lower prices, higher quality services and greater choices of services and providers.

More specifically, the 1996 Act includes requirements that ILECs negotiate rates, terms and conditions with carriers regarding interconnection, the provisioning of UNEs, compensation terms for local calls, the resale of telecommunication services and the physical collocation of competitor’s equipment in the ILEC’s facilities. As described in greater detail in the Regulatory Environment section of Item 7, North Pittsburgh’s designation as a Rural carrier under the 1996 Act has exempted it from many of the above-mentioned provisions. A competitor may petition the Pennsylvania Public Utility Commission (PA PUC) for the removal of North Pittsburgh’s exemption (although the prospective competitor must prove its proposal is not unduly economically burdensome to North Pittsburgh, is technically feasible and is consistent with the universal service provisions of the 1996 Act). Although no competitor has yet formally sought the removal of North Pittsburgh’s rural exemption, there is a reasonable risk that some of the barriers to a competitor’s entry into our ILEC territory will be either limited or removed in the future.

Our local wireline operations in our ILEC territory have already been experiencing increased competition over the past several years from various sources, including, but not limited to, larger end-users installing their own networks, IXCs, satellite transmission services, wireless communication providers, cable companies, radio-based personal communications companies, CAPs, ISPs and other systems capable of completely or partially bypassing local telephone facilities.

We are currently addressing potential competition by reducing costs, increasing efficiency, restructuring rates, examining new and bundled product offerings and increasing our focus on customer satisfaction.

At the same time, the 1996 Act has enabled us to expand outside of our franchised ILEC territory through our CLEC operations. With our ILEC territory being adjacent to the greater Pittsburgh metropolitan area, we

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have been able to selectively enter attractive markets through a CLEC edge-out strategy. As of December 31, 2004, we served 37,311 dial tone access lines and 21,183 access line equivalents¹, for a grand total of 58,494 equivalent access lines² served in our CLEC edge-out markets.³

The telecommunications market within Pittsburgh and its surrounding areas is very competitive. We compete against not only the area ILEC (Verizon) but also many of the larger national and regional CLECs. The market north of our ILEC’s territory in the City of Butler and its surrounding areas is currently relatively less competitive, as our only main competitor is the area ILEC (Sprint). Due to the higher Sprint UNE charges and lack of proximity to the physical points of presence of many CLECs, this region is currently more isolated from competition. However, we expect that the competitive nature of this market will increase in the future. The incumbent cable company in this market has begun to offer telephony services utilizing Voice over Internet Protocol (VoIP) technology. We have been able to effectively compete in this region by leveraging North Pittsburgh’s reputation and network to reduce the overall cost of providing service, thereby attracting several of the largest business and municipal customers. Due to our success in the area, we have overbuilt a portion of the Sprint distribution plant, which will further increase our competitive advantage as well as decrease the long-term cost of providing service.

Other Products/Services

The toll market is very competitive. All the major IXCs are present in the markets in which we offer service. Wireless carriers also pose a competitive threat to our toll services, especially for those customers who are heavy users and have the flexibility to adapt their calling patterns to take advantage of the bundled packages offered by many of the wireless carriers. In addition, cable companies have begun providing local dial tone and toll services and VoIP companies have begun offering unlimited calling plans for those customers that utilize broadband connections. As has become evident over the past several years through wireless and now VoIP pricing methodologies, the actual market for per minute of use toll calling will decrease over time and eventually disappear for all practical purposes. There will remain implicit amounts within the pricing of the customer’s overall calling plan for what is today considered to be toll (or out of local area calling). However, the effective rate realized on a per minute of use basis from the flat rated calling plans will be much lower than historical rates realized from the traditional per minute of use rated plans. We have developed over the last few years, and continue to modify, our toll calling plans (including the introduction of unlimited calling plans). In addition, we have been able to expand our customer base through our CLEC’s overall growth in access lines and success in bundling toll with local dial tone service. As of December 31, 2004, 78% of our customers in our edge-out markets subscribed to one or another of our toll packages.

The market for Internet and broadband services is also highly competitive. Our DSL product experiences competition from cable modem services, other ILECs and CLECs and, to a lesser extent, wireless and satellite

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broadband products. We also face competition in the dial-up market from most of the national and regional competitors. Many of our broadband and dial-up competitors have significantly greater market presence, advertising budgets and brand recognition. We compete based on our knowledge of the local area, the quality of our product and the high level of service that we provide, especially our responsiveness to the needs of small to medium sized businesses.

We also derive a small percentage of our revenues from directory advertising, telecommunications equipment sales, virtual hosting, web page design, e-commerce enabling technologies and other services, all of which are competitive in nature.

Factors Affecting Our Prospects

A number of factors, which affect our future prospects, are important to an overall understanding of our Company and business. The following items are particularly noteworthy, although we do not represent that the list captures every possible existing or foreseeable factor or risk.

The communications industry is becoming increasingly competitive, and this competition has resulted and most likely will continue to result in pricing pressures on our service offerings.

As discussed in more detail in the preceding Competitive Environment section, the markets in which we operate are growing increasingly competitive. We still maintain a level of protection in our ILEC territory against intra-modal competition, and currently no non-facilities based CLECs are operating in our territory. We are, however, starting to face a high level of inter-modal competition from wireless carriers and cable companies. Although historically existing more as a competitor in the toll market, wireless carriers are now competing more aggressively against our secondary and even primary lines. In addition, cable companies that operate in our markets have begun to deploy telephony offerings, mostly using VoIP platforms.

The toll market has continued to be extremely competitive and we would expect this trend to continue into the foreseeable future, especially driven by bundled pricing in the wireless industry and new VoIP competitors. The broadband market is also very competitive, with cable companies having offerings which compete very aggressively with our DSL and higher broadband circuits. Wireless carriers are also continuing to upgrade their networks and have just begun to offer broadband products in certain areas of the geographical markets in which we operate that could compete with our DSL product.

Many of our competitors are major communications companies that have more extensive resources.

We compete in our various markets with telephone companies such as Verizon, Sprint and other national CLECs (in our edge-out markets), cable companies that include Comcast and Armstrong, and all the major wireless and interexchange carriers. All of these companies have substantially greater financial and marketing resources as well as greater name recognition. In addition, given their financial resources and scale, these companies may be able to devote more capital to newer technologies and/or use their cost advantages to reduce prices for an extended period of time.

We are subject to a complex and uncertain regulatory environment.

The amounts that we charge for most of our services are subject to regulatory oversight at both the federal and state levels. Our business plans are also greatly affected by complex (and highly litigated) laws and regulations pertaining to competitive requirements in the markets in which we operate, such as regulatory barriers to entry in our ILEC territory and rules relating to both the availability and pricing of leased network elements in our edge-out territories. We expect that the competitive barriers to entry in our ILEC territory will continue to be reduced, although we do not know to what degree and when. With regard to the network elements that we utilize in our edge-out territories, any material negative changes in the availability or pricing of such network elements could have a material impact on our financial condition and future business plans.

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Approximately 31% of our revenues for the year ended December 31, 2004 came from charges paid to us from other carriers for services which we performed in originating and terminating toll and local traffic (access revenues) and from proceeds which we received from universal service funds. Our access rates are subject to regulation and reviews at both the federal and state levels. There are currently a number of formal and informal proceedings reviewing both the current access compensation structure as well as the current rules regarding the contribution methodology and eligibility requirements of the universal service funds. One of the proposals being developed by some of the larger companies in the communications industry, which would seek a migration to a bill and keep intercarrier compensation mechanism, could have a material negative impact on our financial results and condition if adequate carve-outs are not made for rural carriers to support the high cost of providing services in rural communities. In addition, any substantive modifications to the availability of, or ability to recover costs from, federal and state universal service funds could have a material negative impact on our financial results and condition.

As a result of the expansion of our customer base in our CLEC edge-out markets, the increases experienced in broadband revenues, and several revenue neutral rate rebalancings that our ILEC has made in the past two years which have increased end-user charges while decreasing access rates, the percentage of our consolidated revenues which we receive from the above mentioned access charges and universal service funds (31% for 2004) has decreased from 34% and 35% of our consolidated revenues for 2003 and 2002, respectively. Although our exposure to these revenue sources has declined over the past several years, those revenue sources still constitute a material percentage of our overall revenues and operating margins.

In addition, newer technologies, such as VoIP, have been introduced since the passage of the 1996 Act. Many of these new technologies do not readily fit into the legacy telecommunications regulatory framework and are causing regulators to reconsider many of the basic assumptions in regard to public policy and regulation of telecommunications industry at both the federal and state levels. The FCC has issued a Notice of Proposed Rulemaking proceeding to examine the regulatory treatment of VoIP. In the interim, the FCC and individual states have been ruling on narrow issues concerning VoIP and other access issues on a case-by-case basis. No comprehensive regulatory framework has yet to be established. The FCC’s final rules, or an extended period of regulatory uncertainty during which carriers might refuse to pay portions of their applicable access charges, might detrimentally affect our future access revenues.

Our ability to grow will require investments in markets and products that may not achieve our desired returns.

With the increased competition in our existing markets and pressures on profit margins, we may have to invest in markets and products that most likely will not generate the margins we have traditionally experienced in our core access line business in our ILEC territory. Access lines in our edge-out markets carry lower margins, mainly due to pricing discounts we offer from the incumbent’s rates, incremental costs we incur to lease some of the facilities we use and overall lower access rates that we charge to carriers using our network. In addition, some of the products which we have deployed over the last several years, such as DSL, have been introduced into already competitive environments that have lower overall margins than our traditional ILEC access lines. Some of these products, although producing a new source of revenue, have had detrimental impacts on other existing revenue streams (such as second lines which can be rendered redundant by DSL). Although we believe that we can continue to penetrate our current edge-out markets (which mostly encompass Pittsburgh and its surrounding communities), potential expansion into further markets, which may be needed to grow revenues, will most likely carry greater risk as our brand recognition will not be as strong and our network efficiencies may not be as great as we are currently experiencing in our existing edge-out markets.

A lack of parity between us and our competitors concerning regulatory fees and assessments as well as taxation laws could adversely impact our ability to profitably compete.

The telecommunications industry is one of the most heavily taxed in our country. While serving as monopolies in the past, both federal and state agencies have used telephone companies to assess onto individuals

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and businesses a multitude of taxes and regulatory assessments, including, but not limited to, federal excise taxes, gross receipts taxes, 911 recovery fees, universal service assessments, Pennsylvania relay service charges and state and local sales taxes (where applicable). Typically, such assessments and taxes can constitute 10-20% of the gross amount of a telephone bill, dependent upon the types of services purchased. We recognize no margin on these fees and taxes but rather serve as the pass through entity responsible for charging and collecting the fees and taxes from our end-user customers and remitting the monies collected to the taxing and regulatory authorities. As inter-modal competition continues to develop, companies which do not meet the traditional definitions of telecommunications carriers and/or offer services which do not neatly fit into the outdated definitions of such terms as communication services (that is, for example, a service that may instead be deemed an informational service) have claimed and may continue to claim that they are not subject to some or all of the above-mentioned taxes and assessments. Unless regulators and taxing authorities change or clarify their rules and regulations to include such companies and services as being subject to such taxes and assessments or deregulate and exclude us from being subject to such taxes and assessments, the lack of parity could adversely impact our ability to effectively compete on price.

Employees

At December 31, 2004, the Company, through all of its subsidiaries, employed 398 persons. Approximately 31% of our employees are covered under collective bargaining agreements. In October 2004, North Pittsburgh’s bargaining employees ratified a new labor contract with the Communications Workers of America (CWA) that will remain in effect until September 30, 2007. Also, in September 2002, Penn Telecom’s bargaining employees ratified a new labor contract with the CWA that will remain in effect until August 31, 2005.

Other Matters

The majority of the services we provide are repetitive and recurring in nature and, as a result, backlog orders and seasonality are not significant factors. In addition, there are no specific special practices relating to working capital.

No material part of our overall business is dependent upon a single or few end-user customers, the loss of any one or more of whom would have a materially adverse effect on our business. We do provide access services to major IXCs and other telecommunications companies, with revenues received from several carriers individually exceeding five percent of consolidated revenues.

We have not encountered, nor do we anticipate, any difficulty in obtaining a ready supply of telecommunications equipment from manufacturer suppliers. Although certain individual suppliers may each supply more than 10 percent of our equipment requirements, we are not primarily dependent upon any one supplier and alternative suppliers of telecommunications equipment are readily available.

North Pittsburgh holds valid, continuing and subsisting rights, certificates, franchises, licenses and renewable permits adequate for the conduct of its business in the territory it serves, none of which contains any burdensome restrictions. We also have FCC licenses to operate a private operational telephone maintenance radio service station (call sign WIK 838) expiring on March 20, 2011 and a non-commercial private license for our own maintenance radio service and other purposes (call sign WPCD 845) expiring on April 29, 2013. We have not encountered in the past, nor do we anticipate in the future, any difficulty in maintaining or renewing these licenses.

Available Information

We maintain a website with the address www.northpittsburgh.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission (SEC).

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We have adopted a written code of ethics that applies to all directors, officers, employees and agents of the Company, including our principal executive officer and senior financial officers, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the SEC promulgated thereunder. The code of ethics, which we call “North Pittsburgh Systems, Inc. Code of Ethics For Executive Management, Directors and All Other Employees and Agents”, is available on our website. In the event that we make changes in, or provide waivers from, the provisions of this code of ethics that the SEC requires us to disclose, we intend to disclose these events on our website.

The Registrant owns in fee an office building, which houses a portion of the operations of Penn Telecom. Penn Telecom also owns an office/warehouse building.

The materially important physical properties of North Pittsburgh, all owned in fee (except some rights-of-way) and most of which are held subject to certain mortgage and security agreements executed in connection with loans through the Rural Utilities Service (RUS), consist generally of any and all property required to operate a modern telecommunications network and include principally land, buildings, central office equipment, long distance switching facilities, transmission facilities, pole lines, aerial cable, underground cable, aerial wire, buried cable, buried wire, distribution wire, underground conduit, furniture, office and computer equipment, garage facilities, vehicles and work equipment. Such facilities are fully utilized except that improvement and expansion of those facilities are, to the extent possible, made in anticipation of the demand for service. All of the foregoing properties are located within Allegheny, Armstrong, Butler and Westmoreland Counties in Western Pennsylvania.

As of the date hereof, except for regulatory matters before the PA PUC and FCC, including matters which could result in the expansion of competition, there were no material pending legal or governmental proceedings directly involving the Company or its subsidiaries, other than ordinary routine litigation and ordinary routine utility matters incidental to the business.

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2004.

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ADDITIONAL ITEM FOR PART I

Executive Officers Of The Registrant

Information regarding the Registrant’s Executive Officers and Chairman of the Board of Directors is provided below. In addition to the positions and business experience related to the Registrant, additional information related to North Pittsburgh Telephone Company, the Registrant’s predecessor, is also presented.

Executive Officers of the Registrant

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PART II

The Company’s Common Stock is registered with the SEC pursuant to Section 12(g) of the Securities Exchange Act of 1934 and, effective January 10, 1997, the Company’s Common Stock commenced trading on the Nasdaq National Market tier of the Nasdaq Stock Market under the Symbol ‘NPSI’. Prior thereto, the stock was not listed on any stock exchange and was considered as being traded on the OTC (Over-the-Counter) market. The Nasdaq high and low sales prices for the Company’s Common Stock for each quarter of 2004 and 2003 are listed below:

Calculated on the basis of the number of shareholder accounts, the Company had approximately 2,434 common shareholders on February 24, 2005.

Cash dividends per share, declared quarterly by the Company in 2004 and 2003, on the outstanding shares of Common Stock were as follows:

The Company did not repurchase any of its securities during the fourth quarter of 2004.

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The following summary of Selected Financial Data for the years 2004 – 2000 should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report.

Certain prior year amounts have been reclassified to conform with the current year’s presentation.

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The statements contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” which are not historical are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent our present expectations or beliefs concerning future events. We caution that such statements are qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements. Thus, results actually achieved may differ materially from expected results included in these statements.

Overview

We are a telecommunications company with annual revenues for 2004 of $108,469. Our original core business, which dates back to 1906, consisted primarily of providing telecommunications services in our ILEC territory, which today covers approximately 285 square miles and is located north of the City of Pittsburgh. In 1995, as the Internet was still in its relatively early stages, we purchased a small ISP as a segue into that market. During 1999, we began to expand our business beyond our ILEC territory via a CLEC edge-out strategy. In addition, from 1997 through 2001, we invested approximately $83 million in our ILEC territory to upgrade the majority of our network and to deploy a CSA architecture in order to allow us to offer advanced broadband products.

Today, the investments that we have made to develop our Internet related products, to expand our business via our edge-out strategy and to modernize our network for advanced broadband products have provided the majority of our revenue growth. The great majority of our revenues are generated based on monthly recurring services and are therefore not subject to large short-term fluctuations.

In addition to our core businesses described above, we also derive a portion of our net income and cash flow from our limited partner interests in three wireless partnerships, all of which are majority owned and operated by Verizon Wireless. These partnerships, which have their origin in the 1980s with the allocation by the FCC of B licenses, cover territories which overlap the majority of our ILEC and edge-out markets.

Industry Dynamics

Demand for the traditional voice telecommunications business has been negatively impacted by the proliferation of wireless services led by one-rate bundled pricing plans that include large (if not unlimited) buckets of minutes, the popularity of alternative communication technologies such as email and instant messaging and by technological advances such as cable modems and DSL that obviate the need for secondary, and in some cases primary, access lines.

In addition, the telecommunications industry has experienced a very difficult period of contraction brought on by over-investments in the late 1990s that have created excess capacity in certain markets. As a result, the industry has experienced a relatively high number of major bankruptcies over the past several years. Besides the negative financial ramifications of absorbing write-offs of pre-petition amounts owed from such carriers, we are now faced with many of these companies re-emerging from bankruptcy with restructured balance sheets and greater financial flexibility.

Broadband growth has been a bright spot in the overall industry during the past several years. However, the broadband market is very competitive, with little differentiation to the end-user customer between products offered by telephone and cable companies. As such, pricing has been the main focus in winning new customers and retaining existing customers. Although the costs to deliver broadband technologies have decreased over the past several years, margins have continued to be squeezed by pricing decreases to customers.

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The proliferation of broadband access has also resulted in new threats from innovative technologies, such as VoIP, that threaten to further decrease the revenues received from the traditional voice business. Besides potentially displacing the need for a secondary or primary line, the potential regulatory definition and classification of VoIP services (which takes on many forms) may have a significant impact on the current access compensation structure.

Regulation and Competition

The telecommunications industry was greatly impacted by the passage of the 1996 Act, which was the legislative instrument that opened the industry to significantly greater competition. The degree and pace at which markets have been experiencing competition have varied, with most of the original regulatory barriers to entry removed in the markets served by the country’s largest local exchange carriers, also referred to as the Regional Bell Operating Companies (RBOCs). Smaller rural companies, such as our ILEC, North Pittsburgh, were given regulatory relief in the form of exemptions and temporary suspensions from many of the competitive portions of the 1996 Act in order to allow state regulators sufficient time to examine the public policy implications of allowing competition in rural areas, and if deemed in the public interest, to allow smaller companies to gradually prepare for competition and to restructure rates. Although we still maintain in our ILEC territory some of the regulatory protections against non-facilities based competition, we expect that over time these protections will be reduced or entirely eliminated.

While the 1996 Act has placed a higher degree of uncertainty on our future revenue streams and margins in our ILEC territory, it has given us the opportunity to selectively expand outside of that territory by taking advantage of the pro-competitive aspects of the Act. We have pursued an edge-out strategy into Pittsburgh and its surrounding communities as well as into the City of Butler and its surrounding areas, leveraging the network, human capital skills and solid reputation of our traditional ILEC business.

The 1996 Act primarily deals with regulations concerning intra-modal competition—that is, competition among traditional wireline companies. At the same time, however, we have begun to experience a great deal of inter-modal competition, from wireless carriers and cable companies. We view these facilities based competitors to be the most formidable, as these companies can totally bypass our existing networks.

Highlights and Outlook

Revenues for 2004 increased $2,713, or 2.6%, over 2003. The majority of this growth was attributable to our ability to continue to effectively penetrate our edge-out markets as well as expand our broadband service offerings. The revenue growth rate of 2.6%, though, was lower than the 2003 revenue growth rate of 11.1%, due mostly to several intercarrier compensation rate decreases. A revision in the percent local use (PLU) factor used to settle traffic between Verizon and Penn Telecom in September of 2003, the continued phase down of Penn Telecom’s interstate access rates in conjunction with the FCC’s Access Charge Reform Order and decreases in access and transit rates charged for wireless traffic have been the main contributing factors to the curtailment of the revenue growth rate. In addition, the rate of increase in revenues from one of our fastest growing products in 2003, PRI circuits provisioned to ISPs in our edge-out markets, diminished in 2004 ($227 growth in revenues in 2004 as compared to a $747 increase in 2003) due to the general deterioration in the dial-up market and consolidation among our ISP customers which has led to the elimination of redundant facilities. Finally, revenues recorded from the National Exchange Carrier Association (NECA) interstate pooling arrangements in which the Company’s North Pittsburgh subsidiary participates were slightly down for 2004, reversing the trend of increases in such revenues experienced over the past several years. Changes in NECA average schedule formulas used to determine the Company’s interstate revenue requirement as well as some regulatory modifications and other events which have diminished the Company’s ability to earn above the historical allowable rate of return have caused these revenues to decrease slightly.

For 2005, we expect our revenue growth rate to be more comparable to that rate experienced in 2004 than to the historically higher growth rates experienced in 2000 through 2003 (as outlined in the Selected Financial Data

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section of Item 6 to this Form 10-K). Several of the items mentioned above also will have continuing impacts on the 2005 revenue growth rate. In addition, we expect that competition for all of our service offerings will continue to intensify, resulting in further pressures on operating revenues and margins. We expect that revenue growth will continue to be driven by the addition of new customers in our edge-out markets and by further broadband penetration. We have also started to focus to an even greater extent on bundled product offerings, which we anticipate will drive value to our customers and serve as a tool for retention of our existing customer base.

Total operating expenses for 2004 decreased $1,162 from the prior year period, which included $2,725 in charges associated with a workforce reduction program. Excluding those charges, other operating expenses increased $1,563, or 2.0%, in 2004. The increase in operating expenses was predominately due to increases in the direct costs associated with the growth in access lines and access line equivalents, such as fees paid for leasing unbundled network elements in the portions of our edge-out markets that we do not wholly provision over our own facilities and fees paid to terminate the increased local, toll and Internet traffic generated by our growing customer base. The 2% increase in operating expenses, though, was lower than experienced in the past several years due to the positive impacts of a decrease in the cost of contracted operational support system (OSS) services pursuant to a new agreement executed in the third quarter of 2003, a decrease in depreciation expense as a result of the capitalized costs and license fees incurred for our OSS becoming fully depreciated and by our ability to greatly moderate the annual growth rate in overall labor costs (inclusive of current and postretirement benefits). Labor costs increased at an approximate 2% rate for 2004, in contrast to double-digit percentage increases in these costs experienced in the past several years. Labor costs were positively impacted by the 2003 workforce reduction at the Company’s North Pittsburgh subsidiary as well as by the ability to keep postretirement benefit expenses (exclusive of the $1,583 in one-time curtailment charges incurred in 2003 in association with the aforementioned workforce reduction) relatively flat on a year over year basis, reversing the trend of double digit percentage increases experienced in the past several years. The 2% increase in aggregate labor costs was mostly the result of an increase in medical insurance premiums.

For 2005, we expect our operating costs to increase at a slightly greater rate than experienced during 2004. The positive year over year benefits of the decreases in depreciation expense and cost of contracted OSS services experienced in 2004 were mostly the result of 2003 including the higher depreciation and OSS costs, respectively. For 2005 comparative purposes, both years will include the benefits of the reduced costs. In addition, during 2005, we expect to implement several new software systems, including a workforce management system, an automated switch provisioning system and a new billing and OSS platform at our CLEC. We believe that these systems will improve our cost structure and operational efficiencies over the long-term. However, it is typical that the implementation costs for such projects exceed the cost savings in the first year. In addition, we anticipate rolling out our new VoIP product in 2005. Again, although we expect that this new product will enhance our ability to compete in both the residential and business customer segments as well as, over time, serve as a lower cost platform for many elements of our network, the costs associated in the first year will likely exceed the first-year benefits.

With respect to our operating costs in our edge-out CLEC markets, we continue to monitor the developments in the FCC’s Triennial Review Order (TRO). Based on our interpretation of the most recent authoritative guidelines (the FCC’s Order on Remand released on February 4, 2005), we do not believe that the Order will have a material impact on our cost structure. Currently, we provision only 8% of our CLEC access lines (which represents only 3% of our consolidated access lines) utilizing Unbundled Network Element Platform (UNE-P) loops. Although costs for UNE-P loops will increase over time, our relatively low use of UNE-P and the ability to migrate some of the lines to alternative provisioning methodologies will limit the overall impact. Based on our interpretation of the rules concerning access to unbundled high capacity loops, interoffice transport facilities and dark fiber, we believe we will experience moderate increases in the overall cost to provision such loops and facilities during 2005. However, we caution that although the FCC’s Order defines impairment of such circuits based on a review of the number of business lines and fiber based collocators in a serving wiring center, the practical definitions of what constitutes a business line or fiber based collocator have yet to be decided. In a separate matter, the PA PUC has recently revised many of Verizon’s unbundled rates for loops as well as high

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capacity circuits. Although the revised rates reflect a mixture of both increases and decreases, based on the specific types of circuits and markets in which we operate, we should experience in 2005 an overall slight decrease in the average costs to provision our CLEC access lines. We caution, however, that Verizon has challenged the PA PUC’s revisions of these Verizon rates in Federal court.

Our cost structure is heavily weighted towards labor and depreciation. As such, there is not a great deal of direct correlation between our revenues and our largest operating expenses. As previously noted, we have taken steps to address our overall labor costs, including the workforce reduction program implemented in 2003 and using our excess cash reserves to make additional contributions into the defined benefit pension plan. The benefits of taking these steps were evident in the results of operations for 2004, as we were able to contain the growth in overall labor costs to 2% in 2004. In addition, pursuant to a renegotiated collective bargaining agreement in 2004 covering our North Pittsburgh subsidiary, we have restricted future hires from being eligible to participate in the North Pittsburgh defined benefit pension plan. Although we will not see any immediate benefits from this in 2005 and estimate only modest benefits in the next few years thereafter, the long-term impact should be to greatly reduce postretirement benefit expenses which currently exceed $3,000 per year.

We also have implemented a targeted capital expenditure program, in which the majority of our expenditures are directly related to new customer additions. The significant network modernization investments which we made from 1997 through 2001 have enabled us to keep our maintenance capital expenditures (defined as capital expenditures needed to continually replace and/or expand our network capabilities to address our existing customer base) at levels of 5-7% of revenues over the last several years, which is much lower than the industry average of over 10%. Maintaining our existing operating margins going forward will be challenging as competition intensifies and lower margin services, such as DSL and CLEC access lines, generate a larger percentage of our overall revenues. Nevertheless, we will continue to manage our cost structure and capital spending aggressively.

In addition, we have benefited from investments made in the last two decades in wireless partnerships, all of which today are majority owned and operated by Verizon Wireless. Instead of deploying the majority of our capital into forming and operating our own wireless business, which would from a scale perspective be at a tremendous disadvantage in a market in which our competition would be national carriers with billions of dollars in capital resources, we alternatively invested in three wireless partnerships covering Pittsburgh and other portions of Western Pennsylvania. Total equity income recorded from our investments in the wireless partnerships increased $2,593 in 2004.

Our financial condition and balance sheet have continually improved over the last several years through prudent investment strategies and strong cash flows generated from operating activities. Unlike many telecommunication companies that have substantially leveraged their businesses, we have a greater amount of cash and temporary investments on hand ($42,569) than our total debt outstanding ($24,682). Our financial condition gives us the ability to invest in new products and/or opportunities and the flexibility to continue to evaluate ways to create greater shareholder value, whether through our dividend policy, stock repurchases or other investment opportunities.

The following discussion should be read in conjunction with our consolidated financial statements, and the notes thereto, included in this annual report.

Results of Operations: 2004 vs. 2003

Net income for 2004 was $18,960, or $1.26 per share, compared to net income of $14,617, or $.97 per share, for 2003. The increase in net income was attributable to the following factors:

Operating Revenues

Total operating revenues increased $2,713, or 2.6%, during 2004. This increase was the result of increases in local network services revenues of $2,409 (9.1%), directory advertising, billing and other services revenues of

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$81 (6.2%) and other operating revenues of $1,086 (10.6%), offset partially by decreases in long distance and access services revenues of $574 (0.9%) and telecommunication equipment sales of $289 (12.8%).

Increases in local network services revenues of $2,409, or 9.1%, were primarily attributable to the following factors:

The increase in directory advertising, billing and other services revenues of $81 was mostly attributable to the 2003 first quarter including an approximate $120 reduction in revenues recorded in anticipation of a lower settlement for the 2002 directory book than originally estimated. The positive increase in directory advertising revenues was partially offset by a $57 decrease in carrier billing and collection revenues as the volumes of services and calls billed on behalf of other carriers have continued to decrease.

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The increase in other operating revenues of $1,086, or 10.6%, was primarily due to growth in DSL revenues of approximately $1,090 as combined DSL lines (both wholesale and retail) sold increased from 10,029 as of December 31, 2003 to 12,063 as of December 31, 2004.

The decrease in long distance and access services revenues⁴ of $574, or 0.9%, was primarily attributable to the following factors:

Second, the 2003 second quarter was favorably impacted by $427 in final intercarrier settlement adjustments covering a two-year period.

Third, Penn Telecom experienced reductions in its effective intercarrier compensation rates, the most significant of which was a revision made between Verizon and Penn Telecom in September of 2003 in the PLU factor used to settle traffic between the companies. At that time, the PLU factor change resulted in an approximate $250 per month decrease in intrastate access revenues recognized. Also, in conjunction with the FCC’s Access Charge Reform Order, Penn Telecom’s interstate access rates have been phased down over a three-year period that began in 2001. The final decrease, which adjusted Penn Telecom’s rates to mirror the incumbents’ rates, was effective June 20, 2004 and resulted in an approximate $40 per month decrease in access revenues. Although Penn Telecom’s access line growth contributed to an approximate 20% increase in minutes of use (MOUs) on the network, the decreases in the effective intercarrier compensation rates described above resulted in an approximate $700 decrease in access charges to carriers. The largest of the factors contributing to the decrease (the change in the PLU factor) occurred in 2003, and we therefore do not expect to see the same magnitude of a decrease in 2005 revenues as compared to 2004, as both years would reflect a full twelve months at the revised PLU factor.

Fourth, reductions in wireless intercarrier compensation rates contributed to a $356 decrease in access revenues received from wireless carriers, despite a 28% increase in billable MOUs. In comparison, revenues from wireless traffic increased approximately $540 for full year 2003, as there were no material rate changes experienced in that year. We expect to see a decrease in access revenues from wireless carriers again in 2005, due to the fact that the majority of the decreases in rates were effective in the beginning of the third quarter of 2004. As such, 2005 will reflect a full year of the reduced rates in comparison to only six months in 2004.

Partially offset by:

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The decrease in telecommunication equipment sales of $289 was mostly due to a decrease in new equipment sales.

Operating Expenses and Net Operating Income

Total operating expenses decreased $1,162, or 1.4%, during 2004. The change was the result of decreases in network and other operating expenses of $575 (1.0%), depreciation and amortization expenses of $87 (0.5%), state and local taxes of $202 (5.3%) and telecommunications equipment expenses of $298 (18.3%).

The decrease in network and other operating expenses of $575, or 1.0%, was primarily due to:

Partially offset by:

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The decrease in consolidated depreciation and amortization expenses of $87, or 0.5%, was the result of the capitalized costs and license fees, which were incurred with the conversion to a Year 2000 compliant OSS approximately six years ago, becoming fully depreciated in December of 2003. This resulted in a $990 decrease in depreciation for that set of assets. Otherwise, depreciation expense for all other assets increased $903 as the depreciable asset base (gross property, plant and equipment) grew 4.6% over the course of the past year.

The decrease in state and local taxes of $202, or 5.3%, was attributable mostly to nominal decreases in payroll taxes and gross receipts tax expense.

The decrease in telecommunication equipment expenses of $298, or 18.3%, was attributable to decreases in the direct costs of goods for equipment sales, as the associated revenues have declined $289 from the prior year. In addition, 2003 contained a write-off of approximately $150 relating to obsolete inventory and spare equipment.

Overall, the increase in total operating revenues of $2,713, coupled with the decrease in total operating expenses of $1,162, resulted in a $3,875, or 16.7%, increase in net operating income in 2004 as compared to 2003.

Other Items

Interest expense decreased during 2004 by $195 due to the continued scheduled pay-down of our Federal Financing Bank (FFB) notes and capital lease obligation.

Interest income increased $204 during 2004 due to higher average invested cash balances as well as a slight increase in the average interest rate received on our temporary investments.

Dividend income increased $561 during 2004 as a result of a $558 increase in the dividend received from the Rural Telephone Bank (RTB). As a result of the prepayment of our RTB notes in December of 2002, we were able during January of 2003 to convert our RTB Class B stock into Class C stock (a class of stock eligible for cash dividends). Because we held the Class C stock for only nine months of the bank’s fiscal year ending in 2003, the dividend we received in the fourth quarter of 2003 was pro-rated. In the fourth quarter of 2004, the dividend we received was for a full twelve-month period. In addition, dividend income from the RTB stock was positively impacted by the dividend rate increasing from 4.2% in 2003 to 6.0% in 2004.

Equity income of affiliated companies increased $2,537 during 2004 due mainly to a $2,593 increase in the amount of income generated from the Company’s limited partner interests in three wireless partnerships. These partnerships, all of which are majority owned and operated by Verizon Wireless, have continued to show strong growth in the number of customers and operating results. We are also benefiting from a reduction in the partnerships’ switching costs which became effective in 2004, which we estimate contributed approximately $900 to the overall increase in 2004 earnings noted above. In addition, for year over year comparative purposes, the 2003 results of operations for the RSA 6(I) partnership were negatively impacted by approximately $200 as a result of the conversion costs incurred with the transition of the majority partnership interest from Alltel Communications to Verizon Wireless during 2003 and higher up-front network investments and customer acquisition costs. While we expect that the earnings of the wireless partnerships will continue to improve during 2005, we do not anticipate the same magnitude of improvement as seen in 2004. Although we will continue to benefit from the aforementioned reduction in switching costs, the incremental impact it had on 2004 earnings is considered non-repetitive in nature (that is, for 2005 comparison purposes, both 2004 and 2005 will contain the lower switching rates).

The changes in sundry expense (net) were not material.

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Results of Operations: 2003 vs. 2002

Net income for 2003 was $14,617, or $.97 per share, compared to net income of $12,118, or $.81 per share, for 2002. The increase in net income was attributable to the following factors:

Operating Revenues

Total operating revenues increased $10,580, or 11.1%, during 2003. This increase was the result of increases in local network services revenues of $2,800 (11.9%), long distance and access services revenues of $5,747 (9.6%) and other operating revenues of $2,360 (30.1%), offset partially by decreases in directory advertising, billing and other services revenues of $132 (9.2%) and telecommunication equipment sales of $195 (8.0%).

Increases in local network services revenues of $2,800, or 11.9%, were primarily attributable to the following factors:

The increase in long distance and access services revenues of $5,747, or 9.6%, was primarily attributable to the following factors:

The increase in other operating revenues of $2,360, or 30.1%, was primarily due to two factors. One was the growth of DSL revenues of approximately $1,417 as combined DSL lines (both wholesale and retail) sold increased from 7,490 as of December 31, 2002 to 10,029 as of December 31, 2003. The second factor was that

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the prior year period included approximately $694 in charges associated with the bankruptcies of carriers, most notably WorldCom and Global Crossing. These charges were recorded as reductions in revenue in 2002.

The decrease in directory advertising, billing and other services revenues of $132 was mostly attributable to a slight decrease in directory advertising revenues, due to greater competition in a relatively soft advertising market. The decrease in telecommunication equipment sales of $195 was due to lower post-sale support revenues.

Operating Expenses and Net Operating Income

Total operating expenses increased $10,074, or 13.9%, during 2003. The change was the result of increases in network and other operating expenses of $8,587 (17.3%), depreciation and amortization expenses of $1,139 (6.4%) and state and local taxes of $496 (15.1%), offset partially by a minor decrease in telecommunications equipment expenses of $148 (8.3%).

The increase in network and other operating expenses of $8,587, or 17.3%, was primarily due to increases in the direct costs associated with the growth in access lines and access line equivalents. Such direct costs include the fees paid for leasing UNEs in the portions of our edge-out markets that we do not provision over our own facilities, fees paid to terminate the increased local, toll and Internet traffic generated by our growing customer base and overall general increases in sales and support areas. In addition to the aforementioned costs, which normally increase as our customer base and network grow, the following costs also contributed to the increase in network and other operating expenses:

The increase in consolidated depreciation and amortization expenses of $1,139, or 6.4%, was the result of an increase in the depreciable asset base (gross property, plant and equipment) of 4.8% over the course of the past year. Furthermore, a higher ratio of the new additions reflected data centric equipment, which has shorter useful lives than our average depreciable base.

The increase in state and local taxes of $496, or 15.1%, was attributable to increases in a variety of taxes, including the public utility realty tax assessment (PURTA) tax, gross receipts tax, capital stock tax and payroll related taxes.

Overall, the increase in total operating revenues of $10,580, coupled with the increase in total operating expenses of $10,074, resulted in a $506, or 2.2%, increase in net operating income in 2003 as compared to 2002.

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Other Items

Interest expense decreased $1,864 during 2003 due to the prepayment of our RTB notes in December of 2002 and the continued scheduled pay-down of our remaining FFB notes. In addition, during the fourth quarter of 2002, we incurred a $510 charge associated with the accelerated amortization of debt issuance costs related to the RTB debt prepayment.

Interest income decreased $328 during 2003 due to lower average temporary investment balances during the year, as a result of the RTB debt prepayment, as well as the general decrease in short-term money market rates for temporary investments.

Equity income of affiliated companies increased $276 during 2003 due to an increase in the amount of income generated from our investments in three wireless partnerships and in Boulevard. The growth rate in this category was lower than in prior years, partially due to a $218 decrease in equity income from our RSA 6(I) partnership during 2003. This decrease was a result of conversion costs incurred with the transition of the majority partnership interest from Alltel Communications to Verizon Wireless during 2003, increases in network investments and much higher customer growth in the last two quarters, which resulted in temporary decreases in income due to higher up-front customer acquisition costs, such as equipment subsidies and commissions.

Dividend income increased $604 during 2003 primarily due to the receipt of $601 in dividends from the RTB. As a result of the prepayment of the RTB notes in December of 2002, we were able during January of 2003 to convert our RTB Class B stock into Class C stock (a class of stock eligible for cash dividends). As we held the Class C stock for nine months of the RTB’s twelve-month fiscal year, we received a pro-rated cash dividend of $601 in the fourth quarter of 2003.

The $1,312 change in sundry expense (net) was due primarily to $1,220 of costs expended by the Company in 2002 exploring strategic alternatives and business arrangements which were not incurred in 2003. In addition, 2002 included an investment loss of $140 associated with the other-than-temporary decline in value of several equity securities.

Liquidity and Capital Resources

Cash and temporary investments were $42,569 at December 31, 2004 as compared to $32,026 at December 31, 2003. The increase was a result of operating cash flows exceeding investment and financing requirements. Cash flows from operations were $34,091 for 2004, a $3,176 increase from 2003. Cash flows from operations were positively impacted by an increase in net income during 2004 as well as by the fact that the prior year period included $1,076 in pre-tax ($629 in after tax) cash severance and early retirement incentives. In addition, contributions into the Company’s defined benefit pension plan were $491 lower in 2004 as compared to 2003.

Cash flows used for investing activities were $8,738 for 2004, a $1,889 increase from 2003. The increase was primarily the result of a $2,713 increase in capital additions, as 2004 included investments in equipment for our next generation of broadband products (including multi-megabit offerings), investments in network equipment for our planned VoIP product, an increase in purchases for fleet vehicles and expenditures for several building renovations. The increase in cash outflows for capital additions was partially offset by an $825 increase in net proceeds received from our wireless partnerships.

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We expended $14,810 during 2004 for financing activities, which included cash dividends and the scheduled repayments of debt and capital lease obligations. The amount was $526 higher than the prior year period, mostly as a result of a $450 increase in dividends paid pursuant to the Company raising by $.01 per share the dividend it declared payable during the last three quarters of 2004.

Temporary excess funds were invested in short-term cash equivalents with maturity dates scheduled to coincide with tax payment due dates, debt principal payments, dividend payment dates and other predictable cash needs. We expect to continue the investment of such excess funds throughout 2005, which should enable us to meet all short-term obligations.

Working capital levels at December 31, 2004 increased $7,660 from December 31, 2003, mostly due to the continued generation of cash flows from operations, which contributed to a $10,543 increase in cash and temporary investments (as discussed above).

The decrease in long-term debt was a result of scheduled principal repayments of $3,085 in 2004. We funded 100% of our 2004 expenditures for property and equipment from operations cash flows and cash reserves. Therefore, no additional advances were requested from our available debt facilities. In 1996, North Pittsburgh was granted approval for a loan from the FFB guaranteed by the RUS in the maximum principal amount of $75,000. The total amount outstanding at December 31, 2004 to the FFB under this loan was $24,682, with all advances having a maturity date of December 31, 2012. The unadvanced amount of this facility as of December 31, 2004 was $34,764. North Pittsburgh can draw against this facility through June 30, 2012 for qualified capital expenditure projects, as defined in the loan agreement, to furnish and improve telephone service in rural areas. As of December 31, 2004, North Pittsburgh had approximately $3,999 of qualified capital expenditures that were eligible to be drawn against this facility.

The notes payable to the FFB are secured by a supplemental Mortgage Agreement executed by North Pittsburgh, which provides that substantially all of the assets of North Pittsburgh, which approximate a net book value of $97,784, are subject to a lien or a security interest. Such agreement contains restrictions regarding dividends and other distributions by North Pittsburgh. Under these restrictions, unless certain working capital levels, net worth levels and interest expense ratios are maintained, North Pittsburgh is not permitted to pay dividends on its capital stock (other than in shares of capital stock), or make any other distributions to its shareholder, or purchase, redeem or retire any of its capital stock or make any investment in affiliated companies. As a result of these restrictions, approximately $4,595 of North Pittsburgh’s retained earnings was available for dividends and other distributions to the Registrant as of December 31, 2004. Taking into consideration these North Pittsburgh restrictions, approximately $50,093 of our consolidated retained earnings was available for dividends and other distributions to our shareholders as of December 31, 2004.

North Pittsburgh also has available through June of 2009 a $10,000 line of credit with the Rural Telephone Finance Cooperative at a rate of prime plus 1-1/2%. No borrowings have been taken against the line of credit and there are no commitment fees associated with it.

The following table discloses aggregate information about our contractual obligations and purchase commitments as of December 31, 2004:

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We expect cash flows provided by operating activities and cash reserves over the next twelve months to be sufficient to service long-term debt and capital lease obligations, to pay dividends and to finance all capital projects. We currently expect a capital expenditure program for 2005 in the range of $13,000 to $14,000. We expect to continue to have the necessary cash flows from operations and cash reserves to internally finance 100% of our projected capital expenditures. However, due to the low cost financing available through the RUS for qualified North Pittsburgh capital expenditures, we may request advancements from the RUS facility in the future.

Critical Accounting Policies

Certain accounting policies are very important to the portrayal of our financial condition and results of operations and require management’s most subjective or complex judgments. These policies are as follows:

Revenue Recognition

Revenues are recognized when local network, long distance, and access services are provided. Local service, intrastate long distance and intrastate access service revenues are subject to the jurisdiction of the PA PUC. Revenues from equipment sales are recorded after equipment has been installed and accepted by the customer. Directory advertising revenues are recognized ratably over the period related to the directory publication.

Our North Pittsburgh subsidiary receives a portion of its interstate access revenues from pooling arrangements in which it participates with other telephone companies. Such pools, which are administrated by NECA, are funded by access service charges regulated by the FCC. Revenues earned through these pooling arrangements, which are based on nationwide average costs applied to certain projected demand quantities, are initially recorded based on estimates and are subject to adjustments that may either increase or decrease the final amount of interstate revenues realized for a given period. Management monitors the activity of the pools and establishes accruals, if deemed necessary, for estimated obligations to the pool. The calculations used to record these revenues are complex and involve a variety of estimates, and it is therefore possible that the ultimate amount realized from the pools could differ materially from our estimates, although historically we have not experienced significant out-of-period adjustments to our revenues as a result of participating in these pools.

Valuation of Accounts Receivable

We review accounts receivable to determine which are doubtful of collection. In making the determination of the appropriate allowance for doubtful accounts, we consider our accounts receivable aging schedules, history of write-offs, relationships with our customers and the overall credit worthiness of our customers.

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Income Taxes

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

Pension and Other Postretirement Benefits

We calculate the costs of providing retiree benefits under the provisions of Statement of Financial Accounting Standards (SFAS) No. 87 and SFAS No. 106. The key assumptions used in making these calculations are disclosed in Note 6 to our consolidated financial statements included in this Form 10-K. The most significant of these assumptions are the discount rate used to value the future obligation, expected return on plan assets and health care cost trend rates. We select discount rates commensurate with current market interest rates on high-quality, fixed-rate debt securities. The expected return on assets is based on our current view of the long-term returns on assets held by the plan, which is influenced by the historical performance of plan assets, asset allocation and other third-party studies. The medical cost trend rate is based on our actual medical claims and future projections of medical cost trends.

The judgments used in applying the above policies are based on our evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results may differ from those estimates.

WorldCom Bankruptcy

On July 21, 2002, WorldCom petitioned the U.S. Bankruptcy Court for the Southern District of New York for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. During 2002, we realized reductions in revenue of $571 as a result of the write-off of pre-petition amounts owed by WorldCom to Penn Telecom ($66) and to North Pittsburgh ($505) for intrastate services. For interstate services, North Pittsburgh was able to submit and recover from the NECA pool the majority of the $658 of uncollectible pre-petition receivables owed by WorldCom.

During March of 2003, we negotiated a claim sale agreement for North Pittsburgh’s receivables with Deutsche Bank and achieved a recovery of $582. Of the total amount recovered, the $329 which represented a recovery of interstate receivables was remitted back to the NECA pool (as we had already collected the entire write-off from the pool in 2002), resulting in no effect on the income statement. The $253 which represented a recovery of intrastate receivables was recognized in the income statement as a recovery of revenue during the first quarter of 2003. We sold Penn Telecom’s claim for $18 and recognized a recovery of revenue during the fourth quarter of 2003.

Workforce Reduction and Business Restructuring

During the second quarter of 2003, we instituted a workforce reduction program at our North Pittsburgh subsidiary. This program, consisting of both layoffs and early retirement incentives, reduced the North Pittsburgh workforce by 37 people, or 15%. We recorded severance charges of $1,076 and $66 during the second and third quarters of 2003, respectively. No severance accrual remained as of December 31, 2003, as all amounts had been paid prior to that date.

Because of the workforce reduction program, we also recorded curtailment charges and completed a re-measurement of our obligations under our pension and postretirement healthcare plans. Curtailment charges totaling $1,583 were recorded in the second quarter of 2003. Both the $1,142 in severance charges and $1,583 in curtailment charges were recorded in the “Network and other operating expenses” line item on our Consolidated Statement of Income.

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Regulatory Environment

Both North Pittsburgh and Penn Telecom are subject to regulatory oversight by the PA PUC for intrastate services and the FCC for interstate services. The PA PUC and the FCC have broad powers of supervision and regulation over public utilities with respect to service and facilities, rates and charges, securities, the encumbering or disposition of public utility properties, accounting and various other matters.

Federal Regulatory Matters

The FCC regulates the rates, the system of financial accounts for reporting purposes, rules for interconnection with other carriers, universal service funding, certain aspects of service quality, the use of numbering resources, compliance with the Communications Assistance for Law Enforcement Act (CALEA), and other aspects related to North Pittsburgh’s and Penn Telecom’s provision of interstate services.

FCC Interconnection Rules

In 1996, Congress passed the 1996 Act, which has the goal of opening the telecommunications industry to further competition for all services, including the local exchange market. The 1996 Act prohibits state legislative or regulatory restrictions or barriers to entry regarding the provision of local telephone service. It also requires most ILECs to interconnect with the networks of other telecommunications carriers, unbundle their services into network elements, offer their telecommunications services at wholesale rates in order to permit the resale of such services and allow other telecommunications carriers to locate equipment on their premises. Local exchange telephone carriers are also required to compensate each other for the transport and termination of calls. The FCC has issued a number of Rulemakings that continue to implement the requirements of the 1996 Act and are intended to facilitate the resale of services at wholesale rates and provide for local number portability (LNP), dialing parity, interconnection to any requesting carrier and access to network elements.

North Pittsburgh’s wireline operations are considered Rural under the 1996 Act and are exempt from certain of the foregoing obligations unless, in response to a bona fide request for interconnection, the PA PUC removes that exemption. More specifically, pursuant to the rural exemption provision of Section 251(f)(1) of the 1996 Act, North Pittsburgh is currently exempted from offering collocation, UNEs, wholesale discounts and certain other requirements of the 1996 Act which originally pertained to non-rural ILECs. However, upon a petition by a potential competitor, the PA PUC may grant the removal of North Pittsburgh’s rural exemption if it finds that the competitor’s proposal is not unduly economically burdensome to North Pittsburgh, is technically feasible and is consistent with the universal service provisions of the 1996 Act. In addition, the burden of proof in such a proceeding rests with the competitor. The rural exemption does not, however, prevent facilities based competition in North Pittsburgh’s service area.

In March of 2003, North Pittsburgh received a request from a CLEC to negotiate an interconnection agreement. Accompanying the request for interconnection by the CLEC was a request for LNP. As a result of that request, North Pittsburgh implemented LNP capability in November of 2003. North Pittsburgh is still in negotiations with the requesting CLEC, along with others who have requested interconnection since, with regard to final agreements.

The North Pittsburgh implementation of LNP capability coincided with the FCC’s ordered deadline for certain ILECs, including North Pittsburgh, to implement wireline to wireless LNP by November 24, 2003. On January 19, 2004, the FCC extended the November 24, 2003 deadline until May 24, 2004 for certain rural local exchange carriers. However, because North Pittsburgh was already LNP capable, this extension did not apply to North Pittsburgh. The FCC’s Order regarding wireline to wireless LNP was challenged in court and, on March 11, 2005, the Court of Appeals issued its ruling. Under that ruling, North Pittsburgh and Penn Telecom will be required to provide wireline to wireless LNP once the FCC prepares and publishes a regulatory flexibility analysis in regard to small businesses. Wireline to wireless LNP, when fully implemented, may cause both North Pittsburgh and Penn Telecom to experience some loss of customers and the associated revenues, as customers will be able to migrate from wireline service to wireless service and still retain their current telephone numbers.

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Triennial Review Order

On February 20, 2003, the FCC issued its TRO regarding the 1996 Act. In that decision, the FCC eliminated unbundling requirements for ILECs in regard to broadband services provided over fiber facilities but continued to require unbundled access to mass-market narrowband loops. In addition, ILECs were not required to unbundle packet switching services. The FCC further found that the high frequency portion of the loop, also referred to as line sharing, was no longer required to be provided as a UNE and would therefore be phased out over three years. Additionally, the FCC found that ILECs would no longer have to offer the local switching UNE to CLECs for business customers served by high-capacity loops. The states had 90 days to rebut this finding. For mass market customers served by narrowband loops, the FCC set out specific criteria that states shall apply to determine if switching should no longer be available as an UNE. Upon a state ruling eliminating switching as an UNE for mass market customers, the FCC set forth a three-year period for carriers to transition off UNE-P, which is a service that bundles UNE switching with other UNEs such as UNE loop to provide the entire local service platform.

On March 2, 2004, the U. S. Court of Appeals for the District of Columbia issued a decision in response to a number of court appeals filed in regard to the FCC’s TRO. In that ruling, the court upheld the FCC’s rules in regard to their conclusion that ILECs need not unbundle broadband loops provided through the utilization of new technologies such as hybrid fiber/coaxial cable and fiber-to-the-home. Subsequent FCC orders have also relieved incumbents of the unbundling requirements for fiber-to-the-curb loops, where fiber is extended to within 500 feet of a customer premises. The court also agreed with the FCC that ILECs need not provide line sharing. However, the court vacated and remanded a number of FCC rules regarding the FCC’s finding that CLECs were impaired without access to certain network elements such as local switching. In addition, the court vacated the FCC’s decision to delegate to the state commissions determinations related to mass-market switching and dedicated transport elements.

On February 4, 2005, the FCC released its Order on Remand, setting forth the final rules regarding the unbundling obligations of the ILECs in response to the Appeals Court Decision. The FCC’s revised UNE rules detailed the following changes:

The FCC also set forth regulations that establish a mandatory transition plan to facilitate the transition by CLECs from UNEs to alternative arrangements over either a twelve- or eighteen-month period depending on the UNE being eliminated. At the end of the transition plan, the CLEC must have alternative facilities of its own, or an alternative arrangement with the ILEC under either a tariff or commercial agreement.

On February 10, 2005, Verizon Pennsylvania, Inc. notified Penn Telecom regarding its implementation plan of the FCC Order on Remand. At the same time, Verizon also petitioned the PA PUC to institute an arbitration proceeding regarding amendments to interconnection agreements that it has with CLECs and CMRS providers.

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While the FCC Remand Order was clear in regard to which unbundled elements are no longer required to be provided by ILECs, the definitions relating to the criteria for when a particular UNE is no longer required to be offered are still at issue and should be addressed in the arbitration proceeding.

On February 14, 2005, a number of parties filed a supplementary petition with the U.S. Court of Appeals for the District of Columbia, again seeking a writ of mandamus to compel the FCC to follow the Court’s previous directive in its earlier remand decision. Those parties filing the petition claim that the final FCC rules are still flawed and not in compliance with the Court’s decision. Action by the Court is still pending.

We believe that the outcome of the final FCC rules regarding the unbundling rules, if not overturned, will have no immediate impact on our ILEC operations, because we are not required to offer UNEs to competitors as long as we retain our rural exemption. In regard to our CLEC operations, because we do not currently utilize line sharing and utilize our own switching for business customers which are served by high-capacity loops, the elimination of these network elements will have no effect on our operations or revenues from our existing customer base.

With regard to the elimination of UNE-P, we currently provision 8% of our CLEC access lines (or 3% of our consolidated access lines) utilizing UNE-P. Although costs for UNE-P loops will increase over time as the rates migrate to higher tariff rates, or commercially negotiated rates, our relatively low use of UNE-P and the ability to migrate some of the lines to alternative provisioning methodologies will limit the overall impact on our current cost structure. Based on our interpretation of the rules concerning access to unbundled high capacity loops, interoffice transport facilities and dark fiber, we believe we will experience moderate increases in the overall cost to provision such loops and facilities during 2005 as a result of the FCC’s Order on Remand. We caution, however, that although the FCC’s Order on Remand defines impairment of such circuits based on a review of the number of business lines and fiber based collocators in a serving wiring center, the practical definitions of what constitutes a business line or fiber based collocator have yet to be decided.

In a separate matter, the PA PUC, which has the authority to set rates and terms for interconnection between carriers within the guidelines ordered by the FCC, has recently revised many of Verizon’s unbundled rates for loops as well as high capacity circuits. Although the revised rates reflect a mixture of both increases and decreases, based on the specific types of circuits and markets in which we operate, we should experience in 2005 an overall decrease in the average costs to provision our CLEC access lines as a result of the PA PUC action. The positive impact of the PA PUC revisions to Verizon’s rates should mitigate the negative impacts of the FCC’s Order on Remand, with potential slight decreases in the overall cost to provision access lines in our edge-out markets experienced for 2005. We caution, however, that Verizon has challenged the PA PUC’s revisions to Verizon’s rates in Federal court.

Intercarrier Compensation and Universal Service

On February 10, 2005, the FCC issued a Further Notice of Proposed Rulemaking (FNPRM) in regard to the rules governing intercarrier compensation for the various types of traffic exchanged by telecommunications carriers. Under the current rules, rates charged for traffic vary by the type and/or the jurisdiction of the traffic. The FCC is considering replacing the current system of payments with a uniform regime where all types of traffic are compensated at a unitary rate. In that proceeding the FCC is seeking comment on seven comprehensive reform proposals that have been submitted to the FCC from industry participants and other interested parties. The FCC’s goal is to put in place an intercarrier compensation mechanism that encourages the development of efficient competition, preserves universal service support which ensures affordable rates in rural and high cost areas, that is technologically and competitively neutral and that minimizes regulatory intervention and enforcement and relies on commercially negotiated contracts rather than rules and regulations. Both North Pittsburgh and Penn Telecom receive a large percentage of their revenues from intercarrier compensation payments, and the outcome of this proceeding therefore may have a large impact on their revenue streams. In

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addition, because universal service funding will be affected by any change in the current intercarrier compensation system, North Pittsburgh’s universal service funding from both the interstate and intrastate jurisdictions may be affected by the outcome of this proceeding.

On February 12, 2004, the FCC issued a Notice of Proposed Rulemaking (NPRM) proceeding to examine the regulatory treatment of VoIP. While the FCC indicated its preference for minimal regulation, it also recognized the need to ensure that the provision of VoIP is consistent with social objectives including universal service, emergency 911, law enforcement access, consumer protection and disability access.

Prior to the FCC’s issuance of the NPRM regarding VoIP, several companies had petitioned the FCC for declaratory rulings that their specific service offerings, which utilize some component of Internet Protocol (IP), were exempt from access charges. One of these filings was made by AT&T and one was made by pulver.com.

The AT&T Petition asked the FCC for a declaratory ruling that AT&T’s Phone-to-Phone IP telephony service, which utilizes IP in the transport portion of the service, is exempt from access charges. On April 21, 2004, the FCC released an Order denying the AT&T Petition and affirming that access charges do apply to toll calls that originate or terminate on the Public Switched Telephone Network (PSTN) even if some portion of the call is transported utilizing IP.

In the pulver.com Order released on February 12, 2004, the FCC ruled that pulver.com’s Free World Dialup offering, which provides voice-calling services utilizing IP between two broadband connections to the Internet and which does not utilize the PSTN at either end, was exempt from access charges.

While these two FCC rulings have addressed the applicability of access charges in regard to specific services that utilize IP to provide voice or toll calling services, various questions regarding the full scope of regulations that will apply to VoIP services in general are still unresolved and will be addressed in the VoIP NPRM. The outcome of this NPRM proceeding will affect North Pittsburgh and Penn Telecom because 1) VoIP services compete directly with the local and toll service offerings of North Pittsburgh and Penn Telecom, and 2) both North Pittsburgh and Penn Telecom receive a portion of their revenues from access charges, the applicability of which to various forms of IP traffic is being reviewed in the NPRM. As the outcome of this proceeding is unknown at this time, we are unable to determine the effect such action may have on our operations and revenues.

On December 20, 2003, Level 3 Communications, LLC, filed with the FCC a petition requesting that the FCC forbear from applying switched access charges to IP calls that utilize the PSTN. If the petition were approved, then VoIP traffic would presumably be settled at the lower local interconnection rate. While it is unclear whether the FCC is legally permitted to grant the petition, should it do so both North Pittsburgh and Penn Telecom would be affected by such a decision. If the petition were to be granted, we believe that initially there would be a minimal impact on North Pittsburgh’s and Penn Telecom’s services. However, as the number of VoIP providers grows and the amount of VoIP traffic increases, access revenues would decline over a period of time. The FCC must act on the petition by March 22, 2005 or it will be deemed approved. It is expected that the FCC will take action before that date.

In February of 2002, the FCC also issued a FNPRM regarding the possible reformation of the system for assessing and recovering Universal Service Fund (USF) monies. In that proceeding, the FCC has asked for comment on whether it should assess carrier contributions based on the number and capacity of connections that contributing carriers provide to customers, rather than on the current method, which is based on the interstate revenues they earn. Should the FCC reform the current system for assessing and recovering USF monies, North Pittsburgh, Penn Telecom and Pinnatech would be affected by the change. Because the outcome of this proposal is unknown at this time, we are unable to determine the effect such action may have on our operations and revenues.

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Other Federal Regulatory Matters

In February of 2002, the FCC issued a NPRM regarding the possible classification of wireline broadband Internet access as an information service rather than a telecommunications service. Should the FCC adopt this proposed rule, it may cause network based broadband offerings such as DSL services to be more lightly regulated by the FCC. In this NPRM, the FCC also asked whether it should extend USF requirements to not only facilities based wireline Broadband Internet Service Providers (BISPs) but also wireless, cable TV and satellite BISPs. Should the FCC extend a USF contribution requirement to all BISPs, North Pittsburgh, Penn Telecom and Pinnatech would be affected. Because the outcome of this proceeding is unknown at this time, we are unable to determine the effect such action may have on our operations and revenues.

State Regulatory Matters

The PA PUC regulates the rates, the system of financial accounts for reporting purposes, certain aspects of service quality, billing procedures, universal service funding and other aspects related to North Pittsburgh’s and Penn Telecom’s provision of intrastate services. In addition, the PA PUC sets the rates and terms for interconnection between carriers within the guidelines ordered by the FCC.

Price Regulation

Effective January 22, 2001, under a statutory framework referred to as Chapter 30, North Pittsburgh moved from rate-of-return regulation in the intrastate jurisdiction to an alternative form of regulation, which is a price cap plan. Under North Pittsburgh’s price cap plan, rates for non-competitive intrastate services are allowed to increase based on an index that measures economy-wide price increases less a productivity offset. There is no limitation on earnings under this plan. The terms of the plan also allow North Pittsburgh to rebalance rates once each year to allow North Pittsburgh to gradually realign its intrastate rate structure on a more rational cost and market basis in order to meet future competition. In addition, as competition develops in the future, North Pittsburgh may file with the PA PUC to declare certain services competitive and thereby be freed from all rate regulation for those services. In return for approval of the alternative form of regulation, North Pittsburgh has committed to continue to upgrade its network in the future to ensure that all its customers will have access to broadband services.

That Chapter 30 legislation, which enabled North Pittsburgh to operate under an alternative price-cap form of regulation, expired due to legislative sunset provisions on December 31, 2003. Thereafter, the PA PUC on January 22, 2004 issued a Statement of Policy concluding that under the Pennsylvania Public Utility Code, as then in effect, the approved Chapter 30 alternative plans of regulation for all ILECs operating in Pennsylvania would remain in effect and would be fully enforceable in all respects upon the ILECs after the sunset date of December 31, 2003.

On November 30, 2004, Act 183 was signed into law in Pennsylvania. Act 183 implemented new Chapter 30 legislation, which continued many aspects of the former Chapter 30 provision but also added some additional options for ILECs in regard to alternative regulation. Under the new Chapter 30, ILECs may commit to accelerate the deployment of broadband service capability to their entire service area and in exchange receive a reduction in, or elimination of, the productivity offset in their price index formula.

On February 25, 2005 North Pittsburgh filed an Amended Alternative Form of Regulation and Network Modernization Plan with the PA PUC pursuant to Act 183. In that filing, in addition to modifying its prior Chapter 30 Plan to comport with the new statute, North Pittsburgh committed to accelerate its deployment of a ubiquitous broadband network throughout its entire service area from the previous commitment date of December 31, 2015 to December 31, 2008. In return for making this commitment, North Pittsburgh will no longer be impacted by a productivity offset when calculating the Price Stability Index component of its annual price stability mechanism filing. North Pittsburgh will also not have to contribute to certain new public policy

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funding obligations that were instituted as part of Act 183. The PA PUC is expected to act on North Pittsburgh’s amended plan by the end of the second quarter of 2005. If the PA PUC fails to act within 100 days of the filing date, the amended plan is deemed approved.

Other State Regulatory Matters

In addition to the PA PUC’s revision of Verizon’s unbundled rates previously discussed under the Triennial Review Order heading, there is another recent PA PUC proceeding which could impact North Pittsburgh and Penn Telecom. On December 16, 2004, the PA PUC adopted an Order instituting an investigation regarding the intrastate access charges and intraLATA toll rates of rural carriers in Pennsylvania, and the effect on those charges and rates if the PA PUC were to reduce disbursements from the Pennsylvania USF to the rural carriers or if it were to broaden the base of contributors to include carriers that do not currently pay into the fund. The proceeding will also address the ramifications of recent changes to the Pennsylvania Public Utility Code that affect access rate setting for both rural LECs and CLECs. Under the changes to the Public Utility Code, the PA PUC may not require a LEC to reduce intrastate access rates except on a revenue neutral basis. The new statute also sets limits on a CLEC’s ability to charge intrastate access rates higher than the ILECs in the area in which they are offering service. The procedures regarding the PA PUC’s implementation of these rate setting limitations will be determined in this proceeding. This proceeding may affect both North Pittsburgh’s and Penn Telecom’s ability to set access charge rates. The proceeding also may affect the amount of funding that North Pittsburgh receives from the Pennsylvania USF and the amounts that North Pittsburgh and Penn Telecom contribute to that fund. The outcome of this proceeding is unknown at this time, so we are unable to determine the impact the proceeding may have on the revenues of North Pittsburgh and Penn Telecom.

Transactions with Related Parties

In 1998, we entered into an agreement to outsource certain data processing functions to a third party processor (Processor), which is a member of the Armstrong Group. We are related to the Armstrong Group by a common shareholder and director. Payments to the Processor under this agreement were $2,613, $3,569 and $3,689 in 2004, 2003 and 2002, respectively. During 2004, 2003 and 2002, we paid approximately $224, $253 and $634, respectively, to the law firms of two members of the Board of Directors for various legal services. As of December 31, 2004, we had amounts of $438 and $58 outstanding to the Processor and law firms, respectively. As of December 31, 2003, we had amounts of $308 and $41 outstanding to the Processor and law firms, respectively.

In addition, in the ordinary course of business, we both provide and receive telecommunication transport services from Boulevard, a competitive access provider jointly owned by us and a company in the Armstrong Group. Total revenues recognized from providing services to Boulevard were approximately $26, $53 and $27, and total expenses incurred from receiving services from Boulevard were approximately $191, $275 and $217, for 2004, 2003 and 2002, respectively. We also provide, in the ordinary course of business, telecommunication and transport services to other member companies of the Armstrong Group, with total revenues recognized of approximately $98, $140 and $264 for 2004, 2003 and 2002, respectively. The amounts outstanding from and/or due Boulevard and the companies in the Armstrong Group were negligible as of December 31, 2004 and 2003.

Regulatory Assets

We do not believe that we have any significant regulatory assets or liabilities under SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation”. Historically, we have monitored closely the economic lives of plant in service and have adjusted depreciable lives as necessary to conform to generally accepted accounting principles.

Accounting Changes and Recent Accounting Pronouncements

In July, 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, “Goodwill and Other Intangible Assets”. The pronouncement was effective for our fiscal year beginning January 1, 2002. As of

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December 31, 2004, we had a net book value of $561 in equity method goodwill (recorded under “Investments”) as the result of the purchase of an additional interest in the Pennsylvania RSA 6(II) Limited Partnership in September of 2000. SFAS No. 142 discontinues the amortization of equity method goodwill and prescribes that we continue to test for impairment in accordance with Accounting Principles Board (APB) Opinion 18. We noted no impairment during our review of the equity method goodwill and associated investment during 2004, 2003 and 2002. As the annual amortization of the goodwill before the adoption of SFAS No. 142 was only $30, the cessation of the amortization did not have a material impact on our consolidated financial statements.

In June of 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires that we record the fair value of an asset retirement obligation as a liability in the period in which we incur a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. We would also record a corresponding asset associated with the retirement obligation that is depreciated over the life of the original asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. We adopted SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 did not have a material effect on our consolidated financial statements.

The FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities”, in January 2003 and amended the Interpretation in December 2003. A variable interest entity (VIE) is an entity in which its voting equity investors lack the characteristics of having a controlling financial interest or where the existing capital at risk is insufficient to permit the entity to finance the activities without receiving additional financial support from other parties. FIN 46 requires the consolidation of entities, which are determined to be VIEs when the reporting company determines itself to be the primary beneficiary (the entity that will absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s residual returns, or both). The amended Interpretation was effective for the first interim or annual reporting period ending after March 15, 2004, with the exception of special purpose entities for which the statement was effective for periods ending after December 15, 2003. We have completed a review of our partnership investments and have determined that those entities do not qualify as VIEs.

In December 2003, the FASB issued SFAS No. 132 (revised), “Employers’ Disclosures about Pensions and other Postretirement Benefits”. SFAS 132 (revised) prescribes employers’ disclosures about pension and other postretirement benefit plans; it does not change the measurement or recognition of those plans. The Statement retains and revises the disclosure requirements contained in the original SFAS No. 132. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. The new annual disclosure requirements became effective in part for our year ended December 31, 2003 and in their entirety for our year ended December 31, 2004. Our disclosures in Note 6 to our consolidated financial statements incorporate the requirements of SFAS No. 132 (revised).

In May 2004, the FASB issued FASB Staff Position (FSP) No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” FSP 106-2 provides guidance on the accounting for the effects of the new Medicare prescription drug benefit available to employers who sponsor postretirement health care plans that provide a benefit that is at least actuarially equivalent to the drug benefit provided under Medicare Part D. FSP 106-2 is effective for the first interim period beginning after June 15, 2004. The Company’s current accumulated projected benefit obligation and net periodic postretirement benefit cost do not reflect any amount associated with the federal subsidy provided by that Act. Medical coverage, including prescription drug benefits, provided by the North Pittsburgh postretirement benefit plan ceases when the retiree becomes Medicare eligible (currently age 65). The adoption of FSP 106-2 is not expected to impact the Company’s consolidated financial statements.

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Our limited exposure to market risk for changes in interest rates relates primarily to our long-term debt obligations. We primarily enter into debt obligations to support capital expenditures. We currently have no cash flow exposure due to rate changes for long-term debt obligations, as all our long-term debt obligations contain fixed rates. As of December 31, 2004, we had debt obligations of $24,682 with an average interest rate of 5.46% and maturity dates of December 31, 2012. Based on borrowing rates currently available for loans with similar terms and maturities, the estimated fair value of our long-term debt as of December 31, 2004 was $23,566. Our only exposure to market risk for changes in interest rates would be in the event that we prepay our debt, at which time a debt premium or discount would be calculated based on current RUS borrowing rates.

We do not use derivative financial instruments in our investment portfolio or for any other purpose.

Financial statements meeting the requirements of Regulation S-X and the supplementary financial information specified by Item 302 of Regulation S-K are attached to this document.

During the two most recent fiscal years, there has been neither a change of accountants nor a disagreement with accountants on any matter of accounting principles or practices, financial statement disclosures or auditing scope or procedure.

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial and Accounting Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K, and, based on their evaluation, the Chief Executive Officer and Chief Financial and Accounting Officer concluded that these disclosure controls and procedures are effective.

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

As permitted by the Order of the Securities and Exchange Commission promulgated on November 30, 2004 in Securities and Exchange Act of 1934 Release No. 50754, management’s annual report on internal control over financial reporting and the related attestation report of the Company’s independent registered public accounting firm are not included in or filed with this Annual Report on Form 10-K.

None.

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PART III

and

and

and

and

Information in respect to executive officers of the Registrant is included herein as a separate Additional Item for Part I under the caption “Executive Officers of the Registrant” and follows Item 4. The other information required by Items 10, 11, 12, 13 and 14 has been omitted from this report since we expect to file a Definitive Proxy Statement pursuant to Regulation 14A involving the election of Directors not later than 120 days after the end of the fiscal year covered by this report and such information is incorporated into Part III of this Form 10-K by reference thereto.

PART IV

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2004 and 2003

Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002

Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2004, 2003 and 2002

Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002

Notes to Consolidated Financial Statements

Condensed Financial Information of Registrant for the years ended December 31, 2004, 2003 and 2002

Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2004, 2003 and 2002

All schedules other than those listed above have been omitted because the information either is not required or is set forth in the financial statements or notes thereto.

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SIGNATURES

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

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 Registrant and in the capacities and on the dates indicated.

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NORTH PITTSBURGH SYSTEMS, INC.

AND SUBSIDIARIES

Consolidated Financial Statements

and Schedules (Form 10-K)

December 31, 2004, 2003, and 2002

(With Report of Independent Registered Public

Accounting Firm Thereon)

Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

Table of Contents

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Report of Independent Registered Public Accounting Firm

The Board of Directors

North Pittsburgh Systems, Inc.:

We have audited the consolidated financial statements of North Pittsburgh Systems, Inc. and subsidiaries (the Company) as listed in the accompanying table of contents. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying table of contents. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of North Pittsburgh Systems, Inc. and subsidiaries as of December 31, 2004 and 2003 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

KPMG, LLP

Pittsburgh, Pennsylvania

March 4, 2005

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NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2004 and 2003

(Amounts in thousands)

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NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2004 and 2003

(Amounts in thousands)

See accompanying notes to consolidated financial statements.

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NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Income

Years ended December 31, 2004, 2003, and 2002

(Amounts in thousands, except per share data)