<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D. C.  20549

                                   FORM 10-K

(Mark One)

[ X ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934


For the fiscal year ended           December 31, 1996
                          ------------------------------------------------------
 
                                      OR

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934


For the transition period from                      to
                               --------------------    -------------------------

Commission File Number                     0-13716
                      ----------------------------------------------------------


                        North Pittsburgh Systems, Inc.
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)


               Pennsylvania                             25-1485389
     -------------------------------        ---------------------------------
     (State or other jurisdiction of        (IRS Employer Identification No.)
      incorporation or organization)


4008 Gibsonia Road, Gibsonia, Pennsylvania              15044-9311
------------------------------------------             -----------
 (Address of Principal Executive Offices)               (Zip Code)

Registrant's telephone number, including area code           412/443-9600
                                                     -------------------------

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


Title of Each Class                    Name of each exchange on which registered
-------------------                    -----------------------------------------
   Common Stock                                         NASDAQ



                                             (Cover page continued on next page)
















































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


                                     None
--------------------------------------------------------------------------------
                               (Title of Class)


                    SECTION 13 OR 15(d) FILING REQUIREMENTS
                    ---------------------------------------


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 ]



         AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES
         -------------------------------------------------------------


Based on the average of the bid and asked prices on March 14, 1997, the
aggregate market value of the voting stock held by non-affiliates of the
Registrant is $319,600,000.  (Includes 1,716,184 shares beneficially owned by
Directors and Officers as a group.)



         OUTSTANDING SHARES OF EACH CLASS OF REGISTRANT'S COMMON STOCK
         -------------------------------------------------------------


          Class                                    Outstanding at March 14, 1997
          -----                                    -----------------------------

Common Stock, Par Value $.15625 per share                 15,040,000 shares


                      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 Item 13, Certain Relationships and Related
Transactions, 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, 1996.

                                                             (End of cover page)
<PAGE>
 
                                    PART I

Item 1.   Description of Business
------    -----------------------

      (a) General Development of Business:
          ------------------------------- 

   North Pittsburgh Systems, Inc. (the Registrant), 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) 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.  The principal
business activities of Penn Telecom consist of the sale, rental and servicing of
telecommunication equipment to end users, the resale of bulk billed message toll
services and high capacity intercity facilities.  Management Consulting
Solutions, Inc. (MCSI) and Pinnatech, Inc. (Pinnatech), wholly-owned
subsidiaries of the Registrant, were formed in 1995. MCSI provides consulting
and computer outsourcing services to healthcare and other industries, and
Pinnatech provides Internet access services.  The Registrant, NPTC, Penn
Telecom, MCSI and Pinnatech operate under the provisions of the Pennsylvania
Business Corporation Law.  No significant changes in the mode of conducting
business by the Registrant or its subsidiaries have occurred since the beginning
of the fiscal year ended December 31, 1996.

      (b) Financial Information About Industry Segments:
          --------------------------------------------- 

   This paragraph is not applicable.  The Registrant, through North Pittsburgh
and Penn Telecom, is engaged in the business of providing telecommunication
services and equipment which is not considered separable into industry segments.
The business activities of MCSI and Pinnatech, to date, are not considered
significant and are not reportable as industry segments of the Registrant.

      (c) Narrative Description of Business:
          --------------------------------- 

      (1) Business Done and Intended To Be Done:
          ------------------------------------- 

          (i) Principal Services Rendered.  The Registrant, through North
              ---------------------------                                
Pittsburgh and Penn Telecom, is engaged in providing the following
telecommunication services and equipment to customers generally located in
Western Pennsylvania:

              Local Network Services.  North Pittsburgh furnishes wireline
              -----------------------                                     
telecommunication services in all or parts of Allegheny, Armstrong, Butler and
Westmoreland Counties subject to the jurisdiction of the Pennsylvania Public
Utility Commission (PA PUC) under the provisions of the Pennsylvania Public
Utility Code which confers upon that Commission 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.  At January 31, 1997, North
Pittsburgh served approximately 61,500 customers through nine digital fiber-
linked central offices (eight exchanges) in its franchised area.

                                       1
<PAGE>
 
   The Telecommunications Act of 1996 (the 1996 Act) prohibits state legislative
or regulatory restrictions or barriers to entry regarding the provision of local
telephone service. It also requires most incumbent local exchange carriers to
interconnect with the networks of other telecommunications carriers, unbundle
their services into network elements, offer their telecommunications services at
wholesale rates to allow 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.

   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.
North Pittsburgh recently joined with 17 other rural companies in Pennsylvania
to file a Petition with the PA PUC requesting a temporary suspension for a two-
year period of the interconnection requirements outlined in the Federal
Communications Commission (FCC) Order described in the following paragraph. The
Petition was filed February 20, 1997 and the PA PUC is expected to act on such
Petition by August 19, 1997. (See Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations).

   Previously, on August 8, 1996, the FCC issued its Order promulgating rules to
implement certain aspects of the 1996 Act.  The rules, among other matters,
attempted to impose pricing guidelines to be used by state commissions in
implementing the 1996 Act, defined the network elements of services to be
unbundled and separately priced, required that existing interconnection
agreements among incumbent local exchange carriers be filed and approved by
state commissions and that local exchange telephone companies begin to
compensate wireless communications providers for transporting and terminating
calls on such wireless networks.  Numerous local exchange telephone companies
and state regulatory agencies have requested that the FCC stay and/or reconsider
the above mentioned Order, and a number of parties have filed petitions with
various Federal courts.  On September 27, 1996 and October 15, 1996, the Eighth
Circuit Court stayed certain aspects of such rules including the pricing
guidelines and the rule allowing carriers to pick and choose among the most
favorable terms of interconnection agreed to by an incumbent and another
telecommunications carrier.

   North Pittsburgh is currently under rate base rate-of-return (ROR) regulation
within the intrastate jurisdiction.  However, under PA PUC Chapter 30 rules,
North Pittsburgh is required to develop and file a Network Modernization Plan
prior to July 8, 1998 that commits North Pittsburgh to providing broadband
service capability throughout its service area or be subject to a showcause
order for failure to do so.  North Pittsburgh, as part of this filing, may seek
approval of an alternative form of regulation from the PA PUC, such as price cap
regulation.

   Historically, North Pittsburgh's wireline operations have not experienced
significant competition in its franchised service area.  As a result of the
passage of the 1996 Act, North Pittsburgh's local wireline operations may
experience increased competition from various sources, including, but not
limited to, resellers of their local exchange services, large end users
installing their own networks, Interexchange Carriers (IXCs), satellite
transmission services, cellular communications providers, cable television
companies, radio-based personal communications companies, Competitive Access
Providers (CAPs) and other systems capable of completely or partially bypassing
local telephone facilities.  North Pittsburgh cannot predict

                                       2
<PAGE>
 
the specific effects of competition on its local telephone business, but is
intent on taking advantage of the various opportunities that competition should
provide.  North Pittsburgh is currently addressing potential competition by
focusing on improved customer satisfaction, reducing costs, increasing
efficiency, restructuring rates and examining new product offerings and new
markets for entry.
 
              Long Distance and Access Services.  Telephone service by North
              ----------------------------------                            
Pittsburgh to locations outside of its franchised telephone service territory
but within the Local Access Transport Area (LATA) (currently identified as the
412 Numbering Plan Area [NPA]) is furnished through switched and special access
connections with Bell Atlantic - Pennsylvania, Inc., (BAPA), other independent
telephone companies and, in some instances, IXCs, CAPs or resellers.

   North Pittsburgh bills toll calls within the LATA to its customers using toll
rates contained in a Pennsylvania Telephone Association (PTA) tariff on file
with the PA PUC. North Pittsburgh retains the revenues for such calls and pays
network access charges to BAPA and other telephone companies for terminating
this toll traffic.  Conversely, North Pittsburgh receives network access charge
revenues for terminating the traffic of others.

   North Pittsburgh is a participating Issuing Carrier in the National Exchange
Carrier Association (NECA) tariffs which are on file with the FCC in respect to
the provision of network access to IXCs and others for interstate telephone
service to areas beyond the LATA. Such tariffs contain the rates chargeable for
interstate switched and special access to and from North Pittsburgh's telephone
facilities.  North Pittsburgh is also a participating Issuing Carrier under the
authority of a PTA tariff on file with the PA PUC which contains the rates
chargeable for intrastate switched and special access from North Pittsburgh's
telephone facilities to Pennsylvania locations beyond the LATA and to North
Pittsburgh's facilities from such locations.  Penn Telecom, as an IXC, markets
intrastate and interstate toll services by reselling bulk billed message toll
services.  North Pittsburgh also provides facilities for special circuits
(alarms, data transmission, etc.).

   Access charges concerning interstate services are regulated by the FCC.  On
December 24, 1996, the FCC released a Notice of Proposed Rulemaking regarding
access charge reform. The proposed rules, in most significant aspects, are not
applicable to North Pittsburgh's wireline operation as they apply predominantly
to price cap regulated companies.  The FCC has indicated it will issue another
proposed rulemaking with respect to ROR companies which may affect North
Pittsburgh.

   Toll telecommunications services beyond North Pittsburgh's franchised
telephone service area and within the LATA, hereinafter referred to as
intraLATA, or service within the 412 NPA, are presently provided through
interconnections with BAPA and other telephone companies.  The PA PUC has
approved intraLATA Presubscription (also known as equal access) under which a
customer will be able to choose his or her intraLATA toll carrier similar to the
choice currently made for an interLATA toll carrier.  IntraLATA Presubscription
is required by December 31, 1997; however, North Pittsburgh has filed a Motion
with the PA PUC to implement presubscription no later than August 8, 1997.  It
is not possible to determine the ultimate impact of intraLATA Presubscription,
but it is expected that it may result in some reduction of revenues.

                                       3
<PAGE>
 
   North Pittsburgh's unique location in a growing commercial/residential
suburban traffic corridor to the north of the City of Pittsburgh, its state-of-
the-art switching transmission and transport facilities and its extensive fiber
network place it in a solid position to meet competition and minimize any loss
of revenues.  In addition, North Pittsburgh continues to make its network
flexible and responsive to the needs of its customers to meet competitive
threats.  New services, access line growth and anticipated usage growth will
lessen or offset any reductions in North Pittsburgh's revenue sources.

              Directory Advertising, Billing and Other Services.  North 
              --------------------------------------------------
Pittsburgh receives revenues from the sale of advertising space in telephone
directories and from billing and collection activities. Directory Advertising is
subject to competition from a number of sources and, to date, efforts to meet
such competition have been successful. Billing and collection services are
provided to various IXCs, including Penn Telecom.

              Telecommunication Equipment.  Penn Telecom sells, rents and 
              ----------------------------
services telecommunication equipment to customers generally in the Western
Pennsylvania area. Penn Telecom has been able to sustain its business activities
in a strong, competitive market. Penn Telecom is certified by the PA PUC to
offer toll resale services and has a tariff on file with the FCC to provide
interstate toll services. As a reseller of both interstate and intrastate toll
services, Penn Telecom is in direct competition with other IXCs.

              Other.  North Pittsburgh and Alltel Mobile Communications, Inc.
              ------                                                            
are Limited Partners with a partnership interest of 3.6 percent each and Bell
Atlantic Mobile Systems of Pittsburgh, Inc. is both a General and a Limited
Partner with partnership interests of 40.0 and 52.8 percent, respectively, in
the Pittsburgh SMSA Limited Partnership which provides cellular radio service
(Cellular Service) in and around the Pittsburgh Standard Metropolitan
Statistical Area (SMSA) as authorized by the 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 United
Telephone Company of Pennsylvania is the General Partner with a partnership
interest of 57.13 percent in Pennsylvania RSA 6(I) Limited Partnership, d.b.a.
360/o/ Communications Company, which provides Cellular Service in a Rural
Service Area (RSA) consisting of Clarion and Lawrence Counties and the Northern
portions of Armstrong and Butler Counties.

   North Pittsburgh, Centennial and Venus are Limited Partners with partnership
interests of 20.29, 14.29 and 14.29 percent, respectively, and Bell Atlantic
Mobile Systems of Pennsylvania RSA 6(II), Inc. is the General Partner with a
partnership interest of 51.13 percent in Pennsylvania RSA 6(II) Limited
Partnership which provides Cellular Service in a RSA consisting of the Southern
portions of Armstrong and Butler Counties.

              Operating Revenues.  The respective amounts of operating revenues
              -------------------                                              
contributed by local network services, long distance and access services,
telecommunication equipment sales, directory advertising and billing and
collection services 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.

                                       4
<PAGE>
 
          (ii) Status of New Products.  This paragraph is not applicable.  The
               ----------------------                                         
Registrant and its subsidiaries have not made public any information concerning
new products or services that would require the investment of a material amount
of the assets of the Registrant or that otherwise would be material.

          (iii) Equipment Availability.  The Registrant and its subsidiaries 
                ----------------------                         
have not encountered, nor do they anticipate, any difficulty in obtaining a
ready supply of telecommunication equipment from manufacturer suppliers.
Although certain individual suppliers may each supply more than 10 percent of
their equipment requirements, the Registrant and its subsidiaries are not
primarily dependent upon any one supplier with alternative suppliers of
telecommunication equipment being readily available.

          (iv) Certificates, Franchises, Etc. and Licenses.  North Pittsburgh
               -------------------------------------------                   
holds valid, continuing and subsisting rights, certificates, franchises,
licenses (other than those mentioned in the following paragraph) and renewable
permits adequate for the conduct of its business in the territory it serves,
none of which contain any burdensome restrictions.  However, see Local Network
Services under paragraph (c)(1)(i).

   North Pittsburgh has an FCC license to operate a private operational
telephone maintenance radio service station (WIK 838 expiring on March 20,
2001).  In addition, North Pittsburgh has an FCC license to operate an Improved
Mobile Telephone System (IMTS) (call sign KGH-862 expiring on July 1, 1998).
Renewal license applications were filed on December 27, 1990 with the FCC for
the continued operation by North Pittsburgh of two point-to-point microwave
systems (call signs KG0-21 and KGN-88).  The FCC acknowledged such renewal
applications in a Public Notice dated March 21, 1991 indicating an expiration
date of February 1, 2001.  North Pittsburgh also holds a non-commercial private
license (call sign WPCD 845 expiring on April 29, 1998) for its own maintenance
radio service and other purposes.  North Pittsburgh has not encountered in the
past, nor does it anticipate in the future, any difficulty in renewing these FCC
licenses.

          (v) Seasonality of Business.  None of the business activities of the
              -----------------------                                         
Registrant or its subsidiaries are seasonal.

          (vi) Practices Relating to Working Capital.  This paragraph is not
               -------------------------------------                        
applicable. No special practices relating to working capital have been adopted
by the Registrant or its subsidiaries.  (See Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations.)

          (vii) Customers.  No material part of the overall business of
                ---------                                              
the Registrant or it subsidiaries is dependent upon a single customer or a few
customers, the loss of any one or more of whom would have a materially adverse
effect on its business.

          (viii) Backlog of Orders.  The Registrant and its subsidiaries
                 -----------------                                      
do not have a significant backlog of service and installation orders.
Improvements and expansion of their facilities are, to the extent possible, made
in anticipation of demands for service and a reasonable and adequate inventory
is maintained to meet the requirements of customers.

                                       5
<PAGE>
 
          (ix) Renegotiation of Profits or Termination of Contracts.  The
               ----------------------------------------------------      
Registrant and its subsidiaries do not have a material portion of their business
subject to renegotiation of profits or termination of contracts or subcontracts
at the election of the Government.

          (x) Competition.  The competitive environment faced by the Registrant
              ------------                                                     
in respect to the services provided by it or by its subsidiaries is fully
discussed under paragraph (c)(1)(i) of this Item 1.

          (xi) Research Activities.  The Registrant and its subsidiaries do not
               -------------------                                             
engage in any research activities relating to the development of new products or
services or the improvement of existing products or services and no amounts have
been expended in the past three years for such activities.

          (xii) Environmental Matters.  Compliance with federal, state and
                ---------------------                                     
local provisions which have been adopted regulating the discharge of materials
into the environment or otherwise relating to the protection of the environment
have not materially affected the capital expenditures, earnings and competitive
position of the Registrant and its subsidiaries.

          (xiii) Employees.  At December 31, 1996, the Registrant, through
                 ---------                                                
all of its subsidiaries, employed 336 persons.

      (d) Financial Information About Foreign and Domestic Operations and Export
          ----------------------------------------------------------------------
Sales. This paragraph is not applicable.  The Registrant and its subsidiaries do
-----                                                                           
not engage in any operations in foreign countries.



Item 2.   Properties
------    ----------

   The Registrant owns in fee, an office/warehouse building which houses the
operations of Penn Telecom and consulting services of MCSI.  Also, MCSI owns in
fee a building which houses its computer outsourcing operation.

   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, consist principally of 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 and generally any and
all property required to operate a modern telecommunications network.  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.

                                       6
<PAGE>
 
   From January 1, 1992 to December 31, 1996, North Pittsburgh made gross
property additions of approximately $56,049,000 (which is about 46.5% of the
original cost of the present telephone plant) and property retirements of
approximately $19,253,000. North Pittsburgh's 1997 construction program, subject
to adjustment for economic conditions, postponements of housing developments,
etc. is projected to be in the $23 million to $26 million range which includes
central office equipment additions, distribution lines, etc. to permit expansion
or improvement of North Pittsburgh's telecommunications services.



Item 3.   Legal Proceedings
------    -----------------

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



Item 4.   Submission of Matters to a Vote of Security Holders
------    ---------------------------------------------------

   No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996.



      ADDITIONAL ITEM FOR PART I. - Executive Officers of the Registrant
      ------------------------------------------------------------------


   Information regarding the Registrant's Executive Officers 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 and principal subsidiary, is also presented.

                                       7
<PAGE>
 
Executive Officers of the Registrant:
-------------------------------------

                                                       Positions and Offices
                                                       ---------------------
Name and Business Experience                     Age   with Registrant (1)
----------------------------                     ---   -------------------


Charles E. Thomas, Sr.                            83   Chairman, Board of
  Registrant: Chairman of the Board of                 Directors 
  Directors since incorporation in 1985;
  Partner in the law firm of Thomas,
  Thomas, Armstrong & Niesen,
  Harrisburg, PA, since the formation in
  1991 of this firm which is retained as
  general counsel to the Registrant;
  Partner in the law firm of Thomas &
  Thomas from 1977 to 1990. North
  Pittsburgh Telephone Company:
  Chairman of the Board of Directors
  since 1968; Director since 1957.
  Mr. Thomas is also a Director of D & E
  Communications, Inc., Ephrata, PA.


Gerald A. Gorman                                  67   Director and President
  Registrant: Director since
  incorporation in 1985; President since
  May, 1994; Executive Vice President
  from 1992 to 1994; Vice President -
  Finance from 1985 to 1992; Secretary
  from 1985 to 1993.  North Pittsburgh
  Telephone Company: Director since
  1979; President since 1993; General
  Manager since 1992; Executive Vice
  President from 1992 to 1993; Vice
  President - Finance from 1972 to
  1992; Assistant General Manager from
  1986 to 1992; Secretary from 1968 to
  1993.

                                       8
<PAGE>
 
Executive Officers of the Registrant:
-------------------------------------

                                                       Positions and Offices
                                                       ---------------------
Name and Business Experience                     Age   with Registrant (1)
----------------------------                     ---   -------------------

Harry R. Brown                                    60   Director and Vice
  Registrant: Director since 1989; Vice                President
  President since 1992.  North
  Pittsburgh Telephone Company:
  Director since 1989; Vice President -
  Operations since 1987; Assistant Vice
  President - Operations from 1986 to
  1987; Network Engineering Manager
  from 1984 to 1986; Equipment
  Supervisor from 1975 to 1984.


Allen P. Kimble                                   50   Vice President, Secretary
  Registrant: Vice President since                     and Treasurer
  1989; Treasurer since incorporation
  in 1985; Secretary since 1993.  North
  Pittsburgh Telephone Company:
  Vice President since 1989; Treasurer
  since 1979; Secretary since 1993;
  Assistant Vice President from 1987 to
  1989; Assistant Secretary from 1977 to
  1993.



N. William Barthlow                               42   Vice President and
  Registrant: Vice President since May,                Assistant Secretary
  1994; Assistant Secretary since 1993;
  Assistant Vice President from 1990 to
  1994.  North Pittsburgh Telephone
  Company: Vice President - Marketing
  and Revenues since 1994; Assistant
  Secretary since 1993; Assistant Vice
  President - Revenue Requirements
  from 1989 to 1994; Revenue
  Requirements Manager from 1987 to
  1989.

                                       9
<PAGE>
 
(1)  Directors.  Messrs. Thomas, Gorman and Brown were elected as Directors at
     ---------                                                                
     the 1996 Annual Meeting of Shareholders held May 17, 1996 to serve until
     the 1997 Annual Meeting of Shareholders.  All of these current Directors
     will be nominees for reelection as Directors at the Annual Meeting of
     Shareholders to be held May 16, 1997.

(2)  Officers.  Messrs. Thomas, Gorman, Brown, Kimble and Barthlow were elected
     --------                                                                  
     to their respective offices at a Board of Directors' Organizational Meeting
     which followed the May 17, 1996 Annual Meeting of Shareholders.  All
     officers will hold their offices until the first meeting of the Board
     following the 1997 Annual Meeting of Shareholders.

(3)  Arrangements.  There are no arrangements or understandings between any of
     ------------                                                             
     the above executive officers and any other person pursuant to which they
     were elected as an officer.



                                    PART II



Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters
------    ---------------------------------------------------------------------

      (a) Principal Markets and Market Price:
          ---------------------------------- 

     The Registrant's Common Stock is registered with the Securities and
Exchange Commission pursuant to Section 12(g) of the Securities Exchange Act of
1934 and, effective January 10, 1997, the Company's 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.  In the last
quarter of 1995 and in 1996, a brokerage firm in Pittsburgh made an effort to
establish a market for the Registrant's Common Stock.  The market price range on
the OTC market in 1995 was $35.00 to $56.00 per share.  The market price range
on the same market in 1996 was, as far as can be determined, $56.00 to $72.00
per share prior to a 2 for 1 stock split-up on May 22, 1996 and $23.00 to $53.00
per share thereafter.  The above price ranges include the market-maker
activities of the brokerage firm discussed above.   The Nasdaq High and Low
market prices for the Registrant's Common Stock for January and February, 1997
were as follows:

<TABLE>
<CAPTION>
 
                    1997         High    Low
                    ----      ------  ------
                    <S>       <C>     <C>
                        
                    January   $24.75  $18.50
                    February   23.00   20.50
 
</TABLE>

                                       10
<PAGE>
 
      (b) Approximate Number of Holders of Common Stock:
          --------------------------------------------- 

          Calculated on the basis of the number of shareholder accounts, the
Registrant had approximately 3,146 common shareholders on March 14, 1997.



      (c) Common Stock Dividends:
          ---------------------- 

          Cash dividends declared per share by the Registrant on the outstanding
shares of Common Stock in 1996 and 1995 (adjusted for a 2 for 1 stock split-up
effective May 22, 1996) were as follows:

<TABLE>
<CAPTION>
 
                               1996  1995
                               ----  ----  
            <S>               <C>    <C>
                 
            First Quarter     $ .13  $.12
            Second Quarter      .13   .12
            Third Quarter       .13   .12
            Fourth Quarter      .13   .12
                              -----  ----
                              $ .52  $.48
                              =====  ====
 
</TABLE>



Item 6.  Selected Financial Data (Amounts in Thousands Except Per Share Data)
         ------------------------------------------------------------------- 

      The following summary of Selected Financial Data for the years 1996-1992
(adjusted for a 2 for 1 stock split-up effective May 22, 1996) should be read in
conjunction with the consolidated financial statements and notes included
elsewhere in this report.

                                       11
<PAGE>
 
<TABLE>
<CAPTION>
 
 
                                                 1996       1995      1994       1993      1992
                                               ---------  --------  ---------  --------  ---------
<S>                                            <C>        <C>       <C>        <C>       <C>
Operating revenues                              $59,933   $ 52,757  $ 49,188   $ 44,241  $ 41,993
Operating expenses                               40,479     33,748    31,728     28,367    28,004
                                                -------   --------  --------   --------  --------
 
 Net operating revenues                          19,454     19,009    17,460     15,874    13,989
Interest expense                                  1,549      1,596     1,645      1,573     1,605
Interest income                                   1,105      1,066       772        878       967
Sundry expense (income), net                       (629)       738      (202)       558       (23)
                                                -------   --------  --------   --------  --------
 Earnings before income taxes,
  cumulative effect of change in
  accounting method and
  minority interest                              19,639     17,741    16,789     14,621    13,374
 
Income tax expense                                7,909      7,054     6,885      5,906     5,292
                                                -------   --------  --------   --------  --------
 Earnings before cumulative
  effect of change in accounting
  method and minority interest                   11,730     10,687     9,904      8,715     8,082
 
Minority interest                                  ----       ----      ----       ----        18
Cumulative effect of change in
 accounting method                                 ----       ----      ----        450      ----
                                                -------   --------  --------   --------  --------
Net earnings                                    $11,730   $ 10,687  $  9,904   $  9,165  $  8,064
                                                =======   ========  ========   ========  ========
Average common shares
 outstanding                                     15,040     15,040*   15,040*    15,040*   15,040*
                                                =======   ========  ========   ========  ========
Earnings per share before
 cumulative effect of change in
 accounting method                              $   .78   $    .71*  $   .66*   $   .58*  $   .54*
                                                =======   ========  ========   ========  ========
 
Earnings per share of Common
 Stock                                          $   .78   $    .71*  $   .66*   $   .61*  $   .54*
                                                =======   ========  ========   ========  ========
Dividends declared per share of
 Common Stock                                   $   .52   $    .48*  $   .44*   $   .40*  $   .36*
                                                =======   ========  ========   ========  ========
 
Total assets                                    $99,523   $ 96,156  $ 91,578   $ 88,771  $ 84,574
                                                =======   ========  ========   ========  ========
Long-term debt                                  $20,937   $ 21,694  $ 23,396   $ 23,058  $ 23,683
                                                =======   ========  ========   ========  ========
</TABLE>
         *Adjusted for a 2 for 1 stock split-up effective May 22, 1996

                                       12
<PAGE>
 
Item 7.   Management's Discussion and Analysis of Financial Condition and
          ---------------------------------------------------------------
          Results of Operations (Amounts in Thousands)
          --------------------------------------------

          Results of Operations
          ---------------------

   Net earnings for 1996 were $11,730, an increase of $1,043 (9.8%) over 1995
net earnings of $10,687. The 1995 net earnings represented an increase of $783
(7.9%) as compared to 1994. These fluctuations were attributable to the
following factors:
 
   Total operating revenues increased $7,176 (13.6%) during 1996. This change
was principally due to increases in long distance and access services of $2,983
(7.7%), local network services of $1,160 (15.4%) and other operating revenues of
$2,582 (131.3%). Higher long distance and access service revenues were generally
the result of an increase in the number of customers and in minutes of use.
Increased local network service revenues were attributable to customer growth,
growth in second lines and expanded penetration of enhanced services. Other
operating revenues increased due to growth of Pinnatech's Internet access
customers, MCSI's consulting customers and the introduction of MCSI's data
processing outsourcing services.
 
   Total operating revenues increased $3,569 (7.3%) during 1995. This change was
principally due to increases in long distance and access services of $2,663
(7.3%), local network services of $650 (9.5%) and, to a lesser extent,
advertising and other of $153 (7.7%), offset by a decrease in telecommunication
equipment sales of $668 (23.1%). Higher long distance and access service
revenues were generally the result of an increase in the number of customers and
in minutes of use. Increased local network service revenues were attributable to
customer growth. The decrease in telecommunication equipment sales reflects a
decrease in the number of systems sold in 1995 as compared to 1994. Other
operating revenues increased $771 (64.4%) as the direct result of start-up
business activities of MCSI and Pinnatech.
 
   Total operating expenses for 1996 increased $6,731 (19.9%) over the preceding
year. That change was principally the result of increases in network and other
operating expenses of $5,061 (24.0%) and depreciation and amortization expenses
of $1,163 (14.0%). Approximately $4,000 of the $5,061 increase in network and
other operating expenses was directly associated with the increase in other
operating revenues of $2,582 discussed above. The growth in depreciation and
amortization expenses is the direct result of the growth in fixed assets to
serve current and future customer needs. The increase in total operating
revenues of $7,176 discussed above coupled with the increase in total operating
expenses of $6,731 resulted in a modest 2% increase in net operating revenues in
1996 as compared to 1995.
 
   Total operating expenses increased $2,020 (6.4%) during 1995. That change was
principally the result of an increase in depreciation and amortization of $818
(10.9%) and network and other operating expenses of $1,832 (9.5%), offset by a
decrease in telecommunication equipment expenses of $828 (29.2%). Approximately
$593 of the increase in depreciation and amortization resulted from a reduction
in useful lives of certain telecommunication equipment and approximately $1,000
of the increase in network and other operating expenses was attributable to the
activities of start-up businesses mentioned previously. The remainder of the
increase was the result of expanded operations to serve customer growth as noted
above. The decrease in telecommunication equipment expenses is related to the
decrease in equipment sales discussed above. The increase in total operating
 

                                       13
<PAGE>
 
revenues discussed above coupled with the increase in total operating expenses
resulted in an 8.9% increase in net operating revenues in 1995 as compared to
1994.
 
   Interest income fluctuations have resulted from fluctuating interest rates
available on both temporary investments and marketable securities and differing
levels of investment in these instruments. Interest income is expected to
decrease in 1997 as the Registrant and its subsidiaries utilize temporary
investments to meet current cash obligations.
 
   The composition and amounts of sundry expense (income), net, differ each
year. Approximately $509 more of cellular partnership income was recorded in
1996 than 1995. Included in 1995 is approximately $567 of non-recurring charges
related to costs of start-up businesses.
 
   Management does not believe that the Registrant has any significant
regulatory assets or liabilities under Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation."
Historically, the Registrant has monitored closely the economic lives of plant
in service and has adjusted depreciable lives as necessary to conform to
generally accepted accounting principles.
 
   North Pittsburgh, under Chapter 30 of the Pennsylvania Public Utility Code,
must, prior to July 8, 1998, file a petition with the PA PUC for approval of an
alternative form of regulation to replace traditional rate base/rate of return
regulation or be subject to a showcause proceeding. The petition must include a
proposed network modernization plan. Although North Pittsburgh has not
determined the form and content of its petition, the ultimate filing of such
petition is expected to be of some significance to North Pittsburgh. However, it
is not possible at this time to determine the PA PUC's disposition of any
petition filed or the effect on North Pittsburgh's financial position or results
of operations.
 
   The Federal Communications Commission (FCC) continues to work on Rulemakings
that will spell out the specifics of the Telecommunications Act of 1996 (the
1996 Act) and the PA PUC must then finalize its course of action to fully
implement the 1996 Act, or to the extent possible and permissible, change the
manner in which such regulations are implemented in Pennsylvania before the
impact on North Pittsburgh, a Rural Telephone Company under the 1996 Act, can be
fully understood and measured. However, the clear intent of the 1996 Act is to
open up the local exchange market to competition. This appears to mandate, among
other items, that North Pittsburgh, at some point in time, permit the resale of
its services at wholesale rates, provide number portability, if feasible,
provide dialing parity, provide interconnection to any requesting carrier for
the transmission and routing of telephone exchange service and exchange access
and provide access to network elements. The Company recently joined with 17
other rural companies in Pennsylvania to file a Petition with the PA PUC
requesting a temporary suspension of the interconnection requirements of Section
251 of the 1996 Act for a two-year period following resolution of the FCC's
Universal Service and Access Reform Orders. The Petition was filed February 20,
1997 and the PA PUC is expected to act on such Petition by August 19, 1997.
 
   The 1996 Act, FCC and PA PUC regulatory proceedings and the thrust towards a
fully competitive marketplace have created some uncertainty in respect to the
levels of North Pittsburgh's revenue growth in the future. However, its unique
location in a growing commercial/residential suburban traffic corridor to the
north of the City of Pittsburgh, its state-

                                       14
<PAGE>
 
of-the-art switching transmission and transport facilities and its extensive
fiber network place North Pittsburgh in a solid position to meet competition and
minimize any loss of revenues. In addition, North Pittsburgh continues to make
its network flexible and responsive to the needs of its customers to meet
competitive threats. New services, access line growth and anticipated usage
growth will lessen or offset any reductions in North Pittsburgh's revenue
sources.

   Liquidity and Capital Resources
   -------------------------------

   In 1987, North Pittsburgh exhausted the remaining unborrowed funds which had
first become available from the Rural Telephone Bank in 1977. Information
relating to long-term debt is included in Note 2 to the Consolidated Financial
Statements. The Registrant and its subsidiaries have financed capital
expenditures, debt service and dividend payments from internal sources since
1987.

   In 1996, North Pittsburgh applied for and was granted approval for a loan
from the Federal Financing Bank guaranteed by the Rural Utilities Service in the
maximum principal amount of $75 million. The maximum principal amount will be
advanced periodically over a five-year period beginning January 2, 1997 to
furnish or improve telephone service in rural areas. No funds had been requested
or advanced as of March 14, 1997. Actual interest rates and maturity dates will
be specified at the time of each advance based upon a predetermined interest
calculation formula and a choice of predetermined payment options not to extend
beyond a maximum repayment period of sixteen years.

   North Pittsburgh established a line of credit in 1994 in the amount of $10
million with the Rural Telephone Finance Cooperative that is available for
general business purposes. No borrowings have taken place against the line of
credit.

   Capital expenditure commitments for the purchase and installation of new
equipment at December 31, 1996 amounted to approximately $1,280, with such
amount being part of a 1997 construction program of $23 million to $26 million.
Management expects cash flows provided by operating activities and cash reserves
in 1997 to service long-term debt, to pay dividends and to finance approximately
25% of capital additions. The balance of capital additions will be financed from
new borrowings. It is anticipated that future payments for long-term debt
service will be made from the same sources of internally generated funds.
Capital additions beyond 1997 are anticipated to be 20% internally financed.

   Temporary excess funds are invested in short-term cash equivalents with
maturity dates scheduled to coincide with tax payment due dates, debt principal
payments, etc. Management expects to continue the investment of such excess
funds in 1997 which will satisfactorily meet all short-term obligations.

Item 8.   Financial Statements and Supplementary Data
------    -------------------------------------------

   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.

                                       15
<PAGE>
 
Item 9.   Changes in and Disagreements with Accountants on Accounting and
------    ---------------------------------------------------------------
          Financial Disclosure
          --------------------

   This paragraph is not applicable. There has not been a change of accountants
in the past 24 months nor has any disagreement on any matter of accounting
principles or practices been reported on Form 8-K during the same time period.



                                   PART III



Item 10.  Directors and Executive Officers of the Registrant
-------   --------------------------------------------------

             and

Item 11.  Executive Compensation
-------   ----------------------

             and

Item 12.  Security Ownership of Certain Beneficial Owners and Management
-------   --------------------------------------------------------------

             and

Item 13.  Certain Relationships and Related Transactions
-------   ----------------------------------------------

   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 and 13 has been omitted from this report since the
Registrant expects to file a Definitive Proxy Statement pursuant to Regulation
14A involving, inter alia, the election of Directors not later than 120 days
               ----- ----                            
after the end of the fiscal year covered by this report.

                                       16
<PAGE>
 
                                    PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K
-------   ---------------------------------------------------------------

      (a) The following documents of the Registrant and its subsidiaries are
          filed as part of this report:
 
      1.  Financial Statements:
 
             Consolidated Balance Sheets as of December 31, 1996 and 1995
 
             Consolidated Statements of Earnings for each of the years in the
             three-year period ended December 31, 1996
 
             Consolidated Statements of Shareholders' Equity for each of the
             years in the three-year period ended December 31, 1996
 
             Consolidated Statements of Cash Flows for each of the years in the
             three-year period ended December 31, 1996

             Notes to Consolidated Financial Statements

                                        
 
      2.  Financial Statement Schedules:
          ----------------------------- 

 
             Condensed Financial Information of Registrant for each of the years
             in the three-year period ended December 31, 1996


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

      3.  Exhibits.  The Exhibit Index for Annual Reports on Form 10-K and
          --------                                                        
applicable Exhibits are reported in this report under the caption OTHER
INFORMATION.

      (b) Reports on Form 8-K.  No reports on Form 8-K were filed during the 
          -------------------     
quarter ended December 31, 1996.

      (c) Exhibits Required by Item 601 of Regulation S-K.  See (a)(3) above.
          -----------------------------------------------                    


      (d) Financial Statement Schedules.  The financial statement schedules 
          -----------------------------  
listed in Item 14(a)(2) are hereby filed as part of this Form 10-K.

                                       17
<PAGE>
 
                               OTHER INFORMATION
                 Exhibit Index for Annual Reports on Form 10-K
                 ---------------------------------------------

<TABLE> 
<CAPTION> 
 Exhibit No.  Subject                              Applicability
 -----------  -------                              -------------
<S>           <C>                                  <C> 
   (2)        Plan of acquisition, re-             Not Applicable
              organization, arrangement,           
              liquidation or succession            
                                                   
                                                   
   (3) (i)    Articles of incorporation            Provided in Quarterly Report 
                                                   on Form 10-Q for the quarter 
                                                   ended June 30, 1996
                                                   and Incorporated Herein
                                                   by Reference.
                                                   
                                                   
   (3) (ii)   By-Laws                              Provided in Quarterly Report 
                                                   on Form 10-Q for the quarter 
                                                   ended June 30, 1996
                                                   and Incorporated Herein
                                                   by Reference.
                                                   
                                                   
   (4)        Instruments defining the rights      Provided in Registration of
              of security holders, including       Securities of Certain Successor
              indentures                           Issuers on Form 8-B filed on June 
                                                   25, 1985 and Incorporated Herein 
                                                   by Reference.                              
                                                  
                                                  
   (9)        Voting trust agreement               Not Applicable
                                                  
   (10)       Material contracts                   Not Applicable
                                                  
   (11)       Statement re computation of per      Attached Hereto
              share earnings                      
                                                  
   (12)       Statement re computation of ratios   Not Applicable
                                                   
                                                  
   (13)       Annual report to security holders,   Not Applicable
              Form 10-Q or quarterly report to    
              security holders                    
                                                  
   (16)       Letter re change in certifying       Not Applicable
              accountant                          
</TABLE> 

                                       18
<PAGE>
 
<TABLE> 
<CAPTION> 
 Exhibit No.  Subject                              Applicability
 -----------  -------                              -------------
<S>           <C>                                  <C> 
   (18)       Letter re change in accounting       Not Applicable
              principles
 
   (21)       Subsidiaries of the Registrant       Attached Hereto
 
   (22)       Published report regarding matters   Not Applicable
              submitted to vote of security
              holders
 
   (23)       Consent of experts and counsel       Not Applicable
 
   (24)       Power of attorney                    Not Applicable
 
   (27)       Financial data schedule              Attached Hereto
 
   (99)       Additional Exhibits                  Not Applicable
</TABLE> 
 

                                       19
<PAGE>
 


NORTH PITTSBURGH SYSTEMS, INC.
AND SUBSIDIARIES

Consolidated Financial Statements
and Schedule (Form 10-K)

December 31, 1996, 1995 and 1994

(With Independent Auditors' Report Thereon)
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

            Index to Consolidated Financial Statements and Schedule

                        December 31, 1996, 1995 and 1994

                                                                 
                                                                 
                                                                 
Independent Auditors' Report                                     
                                                                 
Consolidated Financial Statements:                               
 Consolidated Balance Sheets as of December 31, 1996 and 1995    
 Consolidated Statements of Earnings for the Years Ended         
  December 31, 1996, 1995 and 1994                               
 Consolidated Statements of Shareholders' Equity for the Years   
  Ended December 31, 1996, 1995 and 1994                         
 Consolidated Statements of Cash Flows for the Years Ended       
  December 31, 1996, 1995 and 1994                               
 Notes to Consolidated Financial Statements                      
                                                                 
Consolidated Financial Statement Schedule:                       
 I.  Condensed Financial Information of Registrant for the       
      Years Ended December 31, 1996, 1995 and 1994               


<PAGE>
 
                         Independent Auditors' Report
                         ----------------------------



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
index.  In connection with our audits of the consolidated financial statements,
we also have audited the financial statement schedule as listed in the
accompanying index.  These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  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 at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.  Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.



                                                 KPMG PEAT MARWICK LLP

Pittsburgh, Pennsylvania
February 28, 1997
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

                          Consolidated Balance Sheets

                          December 31, 1996 and 1995

                            (Amounts in Thousands)

<TABLE>
<CAPTION>
                                             1996      1995
                                           --------  --------
<S>                                        <C>       <C>
                Assets
                ------
Current assets:
   Cash and temporary investments          $ 11,313    9,359
   Marketable securities available for          
    sale (note 8)                               329    1,593 
   Marketable securities held to                
    maturity (note 8)                           451    6,569 
   Accounts receivable:
       Customers                              4,090    3,725 
       Access service settlements and         
        other                                 5,270    5,120 
   Prepaid expenses                             163        -
   Inventories of construction and
    operating materials and supplies          3,169    2,381
                                           --------  -------
              Total current assets           24,785   28,747
 
Property, plant and equipment (note 2):
   Land                                         357      461
   Buildings                                 11,834    8,943
   Equipment                                108,878   97,382
                                           --------  -------
                                            121,069  106,786
 
       Less accumulated depreciation       
        and amortization                     60,333   52,675
                                           --------  -------
                                             60,736   54,111 

   Construction in progress                   4,858    4,505
                                           --------  -------
              Total property, plant and
               equipment, net                65,594   58,616
 
Investments (note 7)                          5,763    3,876
Deferred financing cost                       1,055    1,159
Prepaid pension cost (note 4)                   622      689
Other assets                                  1,704    3,069
                                           --------  -------
                                           $ 99,523   96,156
                                           ========  =======
</TABLE>
                                    (Continued)

<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

                    Consolidated Balance Sheets, Continued

                            (Amounts in Thousands)

<TABLE>
<CAPTION>
                                             1996    1995
                                           -------  -------
<S>                                        <C>      <C>
  Liabilities and Shareholders' Equity
  ------------------------------------
Current liabilities:
   Current portion of long-term debt       
    (note 2)                               $   753     702 
   Obligations under capital lease             
    (note 3)                                   191       - 
   Accounts payable                          4,702   6,337
   Accrued interest                            119     124
   Dividend payable                          1,955   1,805
   Taxes other than income taxes               657     610
   Accrued vacation                            705     672
   Other liabilities                           632     404
   Federal and state income taxes          
    (note  6)                                  670     291
          Total current liabilities        -------  ------
                                            10,384  10,945 

Long-term debt (note 2)                     20,937  21,694
Obligations under capital lease (note 3)       374       -
Unamortized investment tax credits             
 (note 6)                                      369     470 
Deferred income taxes (note 6)               5,969   5,670
Postretirement benefits (note 5)             4,497   4,250
Other liabilities                            1,687   1,600
 
Shareholders' equity:
   Capital stock - common stock, par
    value $.15625; authorized 50,000
    shares; issued and outstanding
    15,040 shares (note 9)                   2,350   2,350
   Capital in excess of par value            2,215   2,215
   Retained earnings (note 2)               50,724  46,814
   Unrealized gain on available for
    sale securities, net (notes 6
    and 8)                                      17     148
                                           -------  ------
          Total shareholders' equity        55,306  51,527
                                           -------  ------

                                           $99,523  96,156
                                           =======  ======
</TABLE>
See accompanying notes to consolidated financial statements.

<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

                      Consolidated Statements of Earnings

              For the Years Ended December 31, 1996, 1995 and 1994

                  (Amounts in Thousands Except Per Share Data)

<TABLE>
<CAPTION>
                                            1996      1995     1994
                                           -------   -------  -------
<S>                                        <C>       <C>      <C>
Operating revenues:
   Local network services                  $ 8,684    7,524    6,874
   Long distance and access services        41,880   38,897   36,234
   Directory advertising, billing
    and other services                       2,181    2,139    1,986
   Telecommunication equipment sales         2,639    2,230    2,898
   Other operating revenues                  4,549    1,967    1,196
                                           -------   ------   ------
                                            59,933   52,757   49,188
 
Operating expenses:
   Network and other operating expenses     26,196   21,135   19,303
   Depreciation and amortization
    (note 1)                                 9,508    8,345    7,527
   State and local taxes                     2,364    2,267    2,069
   Telecommunication equipment expenses      2,411    2,001    2,829
                                           -------   ------   ------
                                            40,479   33,748   31,728
                                           -------   ------   ------
 
          Net operating revenues            19,454   19,009   17,460
 
Other expense (income), net:
   Interest expense                          1,549    1,596    1,645
   Interest income                          (1,105)  (1,066)    (772)
   Sundry expense (income), net               (629)     738     (202)
                                           -------   ------   ------
                                              (185)   1,268      671
                                           -------   ------   ------
 
          Earnings before income taxes      19,639   17,741   16,789
 
Provision for income taxes (note 6)          7,909    7,054    6,885
                                           -------   ------   ------
          Net earnings                     $11,730   10,687    9,904
                                           =======   ======   ======
 
Average common shares outstanding
 (note 9)                                   15,040   15,040   15,040
                                           =======   ======   ====== 
Earnings per share of common stock 
 (note 9)                                     $.78      .71      .66
                                           =======   ======   ====== 
Dividends per share of common stock
 (note 9)                                     $.52      .48      .44
                                           =======   ======   ====== 
</TABLE>
See accompanying notes to consolidated financial statements.

<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

                Consolidated Statements of Shareholders' Equity

              For the Years Ended December 31, 1996, 1995 and 1994

                             (Amounts in Thousands)

<TABLE>
<CAPTION>
                                            1996      1995    1994
                                           -------   ------  ------
<S>                                        <C>       <C>     <C>
 
Capital stock - common stock:
   Amount at beginning and end of year     $ 2,350    2,350   2,350
                                           =======   ======  ======
 
Capital in excess of par value:
   Amount at beginning and end of year     $ 2,215    2,215   2,215
                                           =======   ======  ======
 
Retained earnings:
   Amount at beginning of year              46,814   43,346  40,059
   Net earnings for year                    11,730   10,687   9,904
                                           -------   ------  ------
                                            58,544   54,033  49,963
 
 
   Dividends on common stock                 7,820    7,219   6,617
                                           -------   ------  ------
   Amount at end of year                   $50,724   46,814  43,346
                                           =======   ======  ======
 
Unrealized gain on available for sale
 securities:
   Amount at beginning of year                 148        -       -
   Change during year                         (131)     148       -
                                           -------   ------  ------
   Amount at end of year                   $    17      148       -
                                           =======   ======  ======
</TABLE>
See accompanying notes to consolidated financial statements.

<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows

              For the Years Ended December 31, 1996, 1995 and 1994

                             (Amounts in Thousands)

<TABLE>
<CAPTION>
                                            1996      1995     1994
                                           -------   ------   ------ 
<S>                                        <C>       <C>      <C>
 
Cash from operating activities:
   Net earnings                            $11,730   10,687    9,904
   Adjustments to reconcile net earnings
    to net cash from operating
    activities:
        Depreciation and amortization        9,508    8,345    7,527
        Gain on sale of marketable
         securities                           (128)       -        - 
        Equity income of affiliated
         companies                            (989)    (474)    (107) 
        Provision for postretirement
         benefits other than
         pensions                              247      185      223 
        Investment tax credit
         amortization                         (101)    (151)    (173) 
        Deferred income taxes                  389      (85)     (42)
        Changes in assets and
         liabilities:
            Accounts receivable               (515)  (1,381)    (600)
            Inventories of
             construction and
             operating materials
             and supplies                     (788)    (270)     404 
            Deferred financing costs,
             prepaid pension costs and
             other assets                    1,536      131      115 
            Accounts payable                (1,635)   1,163      994
            Taxes other than income
             taxes                              47      (10)     (28) 
            Other liabilities,
             accrued interest and
             accrued vacation                  343      224      444 
            Federal and state income           
             taxes                             379       43   (1,277) 
            Other, net                        (163)      20       19
                                           -------   ------   ------
                   Total adjustments         8,130    7,740    7,499
                                           -------   ------   ------
 
                   Net cash from
                    operating
                    activities              19,860   18,427   17,403
</TABLE>
                                       (Continued)

<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

                Consolidated Statements of Cash Flows, Continued

                             (Amounts in Thousands)

<TABLE>
<CAPTION>
                                             1996       1995      1994
                                           --------   -------   -------
<S>                                        <C>        <C>       <C>
 
Cash used for investing activities:
   Expenditures for property and
    equipment                              $(16,303)  (15,818)  (10,943)
   Net (cost of removal) salvage on             
    retirements                                 382      (148)       48
                                           --------   -------   -------
          Net capital additions             (15,921)  (15,966)  (10,895)
                       
   Purchase of marketable securities
    held to maturity                           (454)   (7,381)   (6,514)
   Proceeds from redemption of
    marketable securities held to maturity    6,519     6,376     4,476
   Purchase of marketable securities
    available for sale                         (433)     (908)   (1,053)
   Proceeds from sale of marketable
    securities available for sale             1,657     1,683     1,245 
   Investments in affiliated entities          (898)     (282)   (1,691)
   Distributions from affiliated           
    entities                                      -       361         -
                                           --------   -------   ------- 
          Net cash used for investing        
           activities                        (9,530)  (16,117)  (14,432) 
Cash used for financing activities:
   Cash dividends                            (7,670)   (7,068)   (6,617)
   Retirement of debt                          (706)     (661)     (620)
                                           --------   -------   -------
          Net cash used for financing
           activities                        (8,376)   (7,729)   (7,237)
                                           --------   -------   -------
 
Net increase (decrease) in cash and
 temporary investments                        1,954    (5,419)   (4,266)
Cash and temporary investments at          
 beginning of year                            9,359    14,778    19,044
                                           --------   -------   ------- 
Cash and temporary investments at end
 of year                                   $ 11,313     9,359    14,778
                                           ========   =======   ======= 
Supplemental disclosure of cash flow
 information:
   Interest paid                           $  1,450     1,492     1,538
                                           ========   =======   =======
 
   Income taxes paid                       $  7,241     6,994     7,277
                                           ========   =======   =======
 
   Fixed assets acquired under capital
    leases                                 $    565         -         -
                                           ========   =======   ======= 
</TABLE>
See accompanying notes to consolidated financial statements.

<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        December 31, 1996, 1995 and 1994

                  (Amounts in Thousands Except Per Share Data)



(1)  Summary of Significant Accounting Policies
     ------------------------------------------

     Basis of Presentation and Consolidation
     ---------------------------------------

     The consolidated financial statements include the accounts of North
         Pittsburgh Systems, Inc. (the Company) and its subsidiaries, North
         Pittsburgh Telephone Company (NPTC), Penn Telecom, Inc. (PTI),
         Pinnatech, Inc. and Management Consulting Solutions, Inc. (MCSI). The
         Company, through NPTC and PTI, is primarily engaged in providing
         telecommunications equipment and services to its customers generally
         located in western Pennsylvania. All significant intercompany accounts
         and transactions have been eliminated in consolidation.

     The preparation of the consolidated financial statements in conformity
         with generally accepted accounting principles requires management to
         make estimates and assumptions that affect the reported amounts of
         assets, liabilities, revenues and expenses and disclosure of contingent
         assets and liabilities. The estimates and assumptions used in the
         accompanying consolidated financial statements are based upon
         management's evaluation of the relevant facts and circumstances as of
         the date of the financial statements. Actual results may differ from
         the estimates and assumptions used in preparing the accompanying
         consolidated financial statements.

     Revenue Recognition
     -------------------

     Revenues are recognized when earned.  Local service and intralata long
         distance revenues are subject to the jurisdiction of the Pennsylvania
         Public Utilities Commission (PUC). The Company participates in
         interstate pooling arrangements with other telephone companies. Such
         pools are funded by access service charges regulated by the Federal
         Communications Commission. Revenue earned through pooling is initially
         recorded based on estimates. The Company has settled substantially all
         access service arrangements through 1995.

                                                                     (Continued)

<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued



     Marketable Securities
     ---------------------

     All marketable equity securities are considered available for sale, and
         debt securities are classified either as available for sale or held to
         maturity. Marketable securities available for sale are recorded at fair
         value, based on quoted market prices. Significant changes in value of
         available for sale securities are included as a separate component of
         shareholders' equity. Marketable securities held to maturity are
         recorded at amortized cost. A decline in the fair value of any
         marketable investment security below cost, that is deemed other than
         temporary, is charged to earnings resulting in a new cost basis for the
         security. Costs of investments sold are determined on the basis of
         specific identification.

     Investments
     -----------

     The Company's investments in three cellular limited partnerships are
         carried at cost plus equity in accumulated net profits or losses. Other
         investments in nonmarketable securities are carried either at cost or
         at equity as the circumstances warrant.

     Property, Plant and Equipment
     -----------------------------

     Telephone plant in service is recorded at cost. Retirements relating to
         replacements of telephone plant and equipment are accounted for in
         accordance with applicable regulations of the PUC. Accordingly, the
         original costs of facilities retired, plus costs of removal, net of
         salvage or other credits, are charged to accumulated depreciation.

     Depreciation on telephone plant in service is provided on a straight-line
         basis over estimated useful lives of 10 to 30 years for buildings and 5
         to 20 years for equipment. In 1995, the Company reduced estimated
         useful lives of cable and central office equipment due to technological
         and competitive changes in the telecommunications industry, resulting
         in a 1995 charge of $593 ($357 after income taxes, $.02 per share).
         Depreciation as a percentage of average depreciable plant in service
         amounted to 8.2%, 8.2% and 8.0% in 1996, 1995 and 1994, respectively.
         The average remaining life of plant in service as of December 31, 1996,
         is approximately 6.4 years.

     Included in 1994 depreciation expense is a charge of approximately $586
         ($335 after income taxes, $.02 per share) to recognize the reduction in
         useful lives of various central office telecommunications equipment to
         coincide with the Company's planned replacement of such equipment
         completed in 1995.

     On construction projects lasting twelve months or more, interest costs
         incurred on the related funds expended during the construction period
         are capitalized as part of the project cost in accordance with
         regulatory requirements. No interest was capitalized during 1996, 1995
         or 1994.

     Expenditures for maintenance, repairs and renewals are charged to
         operations as incurred.

                                                                     (Continued)

<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued



     Inventories
     -----------

     Inventories consist of telecommunication equipment and parts to provide
         service to, or to make sales to, the Company's customers. Inventories
         are valued at the lower of cost (using the moving average method) or
         market.

     Accounts Receivable
     -------------------

     The Company provides telecommunication services to customers (business and
         residential) located in western Pennsylvania and access connectivity to
         interexchange carriers. Access service settlements and other,
         represent, for the most part, amounts due from interexchange carriers.

     The Company employs the direct write-off method for bad debts. Uncollected
         accounts receivable are expensed approximately ninety days after
         telephone service to such customer has been disconnected.

     Income Taxes
     ------------

     Income taxes are accounted for under the asset and liability method.
         Deferred tax assets and liabilities are recognized for the future tax
         consequences attributable to differences between the financial
         statement carrying amounts of existing assets and liabilities and their
         respective tax bases and operating loss and tax credit carryforwards.
         Deferred tax assets and liabilities are measured using enacted tax
         rates expected to apply to taxable income in the years in which those
         temporary differences are expected to be recovered or settled. The
         effect on deferred tax assets and liabilities of a change in tax rates
         is recognized in income in the period that includes the enactment date.

     Investment tax credits applicable to assets acquired or committed for by
         January 1, 1986, are being amortized over the average useful lives of
         the assets to which they relate.

     The Company and its subsidiaries file a consolidated federal income tax
         return.

     Cash Equivalents
     ----------------

     For purposes of the consolidated statements of cash flows, the Company
         considers all temporary investments with a maturity of three months or
         less to be cash equivalents.

                                                                     (Continued)

<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued



     Postretirement Benefits
     -----------------------

     The Company provides pension and other postretirement benefits to
         substantially all of its employees and eligible retirees. Benefits
         provided by these plans are expensed over the estimated working lives
         of employees.

(2)  Long-Term Debt
     --------------

     Long-term debt as of December 31, 1996 and 1995, was as follows:

<TABLE>
<CAPTION>
 
                                                   1996     1995
                                                 --------  ------
       <S>                                       <C>       <C>
 
       6-1/2% notes payable to Rural Telephone
        Bank, maturing in 2019                    $21,690  22,396
            Less current portion of long-term
             debt                                     753     702
                                                  -------  ------
                   Long-term debt                 $20,937  21,694
                                                  =======  ======
</TABLE>

     Principal payments required over the next five years calculated on the
         outstanding indebtedness at December 31, 1996, are $753 in 1997, $803
         in 1998, $856 in 1999, $913 in 2000 and $974 in 2001.

     The notes are secured by a supplemental Mortgage Agreement executed by
         NPTC which provides that substantially all of the property, plant and
         equipment of NPTC are subject to a lien or a security interest. Such
         agreement contains restrictions regarding dividends and other
         distributions. Under these restrictions, unless certain working capital
         and net worth levels are maintained, NPTC is not permitted to pay
         dividends on its capital stock (other than in shares of capital stock),
         or to 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 of December 31, 1996, consolidated retained
         earnings of the Company of approximately $17,235 were available for
         dividends and other distributions.

     Based on borrowing rates currently available to the Company for loans
         with similar terms and maturities, the estimated fair value of long-
         term debt as of December 31, 1996, is $21,801.

                                                                     (Continued)

<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued



     In 1996, NPTC applied for and was granted approval for a loan from the
         Federal Financing Bank guaranteed by the Rural Utilities Service in the
         maximum principal amount of $75 million. The maximum principal amount
         will be advanced periodically over a five-year period beginning January
         2, 1997, to furnish or improve telephone service in rural areas. No
         funds have been requested or advanced as of December 31, 1996. Actual
         interest rates and maturity dates will be specified at the time of each
         advance based upon a predetermined interest calculation formula and a
         choice of predetermined payment options not to extend beyond a maximum
         repayment period of sixteen years.

     NPTC also has a $10 million line of credit at a rate of prime plus 1-1/2%
         with the Rural Telephone Finance Cooperative. The line of credit was
         not used in 1996 or 1995.

(3)  Capital and Operating Lease Arrangements
     ----------------------------------------

     In 1996, the Company entered into capital leases to acquire computer
         equipment totaling $565. The following schedule sets forth future
         minimum lease payments under the capital leases together with the
         present value of the net minimum lease payments as of December 31,
         1996:

<TABLE>
               <S>                                      <C>
               1997                                     $250
               1998                                      250
               1999                                      169
               Thereafter                                  -
                                                        ----
                      Total minimum lease payments       669
 
                  Less amount representing interest      104
                                                        ----
                      Present value of net minimum
                       lease payments                    565
 
                  Less amounts due within one year       191
                                                        ----
                                                        $374
                                                        ====
</TABLE>

     In addition, the Company has entered into certain noncancelable operating
         leases. Total rental expense on all operating leases amounted to $564
         for the year ended December 31, 1996. The future minimum lease payments
         required under these operating leases consist of the following as of
         December 31, 1996:

<TABLE>
               <S>                                      <C>
               1997                                     $  509
               1998                                        494
               1999                                        113
               2000                                         11
               2001                                          7
               Thereafter                                    -
                                                        ------
                                                        $1,134
                                                        ======
</TABLE>

                                                                     (Continued)
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued



(4)  Retirement Plan
     ---------------

     Substantially all employees of the Company are covered by a
         noncontributory, defined benefit retirement plan. The benefits are
         based on each employee's years of service and compensation. The
         Company's funding policy is to contribute an amount annually that
         satisfies at least the minimum funding required under the Employee
         Retirement Income Security Act of 1974. The assets of the plan are held
         in a trust and are invested in a variety of equity and fixed income
         securities.

     Net periodic pension cost includes the following components:

<TABLE>
<CAPTION>
                                                  1996     1995     1994
                                                --------  -------  ------
<S>                                             <C>       <C>      <C>
 
              Service cost                      $   836      779     708
              Interest cost on projected
               benefit obligation                 1,595    1,491   1,309
              Return on assets                   (2,539)  (1,975)   (653)
              Net amortization and deferral       1,012      655    (718)
                                                -------   ------   -----
                    Net periodic pension
                     cost                       $   904      950     646
                                                =======   ======   =====
</TABLE> 
 

     Assumptions used in the calculation of net periodic pension cost are:

 
<TABLE>
<CAPTION>
                                                      1996     1995     1994
                                                     ------    ----     ---- 
<S>                                                  <C>       <C>      <C>
 
              Discount rate                          % 7.00    7.00     7.00
              Salary increases                         6.00    6.00     6.00
              Expected long-term rate of return        7.50    7.50     7.50
</TABLE>
                                                                     (Continued)

<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued



     The following table sets forth the plan's funded status and amounts
         recognized in the Company's consolidated balance sheets at December 31,
         1996 and 1995:

<TABLE>
<CAPTION>
                                                            1996       1995
                                                         ----------  --------
<S>                                                     <C>         <C>
 
              Actuarial present value of benefit
               obligations:
                     Vested benefit obligation           $(17,069)  (15,627)
                                                         ========   ======= 
                     Accumulated benefit obligation      $(17,788)  (16,339)
                                                         ========   ======= 
                     Projected benefit obligation         (25,026)  (23,178)
              Plan assets at fair value                    23,482    20,844
                                                         --------   -------
              Plan assets less than
               projected benefit obligation                (1,544)   (2,334)
 
              Unrecognized net asset at transition         (1,376)   (1,529)
              Unrecognized prior service cost               1,738     1,924
              Unrecognized net loss                         1,804     2,628
                                                         --------   -------
              Prepaid pension cost                       $    622       689
                                                         ========   =======
 
              Assumptions used in the calculation of
               the actuarial present value of benefit
               obligations:
                     Discount rate                        %  7.00      7.00
                     Salary increases                        6.00      6.00
</TABLE>

(5)  Other Postretirement Benefit Plans
     ----------------------------------

     Eligible retirees are provided healthcare and life insurance benefits until
         the retiree reaches 65 years of age under an unfunded plan.

                                                                     (Continued)

<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued



     The following table presents the plan's funded status reconciled with
         amounts recognized in the Company's consolidated balance sheets at
         December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                           1996   1995
                                                          ------  -----
<S>                                                      <C>     <C>
        Accumulated postretirement benefit obligation:
         Retirees                                         $1,004    813
         Fully eligible active plan participants           1,240  1,228
         Other active plan participants                    2,132  1,942
                                                          ------  -----
             Accumulated postretirement
              benefit obligation                           4,376  3,983
 
        Unrecognized prior service cost                      111      -
        Unrecognized net gain                                 10    267
                                                          ------  -----
        Accrued postretirement benefit cost               $4,497  4,250
                                                          ======  =====
</TABLE> 
 
     Net periodic postretirement benefit cost includes the following components:
 
<TABLE> 
<CAPTION> 
                                                  1996     1995   1994
                                                  -----   ------  -----
<S>                                              <C>     <C>     <C> 
        Service cost                              $ 144      151    145
        Interest cost                               272      267    255
                                                  -----   ------  -----
            Net periodic postretirement
             benefit cost                         $ 416      418    400
                                                  =====   ======  =====
</TABLE>

     For measurement purposes, the annual rate of increase in the per capita
         cost of covered benefits (i.e., healthcare cost trend rate) for 1996
         was 10.9 percent for participants whose coverage included Major Medical
         insurance and Point-of-Service Plan and 9.3 percent for participants
         who have Blue Cross/Blue Shield coverage only; the rates were assumed
         to decrease gradually to 5 percent by the year 2007 and remain at that
         level thereafter. The healthcare cost trend rate assumption has a
         significant effect on the amounts reported. For example, increasing the
         assumed healthcare cost trend rates by one percentage point in each
         year would increase the accumulated postretirement benefit obligation
         as of December 31, 1996, by $460 and the aggregate of the service and
         interest cost components of net periodic postretirement benefit cost
         for the year ended December 31, 1996, by $54.

     The weighted-average discount rate used in determining the accumulated
         postretirement benefit obligation was 7 percent at December 31, 1996
         and 1995. Salaries were assumed to increase at a rate of 6 percent per
         year for current active employees for life insurance benefit
         projections.

                                                                     (Continued)

<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued

(6)  Income Taxes
     ------------

     The components of income tax expense are:

<TABLE>
<CAPTION>
 
                                            1996     1995    1994
                                          --------  ------  ------
<S>                                       <C>       <C>     <C>
 
        Current:
           Federal                         $5,603   5,446   5,135
           State                            2,018   1,844   1,965
                                           ------   -----   -----
                                            7,621   7,290   7,100
 
        Deferred:
           Federal                            291     (85)    (38)
           State                               98       -      (4)
                                           ------   -----   -----
                                              389     (85)    (42)
 
        Deferred investment tax credit       (101)   (151)   (173)
                                           ------   -----   -----
                                           $7,909   7,054   6,885
                                           ======   =====   =====
</TABLE>

     The Company's income tax expense differs from income tax expense computed
         at the federal statutory rate of 35 percent due to the following
         factors:

<TABLE>
<CAPTION>
                                               1996     1995    1994
                                             --------  ------  ------
<S>                                          <C>       <C>     <C>
 
        Statutory federal income tax          $6,874   6,209   5,876
        State taxes on income (net of
         federal income tax benefit)           1,275   1,152   1,323
        Federal benefit of phase-in of 1%
         surtax                                    -     (30)   (100)
        Change in beginning of year
         valuation allowance                      99      57     107
        Investment tax credit                   (101)   (151)   (173)
        Tax-exempt interest                      (88)   (143)   (204)
        Other                                   (150)    (40)     56
                                              ------   -----   -----
        Income tax expense                    $7,909   7,054   6,885
                                              ======   =====   =====
</TABLE>
                                                                     (Continued)

<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued



     The significant components of deferred income tax expense attributable to
         income from operations are as follows:

<TABLE>
<CAPTION>
                                                  1996   1995   1994
                                                  -----  -----  -----
<S>                                               <C>    <C>    <C>
 
        Deferred tax expense (exclusive of the
         effects of the other components
         below)                                   $ 290  (142)  (149)
        Increase in beginning of year valuation
         allowance                                   99    57    107
                                                  -----  ----   ----
                                                  $ 389   (85)   (42)
                                                  =====  ====   ====
</TABLE>

     Additional deferred tax charges of $12 and $102 for the years ended
         December 31, 1996 and 1995, respectively, were included in
         shareholders' equity in relation to an unrealized gain on marketable
         securities classified as available for sale (note 8).

     The tax effects of temporary differences that give rise to significant
         portions of the deferred tax assets and deferred tax liabilities at
         December 31, 1996 and 1995, are presented below:

<TABLE>
<CAPTION> 
                                                    1996      1995
                                                  --------  --------
<S>                                               <C>        <C>
 
        Deferred tax assets:
           Postretirement benefits                 $(1,837)  (1,737)
           Deferred compensation                      (428)    (405)
           Compensated absences, principally due
            to accrual for financial
            reporting purposes                        (228)    (218)
           Capital loss carryforward                  (699)    (697)
           Goodwill                                   (206)    (216)
           Other                                      (607)    (502)
                                                   -------   ------
                  Total gross deferred tax
                   assets                           (4,005)  (3,775)
 
             Less valuation allowance                1,287    1,188
                                                   -------   ------
                  Net deferred tax assets           (2,718)  (2,587)
                                                   
</TABLE>

                                                                     (Continued)

<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued

<TABLE>
<CAPTION>
                                                     1996    1995
                                                    -------  -----
          <S>                                       <C>      <C>
 
          Deferred tax liabilities:
             Plant and equipment, principally due
              to differences in depreciation         $7,642  7,217
             Pension                                    608    639
             Amortization of deferred financing
              costs                                     219      -
             Net unrealized gain on available for
              sale securities                            12    102 
             Other                                      206    299
                                                     ------  -----
                    Total gross deferred tax         
                     liability                        8,687  8,257
                                                     ------  -----
                    Net deferred tax liability       $5,969  5,670
                                                     ======  =====
 
                    Unamortized ITC                  $  369    470
                                                     ======  =====
</TABLE>

     The valuation allowance for deferred tax assets relates to capital loss
         carryforwards, state loss carryforwards of subsidiaries and impairment
         write-downs. The valuation allowance for deferred tax assets as of
         January 1, 1996 and 1995, was $1,188 and $1,131, respectively. The net
         change in the total valuation allowance for the years ended
         December 31, 1996 and 1995, was an increase of $99 and an increase of
         $57, respectively. In assessing the realizability of deferred tax
         assets, management considers 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. Management considers the
         scheduled reversal of deferred tax liabilities, projected future
         taxable income and tax planning strategies in making this assessment.
         Based upon the level of historical taxable income and projections for
         future taxable income over the periods which the deferred tax assets
         are deductible, management believes it is more likely than not the
         Company will realize the benefits of these deductible differences, net
         of the existing valuation allowances at December 31, 1996. The amount
         of the deferred tax asset considered realizable, however, could be
         reduced in the near term if estimates of future taxable income during
         the carryforward period are reduced.

                                                                     (Continued)

<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued



     At December 31, 1996, the Company has net operating loss carryforwards for
         state income tax purposes of $3,352 which are available to offset
         future federal taxable income, if any, through 1999. In addition, the
         Company has federal capital loss carryforwards of approximately $1,500
         which are available to reduce future federal capital gains, if any,
         through 1997.

(7)  Investments
     -----------

     The Company's investments at December 31, 1996 and 1995, consist of the
         following:

<TABLE>
<CAPTION>
                                                   1996    1995
                                                   -----   -----
<S>                                                <C>     <C>
 
        Investments at equity:
           Investments in cellular limited
            partnerships                           $5,062  3,328
           Conquest Telecommunication
               Services Corp.                         701    548
                                                   ------  -----
                  Total investments                $5,763  3,876
                                                   ======  =====
</TABLE>

     In 1996 and 1995, the Company had capital calls amounting to $898 and $282,
         respectively, to maintain its ownership percentages in its cellular
         limited partnership investments.

(8)  Marketable Securities
     ---------------------

     Information about marketable investment securities at December 31, 1996 and
         1995, is as follows:

<TABLE>
<CAPTION>
                                                                     1996
                                                  ------------------------------------------
                                                  Amortized  Unrealized  Unrealized   Market
                                                    cost       gains       losses     value
                                                  ---------  ----------  -----------  ------
<S>                                              <C>        <C>         <C>          <C>
 
        Available for sale:
           Equity securities                        $300          41         (12)      329
                                                    ====          ==         ===       ===
 
        Held to maturity:
           Debt securities of states and
            their political subdivisions            $451           1           -       452 
                                                    ====          ==         ===       ===
</TABLE>
                                                                     (Continued)

<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued

<TABLE>
<CAPTION>
 
 
                                                   1995
                             -------------------------------------------------
                             Amortized    Unrealized    Unrealized      Market
                               cost         gains         losses        value
                             ---------    ----------    -----------     ------
<S>                          <C>          <C>           <C>             <C>
                                                                
Available for sale:                                             
   Equity securities          $  843           254            (4)      1,093
   Municipal bond mutual                                                       
    fund                         500             -             -         500 
                              ------           ---         -----       ----- 
      Total available for                                                       
       sale securities        $1,343           254            (4)      1,593
                              ======           ===         =====       =====
                                                                        
                                                                        
Held to maturity:                                                       
   Debt securities of                                                   
    states and their                                                           
    political subdivisions    $6,569            11            (1)      6,579 
                              ======           ===         =====       ===== 
</TABLE> 

     The carrying values of debt securities at December 31, 1996 and 1995, by
         contractual maturity, are shown below:

<TABLE> 
<CAPTION> 
                                               1996   1995
                                               ----   -----
               <S>                             <C>    <C>  
               Due in one year or less         $451   6,569
                                               ====   =====
</TABLE>

     Realized gains and losses in each of the three years ended December 31,
         1996, were not significant.

(9)  Shareholders' Equity
     --------------------

     As approved by the shareholders, the Company's common stock was split 2 for
         1 effective May 22, 1996. All per share data presented herein reflects
         retroactive application of the stock split. In addition, the Company
         increased its authorized shares of common stock from 10,000 shares to
         50,000 shares.

                                                                     (Continued)

<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued



(10) Unaudited Quarterly Financial Data for 1996 and 1995
     ----------------------------------------------------

     The following are summaries of quarterly financial data for the years ended
         December 31, 1996 and 1995, as reported by the Company:

<TABLE>
<CAPTION>
                                 Unaudited (in thousands except per share data)
                                 ----------------------------------------------
                                    First       Second      Third      Fourth
                                   quarter     quarter     quarter     quarter
                                 -----------  ----------  ----------  ---------
<S>                              <C>          <C>         <C>         <C>
 
1996:
   Operating revenues              $14,865      14,710      15,252     15,106
   Net operating revenues            5,257       4,568       4,750      4,879
   Net earnings                      3,056       2,620       2,879      3,175
   Earnings per common share:
       Net earnings                    .20         .17         .19        .21
 
1995:
   Operating revenues              $12,474      13,071      13,443     13,769
   Net operating revenues            4,572       4,932       4,700      4,805
   Net earnings                      2,685       2,825       2,603      2,574
   Earnings per common share:
       Net earnings                    .18         .19         .17        .17
</TABLE>

     The 1995 fourth quarter reflects the $593 effect of changes in useful lives
         of cable and central office equipment described in note 1.

<PAGE>
 
                                                                      Schedule I
                                                                      ----------

                NORTH PITTSBURGH SYSTEMS, INC. (Parent Company)

                 Condensed Financial Information of Registrant

                            Condensed Balance Sheets

                           December 31, 1996 and 1995

                             (Amounts in Thousands)

<TABLE>
<CAPTION>
                                            1996     1995
                                          --------  ------
<S>                                       <C>       <C>
         Assets
         ------
 
Current assets:
   Cash and temporary investments         $ 5,609   1,436
   Marketable securities held to     
    maturity                                  451   1,025
   Dividend receivable from subsidiary      1,955   4,000
   Accounts receivable - other                 22     172
                                          -------  ------
              Total current assets          8,037   6,633
 
Property, plant and equipment:
   Land                                       150     150
   Buildings                                1,208     414
                                          -------  ------
                                            1,358     564
 
       Less accumulated depreciation      
        and amortization                       32       8
                                          -------  ------
                                            1,326     556
 
Other assets                                1,529   1,487
Investment in subsidiaries                 40,328  42,618
Investments - other                           701     548
Notes and accounts receivable -             
 subsidiaries                               5,488   1,673
                                          -------  ------
                                          $57,409  53,515
                                          =======  ======
 
  Liabilities and Shareholders' Equity
  ------------------------------------
 
Current liabilities:
   Dividend payable                         1,955   1,805
   Taxes other than income taxes               16      11
   Other liabilities                          132     172
                                          -------  ------
              Total current liabilities     2,103   1,988
 
Shareholders' equity:
   Common stock                             2,350   2,350
   Capital in excess of par value           2,215   2,215
   Retained earnings                       50,741  46,962
                                          -------  ------
                                           55,306  51,527
                                          -------  ------
 
                                          $57,409  53,515
                                          =======  ======
</TABLE>
                                                                     (Continued)

<PAGE>
 
                                                           Schedule I, Continued
                                                           ---------------------

                NORTH PITTSBURGH SYSTEMS, INC. (Parent Company)

                 Condensed Financial Information of Registrant

                       Condensed Statements of Operations

              For the Years Ended December 31, 1996, 1995 and 1994

                             (Amounts in Thousands)

<TABLE>
<CAPTION>
                                            1996      1995     1994
                                          ---------  -------  ------
<S>                                       <C>        <C>      <C>
 
Revenues:
   Dividends from subsidiaries             $13,821    9,415   6,768
   Interest income                             459      288      89
   Nonoperating income                         156      112       -
   Investment losses                           (14)      (8)    (30)
                                           -------   ------   -----
                                            14,422    9,807   6,827
                                           -------   ------   -----
 
Expenses:
   General office salaries and expenses        387      292     117
   State taxes                                  82       65      69
                                           -------   ------   -----
                                               469      357     186
                                           -------   ------   -----
 
Earnings before income taxes and equity
 earnings                                   13,953    9,450   6,641
 
 
Income taxes (benefit)                          16      (23)    (88)
                                           -------   ------   -----
       Earnings before equity earnings      13,937    9,473   6,729
 
Equity in undistributed net earnings of
 subsidiaries                               (2,207)   1,214   3,175
                                           -------   ------   -----
                                                   
       Net earnings                        $11,730   10,687   9,904
                                           =======   ======   =====
</TABLE>
                                                                     (Continued)

<PAGE>
 
                                                           Schedule I, Continued
                                                           ---------------------

                NORTH PITTSBURGH SYSTEMS, INC. (Parent Company)

                 Condensed Financial Information of Registrant

                       Condensed Statements of Cash Flows

              For the Years Ended December 31, 1996, 1995 and 1994

                             (Amounts in Thousands)

<TABLE>
<CAPTION>
                                            1996      1995     1994
                                           -------   -------  -------
<S>                                        <C>       <C>      <C>
   
Cash from operating activities:
   Net earnings                            $11,730   10,687    9,904
   Adjustments to reconcile net earnings
    to net cash from operating
    activities:
          Depreciation                          24        8        -
          Equity in undistributed
           earnings of affiliates            2,207   (1,214)  (3,175)
          (Increase) decrease in cash
           surrender value of life
           insurance policy                    (42)     (37)     104
          Loss on sale of investments           14       11        -
          Equity in earnings of investee      (153)    (148)       -
          Changes in assets and
           liabilities:
              Receivables                      150     (149)     (19)
              Dividend receivable            2,045   (2,346)    (151)
              Taxes other than income
               taxes                             5       (1)       9
              Other liabilities                (88)     152      (73)
                                           -------   ------   ------
                 Total adjustments           4,162   (3,724)  (3,305)
                                           -------   ------   ------
 
                 Net cash provided by
                  operating activities      15,892    6,963    6,599
                                           -------   ------   ------
 
Cash (used for) provided by investing
 activities:
   Expenditures for property and
    equipment                                 (794)    (564)       -
   Investment in affiliates                      -      (40)       -
   Proceeds from sales of available for
    sale securities                              -        -      366
   Purchase of marketable securities
    held to maturity                          (454)  (1,237)  (1,063)
   Proceeds from maturity of marketable
    securities held to maturity              1,014    1,144    1,244
   Notes receivable - subsidiaries          (3,815)  (1,673)       -
                                           -------   ------   ------
                 Net cash (used for)
                  provided by investing                              
                  activities                (4,049)  (2,370)     547 
                                           -------   ------   ------ 
</TABLE>
                                                                     (Continued)

<PAGE>
 
                                                           Schedule I, Continued
                                                           ---------------------

                NORTH PITTSBURGH SYSTEMS, INC. (Parent Company)

                 Condensed Financial Information of Registrant

                 Condensed Statements of Cash Flows, Continued

                             (Amounts in Thousands)

<TABLE>
<CAPTION>
                                            1996      1995     1994
                                          ---------  -------  -------
<S>                                       <C>        <C>      <C>
 
Cash used for financing activities:
   Cash dividends                          $(7,670)  (7,068)  (6,617)
                                           -------   ------   ------
                 Net cash used for
                  financing activities      (7,670)  (7,068)  (6,617)
                                           =======   ======   ====== 
Net increase (decrease) in cash and
 temporary investments                       4,173   (2,475)     529
Cash and temporary investments at                                    
 beginning of year                           1,436    3,911    3,382 
                                           -------   ------   ------ 
Cash and temporary investments at end                                
 of year                                   $ 5,609    1,436    3,911 
                                           =======   ======   ====== 
</TABLE>

<PAGE>
 
                                  SIGNATURES


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



                        NORTH PITTSBURGH SYSTEMS, INC.
                        ------------------------------
                                  Registrant



By    /s/ G. A. Gorman                  By    /s/ C. E. Thomas, Sr.
  --------------------------              --------------------------
      G. A. Gorman                            C. E. Thomas, Sr.
      President and Director                  Chairman of the Board


Date  March 27, 1997                    Date  March 27, 1997
    ------------------------                ------------------------

<PAGE>
 
          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.



By    /s/ A. P. Kimble
  --------------------------
      A. P. Kimble
      Vice President, Secretary and Treasurer



Date  March 27, 1997 
    ------------------------



Directors:


By    /s/ F. D. Reese                   By    /s/ B. B. Williams
  --------------------------              --------------------------
      F. D. Reese                             B. B. Williams
 


Date  March 27, 1997                    Date  March 27, 1997 
    ------------------------                ------------------------



By    /s/ C. E. Cole
  --------------------------
      C. E. Cole
 


Date  March 27, 1997 
    ------------------------