<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC  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 31,1998
                          ------------------------------------------------------
                                      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         724/443-9600
                                                    -------------------------


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


     Title of Each Class            Name of each exchange on which registered
-----------------------------       -----------------------------------------
          None                                     Not Applicable


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


                  Common Stock, par value $.15625 per share                    
-------------------------------------------------------------------------------
                               (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 12, 1999, the
aggregate market value of the voting stock held by non-affiliates of the
Registrant is $200,691,875.  (Includes 1,474,829 shares beneficially owned by
Directors and Officers as a group.)



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


              Class                          Outstanding at March 12, 1999
              -----                          -----------------------------

Common Stock, Par Value $.15625 per share          15,005,000 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, 1998.
<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.  Penn Telecom is also
certificated as a Competitive Access Provider and a competitive local exchange
provider and has entered into these businesses.  Pinnatech, Inc. (Pinnatech), a
wholly-owned subsidiary of the Registrant formed in 1995, provides Internet
related services.  The Registrant, NPTC, Penn Telecom 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, 1998.

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

      This paragraph is not applicable.  The Registrant, through North
Pittsburgh, Penn Telecom and Pinnatech, is engaged in the business of providing
telecommunication services and equipment, which is not considered separable into
industry segments.

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

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

          (i) Principal Services Rendered.
              --------------------------- 

          The Registrant, through North Pittsburgh, Penn Telecom and Pinnatech,
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 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.

                                       1
<PAGE>
 
      The Telecommunication 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 along with 17 other rural companies in Pennsylvania was granted
a temporary suspension for a two-year period of the interconnection requirements
outlined in the 1996 Act.  This initial suspension period expires on July 10,
1999.  North Pittsburgh recently filed a petition seeking a one-year extension
of the suspension until July 10, 2000.  A decision by the PA PUC is expected in
the second quarter of 1999.

      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 was required to develop and file a Network Modernization
Plan by July, 1998 that commits North Pittsburgh to providing broadband service
capability throughout its service area or be subject to a show cause order for
failure to do so.  North Pittsburgh, as part of this filing, also sought
approval of an alternative form of regulation from the PA PUC, by proposing
price cap regulation.  The petition for approval of the Network Modernization
Plan and alternative regulation under price caps is pending before the PA PUC
and a decision is expected in the second quarter of 1999.

      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 are
experiencing 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 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) 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.

                                       2
<PAGE>
 
      The PA PUC has ordered intraLATA Presubscription (also known as equal
access) under which a customer chooses his or her intraLATA toll carrier similar
to the choice currently made for an interLATA toll carrier.  If a customer
chooses North Pittsburgh as his intraLATA toll carrier, North Pittsburgh bills
the charges for such calls within the LATA 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.  Charges for calls, which originate or
terminate over a carrier's network, other than North Pittsburgh, are billed to
the carrier at rates contained in a PTA tariff on file with the PA PUC.

      North Pittsburgh is a participating Issuing Carrier in the National
Exchange Carrier Association (NECA) tariffs which are on file with the Federal
Communications Commission (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 other
Pennsylvania locations 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.  The PA PUC also has instituted access and universal service
investigations, which are still pending.

      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.  

                                       3
<PAGE>
 
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 and has
authority to operate as a Competitive Local Exchange Carrier. As a reseller of
both interstate and intrastate toll services, Penn Telecom is in direct
competition with other IXCs.

          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.

    (ii)  Other Services.
          -------------- 

          Cellular Partnerships.  North Pittsburgh and Alltel Cellular
          ---------------------                                       
Association of South Carolina, L.P. are Limited Partners with a partnership
interest of 3.6 percent each and Cellco Partnership, d.b.a. Bell Atlantic NYNEX
Mobile 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 360(degree)
Communications Company of Pennsylvania No. 1 is the General Partner with a
partnership interest of 57.13 percent in Pennsylvania RSA 6(I) Limited
Partnership, 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
Cellco Partnership, d.b.a. Bell Atlantic NYNEX Mobile, 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.

          Boulevard Communications.  Boulevard Communications, L.L.P.
          ------------------------                                   
(Boulevard), a Competitive Access Provider, provides point-to-point data
services to businesses in Western Pennsylvania including access to Internet
Service Providers, connections to interexchange companies and high speed data
transmission.  Boulevard, a Pennsylvania Limited Liability Partnership, is an
equally owned joint venture of the Registrant and a company in the Armstrong
Group.

          Internet Access and Services.  Pinnatech provides dial up and
          ----------------------------                                 
dedicated Internet access to business and residential customers in Western
Pennsylvania.  Pinnatech also provides virtual hosting services, web page
creation and other Internet related services.  Pinnatech is in direct
competition with national and regional Internet Service Providers.

                                       4
<PAGE>
 
   (iii)  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.

    (iv)  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.

    (v)   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) concerning, inter
                                                                          -----
alia, the impact of the 1996 Act.
----                         

          North Pittsburgh has an FCC license to operate a private operational
telephone maintenance radio service station (WIK 838 expiring on March 20,
2001). The FCC license to operate an Improved Mobile Telephone System (IMTS)
(call sign KGH-862) was discontinued as of January 1, 1998. The FCC licenses to
operate two point-to-point microwave systems (call signs KGO-21 and KGN-88) were
discontinued as of March 30, 1998. North Pittsburgh has an FCC license for the
continued operation of a non-commercial private license for its own maintenance
radio service and other purposes (call sign WPCD 845 expiring on April 29,
2003). North Pittsburgh has not encountered in the past, nor does it anticipate
in the future, any difficulty in renewing these FCC licenses.

    (vi)  Seasonality of Business.
          ----------------------- 

          None of the business activities of the Registrant or its subsidiaries
are seasonal.

    (vii) 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.)

                                       5
<PAGE>
 
          (viii) Customers.
                 --------- 

                 No material part of the overall business of the Registrant or
its 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.

          (ix)   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.

          (x)    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.

          (xi)   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.

          (xii)  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.

          (xiii) 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.

          (xiv)  Employees.
                 --------- 

                 At December 31, 1998, the Registrant, through all of its
subsidiaries, employed 312 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.

                                       6
<PAGE>
 
Item 2.   Properties.
------    ---------- 

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

      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 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.

      From January 1, 1994 to December 31, 1998, North Pittsburgh made gross
property additions of approximately $75,212,000 (which is about 49.8% of the
original cost of the present telephone plant) and property retirements of
approximately $11,979,334.  North Pittsburgh's 1999 construction program,
subject to adjustment for economic conditions, postponements of housing
developments, etc. is projected to be in excess of $20 million and will include
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 and
FCC, 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, 1998.

                                       7
<PAGE>
 
       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.

Executive Officers of the Registrant:
------------------------------------ 

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


Charles E. Thomas, Jr.                       56           Chairman, Board of
  Registrant and North Pittsburgh                              Directors
  Telephone Company:  Chairman of the
  Board of Directors since May 15, 1998;
  Director since 1993; Partner in the law
  firm of Thomas, Thomas, Armstrong &
  Niesen, Harrisburg, PA, since the
  formation of this firm in 1991which is
  retained as general counsel to the
  Registrant; Partner in the law firm of
  Thomas & Thomas from 1977 to 1990.

Harry R. Brown                               62           Director and President
  Registrant:  Director since 1989; 
  President since January 30, 1998; Vice 
  President from 1992 to January 30, 
  1998.  North Pittsburgh Telephone 
  Company: Director since 1989; President 
  and General Manager since January 30, 
  1998; Vice President - Operations from 
  1987 to January 30, 1998; Assistant Vice 
  President - Operations from 1986 to 1987; 
  Network Engineering Manager from 1984 to 
  1986; Equipment Supervisor from 1975 to 
  1984.

                                       8
<PAGE>
 
                                                       Positions and Offices
  Name and Business Experience               Age         with Registrant (1)
  ----------------------------               ---       ---------------------


Allen P. Kimble                              52        Director, Vice President
  Registrant:  Director since January 30,              and Treasurer
  1998; Vice President since 1989;
  Treasurer since incorporation in 1985;
  Secretary from 1993 to January 30, 1998.
  North Pittsburgh Telephone Company:
  Director since January 30, 1998; Vice
  President since 1989; Treasurer since
  1979; Secretary from 1993 to January 30,
  1998; Assistant Vice President from 1987
  to 1989; Assistant Secretary from 1977
  to 1993.


N. William Barthlow                          44        Vice President and
  Registrant:  Vice President since 1994;              Secretary
  Secretary since January 30, 1998;
  Assistant Secretary from 1993 to
  January 30, 1998; Assistant Vice
  President from 1990 to 1994.  North
  Pittsburgh Telephone Company:  Vice
  President - Marketing and Revenues
  since 1994; Secretary since January 30,
  1998; Assistant Secretary from 1993
  to January 30, 1998; Assistant Vice
  President - Revenue Requirements
  from 1989 to 1994; Revenue
  Requirements Manager from 1987
  to 1989.


Kevin J. Albaugh                             47        Vice President
  Registrant: Vice President since
  January 1, 1999. North Pittsburgh
  Telephone Company: Vice President -
  Regulatory Affairs since January 1,
  1999; Manager and Assistant Vice
  President - Revenues from 1997 to 1998;
  Revenue Requirements Supervisor from
  1993 to 1997.


Frank A. Macefe                              50        Vice President
  Registrant: Vice President since
  January 1, 1999. North Pittsburgh
  Telephone Company: Vice President - Sales
  since January 1, 1999; Assistant Vice
  President - Marketing from 1989 to 1998;
  Marketing Manager from 1979 to 1989;
  Marketing Supervisor from 1978 to 1979.


Albert W. Weigand                            40        Vice President
  Registrant: Vice President since
  January 1, 1999. North Pittsburgh
  Telephone Company: Vice President -
  Operations since January 1, 1999;
  Assistant Vice President - Operations
  from 1997 to 1998; Sr. Planning Engineer
  from 1995 to 1997; Planning Engineer
  from 1986 to 1995; Customer Equipment
  Supervisor from 1984 to 1986; Customer
  Equipment Engineer from 1979 to 1984.


(1)  Directors.  Messrs. Thomas, Brown and Kimble were elected as Directors at
     ---------                                                                
     the 1998 Annual Meeting of Shareholders held May 15, 1998 to serve until
     the 1999 Annual Meeting of Shareholders.  Messrs. Thomas, Brown and Kimble
     will be nominees for reelection as Directors at the Annual Meeting of
     Shareholders to be held May 21, 1999.

(2)  Officers.  Messrs. Thomas, Brown, Kimble and Barthlow were elected to their
     --------                                                                   
     respective offices at a Board of Directors' Organizational Meeting which
     followed the May 15, 1998 Annual Meeting of Shareholders. Messrs. Albaugh,
     Macefe and Weigand were elected to their respective offices at a Board of
     Directors' Meeting held on December 8, 1998. All officers will hold their
     offices until the first meeting of the Board following the 1999 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.

                                       9
<PAGE>
 
                                    PART II


Item 5.   Market for Registrant's Common Equity and Related Stockholders
------    --------------------------------------------------------------
          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 Registrant's Common Stock commenced
trading on the Nasdaq National Market tier of the Nasdaq Stock Market under the
Symbol `NPSI'.  Prior thereto, the stock was not listed on any Stock Exchange
and was considered as being traded on the OTC (Over-the-Counter) market.  The
Nasdaq High and Low sales prices for the Registrant's Common Stock for each
quarter of 1998 and 1997 are listed below:

<TABLE>
<CAPTION>
                                1998      1998      1997       1997        
                                High       Low      High        Low        
                               -------   -------   -------    -------      
     <S>                       <C>       <C>       <C>        <C>          
     First Quarter             $18.750   $14.500   $24.000    $18.250      
     Second Quarter             17.000    13.500    23.500     14.375      
     Third Quarter              16.094    11.313    23.500     15.250      
     Fourth Quarter             16.750    11.000    19.500     16.125       
</TABLE>

     (b)  Approximate Number of Holders of Common Stock:
          --------------------------------------------- 

     Calculated on the basis of the number of shareholder accounts, the
Registrant had approximately 3,021 common shareholders on March 12, 1999.

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

     Cash dividends declared per share by the Registrant on the outstanding
shares of Common Stock in 1998 and 1997 were as follows:

                                       10
<PAGE>
 
<TABLE> 
<CAPTION> 
                                              1998     1997      
                                              ----     ----      
<S>                                           <C>      <C>        
     First Quarter                            $ .15    $ .14           
     First Quarter Special Dividend             .05        -           
     Second Quarter                             .15      .14           
     Third Quarter                              .15      .14           
     Fourth Quarter                             .15      .14           
                                              -----    -----      
                                              $ .65    $ .56      
                                              =====    =====       
</TABLE> 


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

     The following summary of Selected Financial Data for the years 1998 - 1994
should be read in conjunction with the consolidated financial statements and
notes included elsewhere in this report.

                                       11
<PAGE>
 
<TABLE> 
<CAPTION> 
                                          1998        1997      1996         1995       1994         
                                          ----        ----      ----         ----       ----         
<S>                                     <C>        <C>        <C>          <C>         <C>   
Operating revenues                      $ 66,788   $  66,207   $ 59,933     $ 52,757   $ 49,188   
Operating expenses                        44,377      44,090     40,349       33,748     31,728   
                                        --------   ---------   --------     --------   --------   
  Net operating revenues                  22,411      22,117     19,584       19,009     17,460   
Interest expense                          (1,884)     (1,710)    (1,549)      (1,596)    (1,645)  
Interest income                            1,308         608        764        1,066        772   
Sundry (expense) income, net               1,947         840        840         (738)       202   
Net gain on sale of                                                                            
  investment*                                  -      14,516          -            -          -   
                                        --------   ---------   --------     --------   --------   
Earnings before income                                                                         
  taxes                                   23,782      36,371     19,639       17,741     16,789   
Income tax expense                         9,264      14,186      7,909        7,054      6,885   
                                        --------   ---------   --------     --------   --------   
Net earnings                            $ 14,518   $  22,185   $ 11,730     $ 10,687   $  9,904   
                                        ========   =========   ========     ========   ========   
Average common shares                                                                          
  outstanding                             15,005      15,019     15,040       15,040     15,040   
                                        ========   =========   ========     ========   ========   
Basic and diluted earnings                                                                     
  per share                             $    .97   $    1.48   $    .78     $    .71   $    .66   
                                        ========   =========   ========     ========   ========   
Dividends declared per share                                                                   
  of Common Stock                       $    .65   $     .56   $    .52     $    .48   $    .44   
                                        ========   =========   ========     ========   ========   
Total assets                            $135,315   $ 127,833   $ 99,523     $ 96,156   $ 91,578   
                                        ========   =========   ========     ========   ========   
Long-term debt                          $ 32,196   $  27,037   $ 21,311     $ 21,694   $ 22,396   
                                        ========   =========   ========     ========   ========   
</TABLE>

                    *See Results of Operations under Item 7
                                        

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

          Net earnings for 1998 were $14,518, or $.97 per share. Record earnings
in 1997 of $22,185, or $1.48 per share included a one-time $.60 per share gain
relating to the sale of an investment. These fluctuations were attributable to
the following factors:

               (1)  Operating Revenues.
                    ------------------ 

               Total operating revenues increased $581 (.9%) during 1998.  This
modest increase was primarily the net result of increases in local network
services of $1,639 (16.0%) and long distance and access services of $1,740
(4.0%) offset by a decrease in other operating revenues of $3,196 (42.6%).
Increased local network service revenues were attributable to customer growth,
growth in second lines and expanded penetration of enhanced services.  Long
distance and access services increased moderately due to the implementation of a
toll savings plan in July, 1997 and rate decreases on interstate switched access
revenues beginning January 1, 1998.  The decrease in other operating revenues 
was primarily due to the cessation of operations and subsequent sale of MCSI on
July 31, 1997 offset, in part, by the growth of Internet access customers.

               Total operating revenues increased $6,274 (10.5%) during 1997.
This change was principally due to increases in long distance and access
services of $1,632 (3.95%), local network services of $1,525 (17.6%) and other
operating revenues of $2,958 (65.0%). Higher long distance and access service
revenues were generally the result of an increase in the number of customers and
minutes of use. However, the rate of increase slowed due to the introduction of
an automatic savings plan in July, 1997. Increased local network service
revenues were attributable to customer growth, growth in second lines, expanded
penetration of enhanced services and line rate increases for residential and
business customers in several exchanges. Other operating revenues increased due
to growth of Internet access customers and the growth of consulting and
outsourcing services through July 31, 1997.

               (2)  Operating Expenses and Net Revenues.
                    ----------------------------------- 

               Total operating expenses for 1998 increased $287 (.6%) over the
preceding year.  That change was principally the result of a decrease in network
and other operating expenses of $1,314 (4.7%), offset by an increase in
depreciation and amortization of $1,278 (12.0%).  The net decrease in network
and other operating expenses consisted of a decrease resulting from the sale of
MCSI, offset by an increase due to the introduction of a data processing
transition plan, increased marketing efforts and on-going increases in
maintenance, customer service and other administrative expenses.  The increase
in depreciation and amortization was the direct result of the growth in fixed
assets to serve current and future customer needs.  The increase in total
operating revenues of $581 discussed above coupled with the increase in total
operating expenses of $287 resulted in net operating revenues increasing $294
(1.3%) in 1998 as compared to 1997.

                                       13
<PAGE>
 
               Total operating expenses for 1997 increased $3,741 (9.3%) over
the preceding year. That change was principally the result of increases in
network and other operating expenses of $1,737 (6.7%) and depreciation and
amortization expenses of $1,169 (12.3%). The increase in network and other
operating expense was principally due to an increase in Central Office switching
expenses and an increase in advertising costs. The growth in depreciation and
amortization expenses was the direct result of the growth in fixed assets to
serve current and future customer needs. The increase in total operating
revenues of $6,274 discussed above, coupled with the increase in total operating
expenses of $3,741, resulted in a 12.9% increase in net operating revenues in
1997 as compared to 1996.

               Interest income increased $700 in 1998 primarily due to increased
levels of investment in temporary investments.  The net increase in Sundry
expense (income) of $1,107 was primarily due to an increase in cellular
partnership income in 1998 as compared to 1997 and receipts from a one-time
insurance settlement.

               (3)  Stock Sales.
                    ----------- 

               As reported in its Current Report on Form 8-K, dated January 28,
1998, the Registrant had an investment in the common stock of Conquest
Telecommunications Services Corporation (Conquest), a non-public company,
engaged in the development and marketing of prepaid calling cards and other
enhanced telecommunications services. In 1997, SmarTalk Teleservices, Inc.
(SmarTalk), a public company, engaged, inter alia, in similar businesses, and
                                       ----- ----                            
Conquest announced the proposed acquisition of Conquest by SmarTalk.  The merger
was completed on December 31, 1997.  In connection with liquidating its
investment in Conquest, the Registrant entered into a series of transactions
which resulted in a net pre-tax gain of $14,516 ($9,003 after income taxes, $.60
per share) in 1997 which was recorded in net gain on sale of investment.

               (b)  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 financed capital
expenditures, debt service and dividend payments from internal sources from 1987
to 1996.

               In 1996, North Pittsburgh was granted approval for a loan from
the Federal Financing Bank (FFB) 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, which began on January 2, 1997
to furnish or improve telephone service in rural areas. Funds advanced in 1998
and 1997 were $7,258 and $6,903, respectively, with all final maturity dates of
advances occurring on December 31, 2012.

               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.

                                       14
<PAGE>
 
          Capital expenditure commitments for the purchase and installation of
new equipment at December 31, 1998 amounted to approximately $4.4 million, with
such amount being part of a 1999 construction program which is projected to be 
in excess of $20 million. Management expects cash flows provided by operating
activities and cash reserves in 1999 to be sufficient to service long-term debt,
to pay dividends and to finance approximately 25% to 50% 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 1999
are anticipated to be 25% 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 1999, which should enable North Pittsburgh to satisfactorily meet all
short-term obligations.

          (c)  Other Information.
               ----------------- 

               (1)  Inflation and Changing Prices.
                    ----------------------------- 

               During the three most recent fiscal years, inflation and changing
prices have not had a significant impact on net sales and on income from
continuing operations.

               (2)  Regulatory Assets.
                    ----------------- 

               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.

               (3)  Alternative Form of Regulation Petition.
                    --------------------------------------- 

               As discussed in Item 1(c)(i), North Pittsburgh, under Chapter 30
of the Pennsylvania Public Utility Code, filed a petition with the PA PUC, on
July 31, 1998, seeking approval of an alternative form of regulation to replace
traditional rate base/rate of return regulation or be subject to a show cause
proceeding. The petition also included a proposed network modernization plan. In
the filing, North Pittsburgh proposed a price cap plan whereby rates for
noncompetitive services are allowed to be increased based on an index that
measures general economy wide price increases. This petition is still pending
before the PA PUC and may be modified in the final order. However, it is not
possible at this time to determine the PA PUC's disposition of this petition or
the effect on North Pittsburgh's financial position or results of operations.

               (4)  Federal and State Regulatory Proceedings.
                    ---------------------------------------- 

               The Federal Communications Commission (FCC) continues to work on
Rulemakings that will further spell out the specifics of the Telecommunications
Act of 1996 (the 1996 Act). 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


                                       15
<PAGE>
 
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. The 1996 Act 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 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
approved the Petition on July 10, 1997. This initial two-year suspension expires
July 10, 1999. In January, 1999, North Pittsburgh filed for a one-year extension
of the suspension until July 10, 2000. A decision by the PA PUC is expected in
the second quarter of 1999.

          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-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 are expected to lessen or offset any
reductions in North Pittsburgh's revenue sources.

          (5)  Year 2000.
               --------- 

               (a)  State of Readiness.
                    ------------------ 

               The Registrant has taken actions to understand the nature and
extent of the work required in order to make its systems and infrastructure Year
2000 compliant. The Registrant began work last year to prepare its information
technology (IT) and non-information technology (non-IT) systems, including
updating and/or replacing existing legacy systems. The Registrant has formed a
Corporate Year 2000 Task Force, which is responsible for all Year 2000
activities and is being monitored by senior management and the Board of
Directors.

               There are six phases of the Registrant's Year 2000 program:
Awareness, Inventory, Assessment, Renovation, Validation and Implementation. The
Registrant has defined the six phases as follows:

Awareness - Gain the commitment of management and staff to solving the problem.
This phase has been completed.

Inventory - Conduct a thorough inventory of all hardware and software systems.
This phase will run until December, 1999 in order to maintain the inventory
throughout the life of the project.

                                       16
<PAGE>
 
Assessment and Planning - Decide which systems to retire, repair or replace.
Prepare contingency plans.  This phase has been completed.

Renovation - Perform upgrades to hardware and software.  This phase is underway
and is scheduled to be completed in June, 1999.  The Registrant has contracted
to outsource certain operational support, billing and accounting systems to a
third party vendor.  The software and hardware components of the systems
selected have been certified as Year 2000 compliant.  All mission critical
systems are scheduled to be remediated by April, 1999.

Validation - Test and certify new and renovated systems.  This phase is underway
and will continue through June, 1999.

Implementation and Follow-up - New or renovated systems go into service.  This
phase is scheduled to be completed in December, 1999, and will include the
resolution of any outstanding problems.  This phase is currently underway.  The
Year 2000 Project will extend until March, 2000 in order to address the leap day
of February 29, 2000 and to address any outstanding issues.

               The Registrant's Year 2000 issues related to third parties can be
broken into two categories: third party vendors who supply products to the
Registrant, and other telecommunications companies who provide joint service to
our customers.  The third party vendors have been providing the Registrant with
Year 2000 solutions on an on-going basis.  Year 2000 upgrades, repairs and
testing are being performed as per vendor specifications.  Other
telecommunications service providers are implementing Year 2000 programs in much
the same fashion as the Registrant and industry testing is being performed on an
on-going basis.

               (b)  Cost to Address Year 2000 Issues.
                    -------------------------------- 

               Expenditures related to Year 2000 remediation are not expected to
exceed $3.5 million.  These expenditures include costs related to the data
processing transition plan, license fees for purchase of software and training
and implementation costs.  A portion of these costs are being capitalized and
will be amortized over the estimated useful life of the asset beginning in
approximately the second quarter of 1999, the anticipated completion date of the
project.  The remainder of these costs will be expensed as incurred.

               (c)  Risks of Year 2000 Issues.
                    ------------------------- 

               The most reasonably likely worst case scenario is loss of
services to other interconnecting companies which, unlike the Registrant, will
not have attained Year 2000 compliance. However, this is unlikely to occur since
the interconnecting companies realize their responsibility to comply.
Nevertheless, should this worst case scenario occur, the Registrant will give
customers the option of rerouting service to a working carrier.

                                       17
<PAGE>
 
               (d)  Contingency Plan.
                    ---------------- 

               The Registrant has developed a Corporate Year 2000 Contingency
Plan to cover its primary business activities. This plan outlines the key areas
of business, and the manner in which they will be supported in the event of a
Year 2000 failure. This plan has been developed as a result of research into
United States Telephone Association member telephone company responses to
hurricanes, tornadoes, ice storms and other disasters. The Registrant has
studied and modified these plans to cover operations during potential Year 2000
related failures. The Registrant has also updated and revised the existing
Emergency Response Plan. The Registrant's Emergency Response Plan will form the
core of its Contingency Plan if a major service outage should occur. Tests of
the Registrant's Contingency Plan will be conducted during the second quarter of
1999.

               Key components of the Contingency Plan are the preparations to
revert to a manual operation, stockpiling and conservation of materials,
increased staffing levels, data storage for processing at a later date,
isolation of harmful network elements and positioning key personnel in areas
where they will be most effective. Should there be a serious service affecting
problem, the Emergency Response Plan will be activated until all services are
restored. Events, which could trigger activation of the Emergency Response Plan,
include widespread loss of gas or electric service, failures at various
interconnecting companies or failure of internal switching or transmission
systems.

               (6)  New Accounting Pronouncements.
                    ----------------------------- 

               In June, 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
The Registrant does not expect the pronouncement to impact the consolidated
financial statements because the Registrant has not entered intro derivative or
hedging transactions.


Item 7A.  Quantitative and Qualitative Disclosure About Market Risk.
-------   --------------------------------------------------------- 

          The Registrant's exposure to market risk for changes in interest rates
relates primarily to the Registrant's investment portfolio and long-term
obligations.  The Registrant does not use derivative financial instruments in
its investment portfolio.  The Registrant places its investments with high
credit quality issuers and, by policy, limits the amount of credit exposure from
any one issuer.  The portfolio includes only marketable securities with active
secondary or resale markets to ensure portfolio liquidity.  The Registrant has
no cash flow exposure due to rate changes for long-term debt obligations.  The
Registrant primarily enters into debt obligations to support capital
expenditures.

          The table below presents principal amounts and related average
interest rates by year of maturity for the Registrant's investment portfolio and
debt obligations.  All temporary investments mature in 90 days or less.
Available for sale debt securities have maturities which range between 1 and 10
years.

                                       18
<PAGE>
 
<TABLE>
<CAPTION>
                                                    THERE-
                1999    2000   2001    2002   2003  AFTER    TOTAL     FV
                ----    ----   ----    ----   ----  ------   -----     --  
<S>             <C>     <C>    <C>     <C>    <C>    <C>     <C>      <C>
Fixed Debt       1,850  1,907  1,968   2,033  2,102  24,186  34,046   32,442
Average %
 Rate             4.81   5.45   5.49    5.52   5.55    5.76    5.68        -
Temporary
Investments     16,212      -      -       -      -       -  16,212    16,212
Average %
 Rate             4.45      -      -       -      -       -    4.45         -
AFS* Debt
 Securities          -  1,841  2,061   1,759  2,183   1,134   8,978     8,978
Average %
 Rate                -   6.25   6.88    6.19   6.00    5.70    5.17         -
</TABLE>

*Available for sale

          As the table incorporates only those exposures that exist as of
December 31, 1998, it does not consider those exposures or positions which could
arise after that date.  Moreover, because firm commitments are not presented in
the table above, the information presented therein has limited predictive value.
As a result, the Registrant's ultimate realized gain or loss with respect to
interest rate fluctuations will depend on the exposures that arise during the
period, the Registrant's borrowing and investing strategies at the time, and
interest rates.


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.

                                       19
<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

                                       20
<PAGE>
 
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.


                                    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, 1998 and 1997

              Consolidated Statements of Earnings for the years ended December
              31, 1998, 1997 and 1996

              Consolidated Statements of Shareholders' Equity and Comprehensive
              Income for the years ended December 31, 1998, 1997 and 1996

              Consolidated Statements of Cash Flows for the years ended December
              31, 1998, 1997 and 1996

              Notes to Consolidated Financial Statements


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

              Condensed Financial Information of Registrant for the years ended
              December 31, 1998, 1997 and 1996

                                       21
<PAGE>
 
              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, 1998.

          (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.

                                       22
<PAGE>
 
                  NORTH PITTSBURGH SYSTEMS, INC.
                  AND SUBSIDIARIES

                  Consolidated Financial Statements
                  and Schedule (Form 10-K)

                  December 31, 1998, 1997 and 1996

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

            Index to Consolidated Financial Statements and Schedule

                       December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                                                Page
                                                                                ----
<S>                                                                           <C>
Independent Auditors' Report                                                     1
 
Consolidated Financial Statements:
  Consolidated Balance Sheets as of December 31, 1998 and 1997                 2 - 3
  Consolidated Statements of Earnings for the Years Ended
    December 31, 1998, 1997 and 1996                                             4
  Consolidated Statements of Shareholders' Equity and Comprehensive
    Income for the Years Ended December 31, 1998, 1997 and 1996                5 - 6
  Consolidated Statements of Cash Flows for the Years Ended
    December 31, 1998, 1997 and 1996                                           7 - 8
  Notes to Consolidated Financial Statements                                   9 - 22
 
Consolidated Financial Statement Schedule:
  I. Condensed Financial Information of Registrant for the
      Years Ended December 31, 1998, 1997 and 1996                            23 - 27
</TABLE>
<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, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, 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 LLP

Pittsburgh, Pennsylvania
February 19, 1999
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

                          Consolidated Balance Sheets

                          December 31, 1998 and 1997

                 (Amounts in Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                                                                 1998           1997
                                                                 ----           ----
                              Assets
                              ------
<S>                                                           <C>             <C>                                
Current assets:                                                                                                
  Cash and temporary investments                              $ 16,786          15,938                         
  Marketable securities available for sale (note 6)             14,670          16,847                         
  Accounts receivable:                                                                                         
    Customers                                                    3,599           3,401                         
    Access service settlements and other                         7,310           5,995                         
  Prepaid expenses                                                 204             109                         
  Inventories of construction and operating                                                                    
    materials and supplies                                       4,019           3,360                         
                                                              --------         -------                         
          Total current assets                                  46,588          45,650                         
                                                                                                               
Property, plant and equipment (note 2):                                                                        
  Land                                                             475             475                         
  Buildings                                                     11,067          10,543                         
  Equipment                                                    136,779         122,492                         
                                                              --------         -------                         
                                                               148,321         133,510                         
                                                                                                               
    Less accumulated depreciation and amortization              78,854          69,303                         
                                                              --------         -------                         
                                                                69,467          64,207                         
  Construction-in-progress                                       6,863           6,990                         
                                                              --------         -------                         
          Total property, plant and equipment, net              76,330          71,197                         
                                                                                                               
Investments (note 5)                                             9,637           7,499                         
Deferred financing cost                                            857             954                         
Prepaid pension cost (note 3)                                      598             580                         
Other assets                                                     1,305           1,953                         
                                                              --------         -------                         
                                                              $135,315         127,833                         
                                                              ========         =======                         
</TABLE>

                                                                     (Continued)

                                       2
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

                    Consolidated Balance Sheets, Continued

                 (Amounts in Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                                                                    1998             1997 
                                                                    ----             ----  
          Liabilities and Shareholders' Equity
          ------------------------------------

<S>                                                              <C>            <C> 
Current liabilities:
  Current portion of long-term debt (note 2)                     $  1,850             803                       
  Accounts payable                                                  6,756           4,794                         
  Accrued legal settlement (note 5)                                     -           3,180                         
  Dividend payable                                                  2,251           2,101                         
  Deferred income taxes (note 4)                                        -           5,289                         
  Other accrued liabilities                                         2,616           2,304                         
  Federal and state income taxes (note 4)                             920             389                         
                                                                 --------         -------                         
          Total current liabilities                                14,393          18,860                         
                                                                                                                  
Long-term debt (note 2)                                            32,196          27,037                         
                                                                                                                  
Deferred income taxes (note 4)                                      8,060           6,560                         
Accrued postretirement benefits (note 3)                            5,002           4,764                         
Other liabilities                                                   1,858           2,052                         
                                                                                                                  
Shareholders' equity:                                                                                             
  Capital stock - common stock, par value $.15625;                                                                
    authorized 50,000 shares; issued and                                                                          
    outstanding 15,005 shares                                       2,350           2,350                         
  Capital in excess of par value                                    2,215           2,215                         
  Retained earnings (note 2)                                       69,265          64,501                         
  Less cost of treasury stock (35 shares)                            (508)           (508)                        
  Accumulated other comprehensive income - unrealized                                                             
    gain on available for sale securities, net (notes 4 and 6)        484               2                         
                                                                 --------         -------
          Total shareholders' equity                               73,806          68,560                         
                                                                 --------         -------                         
                                                                                                                  
                                                                 $135,315         127,833                         
                                                                 ========         =======    
</TABLE>

See accompanying notes to consolidated financial statements.

                                       3
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

                      Consolidated Statements of Earnings

             For the Years Ended December 31, 1998, 1997 and 1996

                 (Amounts in Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                                                                1998              1997             1996
                                                                ----              ----             ---- 
<S>                                                           <C>               <C>              <C>  
Operating revenues:
  Local network services                                      $ 11,848           10,209            8,684
  Long distance and access services                             45,252           43,512           41,880
  Directory advertising, billing
    and other services                                           2,471            2,210            2,181
  Telecommunication equipment sales                              2,906            2,769            2,639
  Other operating revenues                                       4,311            7,507            4,549
                                                              --------          -------          -------
                                                                66,788           66,207           59,933
 
Operating expenses:
  Network and other operating expenses                          26,489           27,803           26,066
  Depreciation and amortization (note 1)                        11,955           10,677            9,508
  State and local taxes                                          3,098            3,009            2,364
  Telecommunication equipment expenses                           2,835            2,601            2,411
                                                              --------          -------          -------
                                                                44,377           44,090           40,349
                                                              --------          -------          -------
 
          Net operating revenues                                22,411           22,117           19,584
 
Other expense (income), net:
  Interest expense                                               1,884            1,710            1,549
  Interest income                                               (1,308)            (608)            (764)
  Net gain on sale of investment (note 5)                            -          (14,516)               -
  Sundry expense (income), net                                  (1,947)            (840)            (840)
                                                              --------          -------          -------
                                                                (1,371)         (14,254)             (55)
                                                              --------          -------          -------
 
          Earnings before income taxes                          23,782           36,371           19,639
 
Provision for income taxes (note 4)                              9,264           14,186            7,909
                                                              --------          -------          -------
          Net earnings                                        $ 14,518           22,185           11,730
                                                              ========          =======          =======
 
Average common shares outstanding                               15,005           15,019           15,040
                                                              ========          =======          =======
Basic and diluted earnings per share                          $    .97             1.48              .78
                                                              ========          =======          =======
 
Dividends per share                                           $    .65              .56              .52
                                                              ========          =======          =======
</TABLE>

See accompanying notes to consolidated financial statements.

                                       4
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

   Consolidated Statements of Shareholders' Equity and Comprehensive Income

             For the Years Ended December 31, 1998, 1997 and 1996

                 (Amounts in Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                                                                                                  Accumulated                 
                                                              Capital in                             other            Total     
                                                    Common    excess of   Retained   Treasury    comprehensive     stockholder's 
                                                     stock    par value   earnings     stock        income            equity     
                                                    ------    ---------   --------     -----        ------            ------
<S>                                                 <C>       <C>         <C>        <C>         <C>               <C>            
Balances at December 31, 1995                       $ 2,350       2,215     46,814         -          148             51,527
Comprehensive income:
  Net income                                              -           -     11,730         -            -             11,730
  Other comprehensive income:
    Unrealized holding gains (losses) arising
      during the period                                                                               (54)
    Less:  Reclassification adjustments for net 
         gains included in net income                                                                 (77)
                                                                                                     ----
    Net unrealized change in investment
      securities, net of tax effect of $(90)                                                         (131)              (131)

Comprehensive income                                                                                                  11,599
 
Dividends declared on common stock                        -           -     (7,820)        -            -             (7,820)
                                                    -------       -----     ------      ----         ----            -------
Balances at December 31, 1996                         2,350       2,215     50,724         -           17             55,306
</TABLE>

                                                                     (Continued)

                                       5
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

  Consolidated Statements of Shareholders' Equity and Comprehensive Income, 
                                   Continued

                 (Amounts in Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                                                                                                  Accumulated                 
                                                              Capital in                             other            Total     
                                                    Common    excess of   Retained   Treasury    comprehensive     stockholder's 
                                                     stock    par value   earnings     stock        income            equity     
                                                    ------    ---------   --------     -----        ------            ------
<S>                                                 <C>       <C>         <C>        <C>         <C>               <C>      
Comprehensive income:
  Net income                                             -            -     22,185         -            -            22,185
  Other comprehensive income:
    Unrealized holding gains (losses) arising
      during the period                                                                                44
    Less:  Reclassification adjustments for net
         gains included in net income                                                                 (59)
                                                                                                     ----
    Net unrealized change in investment
      securities, net of tax effect of $(11)                                                          (15)              (15)
                                                                                                                     ------
Comprehensive income                                                                                                 22,170
 
Dividends declared on common stock                       -            -     (8,408)        -            -            (8,408)
Stock repurchased                                        -            -          -      (508)           -              (508)
                                                   -------        -----     ------      ----         ----            -------
Balances at December 31, 1997                        2,350        2,215     64,501      (508)           2            68,560
 
Comprehensive income:
  Net income                                             -            -     14,518         -            -            14,518
  Other comprehensive income:
    Unrealized holding gains (losses) arising
      during the period                                                                               489
    Less:  Reclassification adjustments for net
         gains included in net income                                                                  (7)
                                                                                                     ----
    Net unrealized change in investment
      securities, net of tax effect of $330                                                           482               482

Comprehensive income                                                                                                 15,000
 
Dividends declared on common stock                       -            -     (9,754)        -            -            (9,754)
                                                   -------        -----     ------      ----         ----            ------
Balances at December 31, 1998                      $ 2,350        2,215     69,265      (508)         484            73,806
                                                   =======        =====     ======      ====        =====            ======
</TABLE>

See accompanying notes to consolidated financial statements.

                                       6
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows

             For the Years Ended December 31, 1998, 1997 and 1996

                            (Amounts in Thousands)

<TABLE>
<CAPTION>
                                                              1998              1997             1996
                                                              ----              ----             ----
<S>                                                           <C>               <C>              <C>  
Cash from operating activities:
  Net earnings                                               $14,518           22,185           11,730
  Adjustments to reconcile net earnings
    to net cash from operating activities:
      Depreciation and amortization                           11,955           10,677            9,508
      Net gain on sale of investment (note 5)                      -          (14,516)               -
      Gain on sale of MCSI                                         -             (292)               -
      Gain on sale of marketable securities                      (12)             (99)            (128)
      Equity income of affiliated companies                   (1,332)          (1,077)            (989)
      Investment tax credit amortization                         (91)             (98)            (101)
      Deferred income taxes                                   (4,120)           5,880              389
      Changes in assets and liabilities:
        Accounts receivable                                   (1,513)          (1,781)            (515)
        Inventories of construction and
          operating materials and supplies                      (659)            (191)            (788)
        Deferred financing costs, prepaid
          pension costs and other assets                         633             (179)           1,536
        Accounts payable                                       1,962              576           (1,635)
        Other accrued liabilities                             (2,972)             314              390
        Accrued postretirement benefits                          238              267              247
        Federal and state income taxes                           531             (281)             379
        Other, net                                                 -                -             (163)
                                                             -------          -------           ------
              Total adjustments                                4,620             (800)           8,130
                                                             -------          -------           ------
 
              Net cash from operating
                activities                                    19,138           21,385           19,860
</TABLE>

                                                                     (Continued)

                                       7
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

               Consolidated Statements of Cash Flows, Continued

                            (Amounts in Thousands)
<TABLE>
<CAPTION>
                                                              1998              1997             1996
                                                              ----              ----             ----
<S>                                                           <C>               <C>              <C>  
Cash used for investing activities:
  Expenditures for property and equipment                    $(17,847)         (18,913)          (16,303)
  Net (cost of removal) salvage on retirements                    759              547               382
                                                             --------          -------           -------
              Net capital additions                           (17,088)         (18,366)          (15,921)
 
  Proceeds from sale of investment (note 5)                         -            1,655                 -
  Proceeds from sale of MCSI, net of cash sold                      -            3,305                 -
  Purchase of marketable securities held to maturity                -                -              (454)
  Proceeds from redemption of marketable
    securities held to maturity                                     -              451             6,519
  Purchase of marketable securities available for             (18,060)            (234)             (433)
   sale
  Proceeds from sale of marketable securities
    available for sale                                         21,061              541             1,657
  Investments in affiliated entities                             (880)          (1,893)             (898)
  Distributions from affiliated entities                           74              534                 -
                                                             --------          -------           -------
              Net cash used for investing
                activities                                    (14,893)         (14,007)           (9,530)
 
Cash used for financing activities:
  Cash dividends                                               (9,603)          (8,262)           (7,670)
  Retirement of debt                                           (1,052)            (886)             (706)
  Proceeds from issuance of debt                                7,258            6,903                 -
  Purchase of treasury stock                                        -             (508)                -
                                                             --------          -------           -------
              Net cash used for financing
                activities                                     (3,397)          (2,753)           (8,376)
                                                             --------          -------           -------
 
Net increase (decrease) in cash and temporary
  investments                                                     848            4,625             1,954
Cash and temporary investments at beginning of year            15,938           11,313             9,359
                                                             --------          -------           -------
Cash and temporary investments at end of year                $ 16,786           15,938            11,313
                                                             ========          =======           =======
 
Supplemental disclosures of cash flow information:
  Interest paid                                              $  1,791            1,612             1,450
                                                             ========          =======           =======
 
  Income taxes paid                                          $ 12,853            8,685             7,241
                                                             ========          =======           =======
 
  Fixed assets acquired under capital leases                 $      -                -               565
                                                             ========          =======           =======
 
  Marketable securities received in connection with
    investment transaction (note 5)                          $      -           16,124                 -
                                                             ========          =======           =======
</TABLE>

See accompanying notes to consolidated financial statements.

                                       8
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements

                       December 31, 1998, 1997 and 1996

                 (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) and
       Pinnatech, Inc. Also consolidated herein is the financial activity of
       Management Consulting Solutions, Inc. (MCSI) until its sale on July 31,
       1997. The Company provides telecommunication services and equipment 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 1996.

                                                                     (Continued)

                                       9
<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. Costs of investments sold are determined on the
       basis of specific identification.

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

     The Company's investments in limited partnerships are carried at cost plus
       equity in accumulated net profits or losses.

     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. Depreciation as a percentage of average
       depreciable plant in service amounted to 8.5%, 8.4% and 8.2% in 1998,
       1997 and 1996, respectively. The average remaining life of plant in
       service as of December 31, 1998, is approximately 5.8 years.

     On construction projects lasting 12 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 1998, 1997 or 1996.

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

                                                                     (Continued)

                                       10
<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 30 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 purchased with a maturity of three
       months or less to be cash equivalents.

                                                                     (Continued)

                                       11
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued


     Pension and Other Postretirement Benefits
     -----------------------------------------

     On January 1, 1998, the Company adopted Statement of Financial Accounting
       Standards (SFAS) No. 132, "Employers' Disclosures About Pension and Other
       Postretirement Benefits."  SFAS No. 132 revises employers' disclosures
       about pension and other postretirement benefit plans.  SFAS No. 132 does
       not change the method of accounting for such plans.

     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.

     Comprehensive Income
     --------------------

     On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
       Comprehensive Income." SFAS No. 130 establishes standards for reporting
       and presentation of comprehensive income and its components in a full set
       of financial statements. Comprehensive income consists of net income and
       net unrealized gains (losses) on securities and is presented in the
       consolidated statements of shareholders' equity and comprehensive income.
       The Statement requires only additional disclosures in the consolidated
       financial statements; it does not affect the Company's financial position
       or results of operations. Prior year financial statements have been
       reclassified to conform to the requirements of SFAS No. 130.

     Earnings Per Share
     ------------------

     Basic earnings per share is calculated based upon the weighted average
       number of common shares actually outstanding, and diluted earnings per
       share is calculated based upon the weighted average number of common
       shares outstanding and other potential common shares if they are
       dilutive. The Company has no potential, dilutive common shares
       outstanding.

     Reclassifications
     -----------------

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

                                                                     (Continued)

                                       12
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued

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

   Long-term debt as of December 31, 1998 and 1997, was as follows:
 
<TABLE> 
<CAPTION> 
                                                                   1998          1997             
                                                                   ----          ----              
          <S>                                                     <C>           <C>               
          Notes payable to Rural Telephone                                                        
            Bank, maturing at various dates from 2009                                             
              through 2019                                        $ 20,133      20,937            
          Notes payable to Federal Financing Bank,                                                
            maturing in 2012                                        13,913       6,903            
                                                                  --------      ------            
                                                                    34,046      27,840            
                                                                                                  
            Less current portion of long-term debt                   1,850         803            
                                                                  --------      ------            
                Long-term debt                                    $ 32,196      27,037            
                                                                  ========      ======            
</TABLE>

     Principal payments required over the next five years calculated on the
       outstanding indebtedness at December 31, 1998, are: $1,850 in 1999;
       $1,907 in 2000; $1,968 in 2001; $2,033 in 2002; and $2,102 in 2003.

     The notes payable to the Rural Telephone Bank 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, 1998, consolidated
       retained earnings of the Company of approximately $34,215 were available
       for dividends and other distributions.

     In 1996, NPTC was granted approval for a loan from the Federal Financing
       Bank (FFB) 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.

                                                                     (Continued)

                                       13
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued


     Notes payable to the Rural Telephone Bank carry an interest rate of 6.5%.
       Notes payable to the Federal Financing Bank carry interest rates ranging
       from 4.3% to 4.7%.

     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, 1998, is $32,442.

     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 1998 or 1997.

(3)  Retirement Plan and Other Postretirement Benefit Plans
     ------------------------------------------------------

     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.

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

                                                                     (Continued)

                                       14
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued


     The following table sets forth the Plans' change in benefit obligation,
       change in plan assets and reconciliation of funded status at December 31,
       1998 and 1997.

<TABLE>
<CAPTION>
                                                      Pension benefits        Other benefits            
                                                      ----------------        --------------            
                                                       1998        1997       1998       1997            
                                                       ----        ----       ----       ----             
<S>                                                   <C>          <C>       <C>        <C>             
Change in benefit obligation:                                                                           
   Benefit obligation at beginning of year            $ 26,056    25,026     4,614       4,376           
   Service cost                                            887       892       161         154           
   Interest cost                                         1,792     1,722       314         300           
   Plan amendments                                           -       593         -           -           
   Benefits paid                                          (904)     (809)     (225)       (174)          
   Actuarial (gain) or loss                                934    (1,369)     (962)        (42)          
                                                      --------    ------    ------      ------           
   Benefit obligation at end of year                    28,765    26,055     3,902       4,614           
                                                                                                         
Change in plan assets:                                                                                   
   Fair value at beginning of year                      27,528    23,482         -           -           
   Actual return on plan assets                          1,028     4,027         -           -           
   Employer contributions                                  701       828       225         174           
   Benefits paid                                          (904)     (809)     (225)       (174)          
                                                      --------    ------    ------      ------           
   Fair value at end of year                            28,353    27,528         -           -           
                                                                                                         
Reconciliation of funded status:                                                                         
   Funded status                                          (412)    1,473    (3,902)     (4,614)          
   Unrecognized actuarial (gain) or loss                   161    (1,815)   (1,013)        (51)          
   Unrecognized transition (asset)                      (1,070)   (1,223)        -           -           
   Unrecognized prior service cost                       1,919     2,145       (87)        (99)          
                                                      --------    ------    ------      ------           
   Net amount at year end                             $    598       580    (5,002)     (4,764)          
                                                      ========    ======    ======      ======           
</TABLE>

Assumptions used in the calculations as of December 31, 1998 and 1997, are:
 
<TABLE>
<CAPTION>
                                                        Pension benefits      Other benefits          
                                                        ----------------      --------------          
                                                         1998      1997       1998      1997          
                                                         ----      ----       ----      ----          
<S>                                                    <C>         <C>       <C>        <C>           
Weighted average assumptions as of                                                                    
December 31, 1998:                                                                                    
    Discount rate                                      %  6.75    7.00        6.75     7.00            
    Expected return on assets                             7.50    7.50         N/A      N/A            
       Rate of compensation increase                      5.00    5.00        5.00     5.00            
</TABLE>

                                                                     (Continued)

                                       15
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued


     Net periodic benefit costs include the following:
              
     <TABLE>  
     <CAPTION>
                                                             Pension benefits             Other benefits 
                                                             ----------------             -------------- 
                                                              1998      1997              1998      1997  
                                                              ----      ----              ----      ----  
     <S>                                                    <C>         <C>              <C>        <C>   
     Components of net periodic benefit cost:                                                            
       Service cost                                         $    887       892             161      154  
       Interest cost                                           1,792     1,722             314      300  
       Expected return on plan assets                         (2,069)   (1,777)              -        -  
        Amortization of prior service cost                       227       186             (12)     (12) 
        Amortization of transition (asset)                      (153)     (153)              -        -  
        Recognized actuarial (gain) or loss                        -         -               -        -  
                                                            --------    ------             ---      ---  
        Net periodic benefit cost                           $    684       870             463      442  
                                                            ========    ======             ===      ===   
</TABLE>

     For purposes of measuring other postretirement benefits, the annual rate of
       increase in the per capita cost of covered benefits (i.e., healthcare
       cost trend rate) for 1998 was 9.7 percent for participants whose coverage
       included Major Medical Insurance, 8.4 percent for participants who have
       Blue Cross/Blue Shield coverage only, and 6.5 percent for participants
       who have Point of Service coverage. The rates were assumed to decrease
       gradually to 5 percent by the year 2007 and remain at that level
       thereafter. Assumed healthcare cost trend rates have a significant
       effect on the amounts reported for the healthcare plans. A one
       percentage point change in the assumed healthcare trend rate would have
       the following effects:

<TABLE> 
<CAPTION> 
                                                                          One             One                 
                                                                      percentage       percentage             
                                                                    point increase   point decrease           
                                                                    --------------   --------------           
<S>                                                                 <C>              <C>                       
Effect on total of service and interest cost
   components for 1998                                                      60             (51)
Effect on 1998 postretirement benefit obligation                           378            (331)
</TABLE>

                                                                     (Continued)

                                       16
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued

(4)  Income Taxes
     ------------

     The components of income tax expense are:

<TABLE> 
<CAPTION> 
                                        1998        1997      1996           
                                        ----        ----      ----           
     <S>                              <C>          <C>       <C>             
     Current:                                                                
       Federal                        $ 10,231      6,141    5,603           
       State                             3,243      2,263    2,018           
                                      --------     ------    -----           
                                        13,474      8,404    7,621           
                                                                             
     Deferred:                                                               
       Federal                          (3,114)     4,460      291           
       State                            (1,005)     1,420       98           
                                      --------     ------    -----           
                                        (4,119)     5,880      389           
                                                                             
     Deferred investment tax credit        (91)       (98)    (101)          
                                      --------     ------    -----           
                                      $  9,264     14,186    7,909           
                                      ========     ======    =====           
</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> 
                                               1998         1997       1996       
                                               ----         ----       ----       
     <S>                                     <C>           <C>        <C>         
     Statutory federal income tax            $ 8,324       12,729     6,874         
     State taxes on income (net of                                                                  
       federal income tax benefit)             1,455        2,362     1,275         
     Change in beginning of year                                                                    
       valuation allowance                      (374)        (845)       99         
     Investment tax credit                       (91)         (98)     (101)        
     Tax-exempt interest                         (13)          (5)      (88)        
     Other tax-exempt income                    (301)           -         -         
     Other                                       264           43      (150)        
                                             -------       ------     -----         
     Income tax expense                      $ 9,264       14,186     7,909         
                                             =======       ======     =====        
</TABLE>

                                                                     (Continued)

                                       17
<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> 
                                                        1998          1997           1996   
                                                        ----          ----           ----   
     <S>                                               <C>           <C>            <C>      
     Deferred tax expense (exclusive of the                                                                      
       effects of the other components below)          $  1,544         737           290        
     Net gain on investment (note 5)                     (5,289)      5,289             -        
     Use of capital loss carryforward                         -         699             -        
     Increase (decrease) in beginning of year                                                                 
       valuation allowance                                 (374)       (845)           99            
                                                       --------       -----           ---                      
                                                       $ (4,119)      5,880           389        
                                                       ========       =====           ===
</TABLE>

     Additional deferred taxes of $331 and $1 as of December 31, 1998 and 1997,
       respectively, were included in shareholders' equity in relation to an
       unrealized gain on marketable securities classified as available for sale
       (note 6).

     The tax effects of temporary differences that give rise to significant
       portions of the deferred tax assets and deferred tax liabilities at
       December 31, 1998 and 1997, are presented below:

<TABLE> 
<CAPTION> 
                                                                               1998            1997
                                                                               ----            ----
       <S>                                                                   <C>               <C>  
       Deferred tax assets:                                                                             
         Postretirement benefits                                             $ (2,044)          (1,947)  
         Deferred compensation                                                   (403)            (446)  
         Compensated absences, principally due                                                          
           to accrual for financial reporting purposes                           (252)            (238)  
         Capital loss carryforward                                                  -                -   
         Goodwill                                                                 (58)             (64)  
         Other                                                                   (170)            (687)  
                                                                             --------           ------   
                 Total gross deferred tax assets                               (2,927)          (3,382)  
                                                                                                        
           Less valuation allowance                                                68              442   
                                                                             --------           ------    
                 Net deferred tax assets                                     $ (2,859)          (2,940)   
</TABLE> 

                                                                     (Continued)

                                       18
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued

<TABLE> 
<CAPTION> 
                                                                               1998            1997
                                                                               ----            ----
       <S>                                                                   <C>               <C>  
       Deferred tax liabilities:                                                                    
       Plant and equipment, principally due to                                                      
           differences in depreciation                                       $ 9,369           8,424
         Pension                                                                 533             538
         Amortization of deferred financing costs                                169             193
         Basis in SmarTalk stock (note 6)                                          -           5,289
         Net unrealized gain on available for sale                                                  
           securities                                                            331               1
         Other                                                                   517             344
                                                                             -------          ------
                 Total gross deferred tax liability                           10,919          14,789
                                                                             -------          ------
                                                                                                    
                 Net deferred tax liability                                  $ 8,060          11,849
                                                                             =======          ====== 
 
       Unamortized investment tax credit                                     $   180             271
                                                                             =======          ======
</TABLE>

     The valuation allowance for deferred tax assets relates to state loss
       carryforwards of subsidiaries. The valuation allowance for deferred tax
       assets as of January 1, 1998 and 1997, was $442 and $1,287, respectively.
       The net change in the total valuation allowance for the years ended
       December 31, 1998 and 1997, was a decrease of $218 and $845,
       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, 1998. 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)

                                       19
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued


     At December 31, 1998, the Company has net operating loss carryforwards for
       state income tax purposes of $1,002 which are available to offset future
       federal taxable income, if any, through 2005.

(5)  Investments
     -----------

     The Company's investments at December 31, 1998 and 1997, consist of the
       following:

<TABLE> 
<CAPTION> 
                                                               1998       1997                                          
                                                               ----       ----                                          
       <S>                                                   <C>          <C>                                           
       Investments at equity:                                                                                           
         Investments in cellular limited partnerships         $ 9,176      7,404                                        
         Boulevard Communications, LLP                            461         95                                        
                                                              -------      -----                                        
                 Total investments                            $ 9,637      7,499                                        
                                                              =======      =====                                         
</TABLE>

     In 1998 and 1997, the Company had capital calls amounting to $880 and
       $1,800, respectively, to maintain its ownership percentages in its
       limited partnership investments.

     The Company owned an investment in the common stock of Conquest
       Telecommunications Services Corporation (Conquest), a non-public company.
       In 1997, SmarTalk Teleservices, Inc. (SmarTalk), a public company,
       announced a proposed acquisition of Conquest, which was completed on
       December 31, 1997. In connection with liquidating its investment in
       Conquest, the Company entered into the following transactions which
       resulted in a net pre-tax gain of $14,516 ($9,003 after income taxes,
       $.60 per share) in 1997.

       (1)  In November 1997, the Company agreed to settle litigation brought
            against it by other Conquest shareholders (Plaintiffs). The
            settlement agreement, which became effective only upon completion of
            the proposed acquisition, resulted in a 1997 pre-tax loss of $3,180.
            In January 1998, the Company paid the Plaintiffs $750 in cash and
            $2,430 in SmarTalk stock (the Settlement Shares) in satisfaction of
            the settlement agreement.

                                                                     (Continued)

                                       20
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued


     (2)  In order to utilize expiring tax loss carryforwards, the Company
          entered into a transaction in December 1997 whereby it sold a portion
          of its investment in Conquest to a third party for cash resulting in a
          pre-tax gain of $1,572. In addition, the Company granted the buyer an
          option to purchase all of its SmarTalk shares, except the Settlement
          Shares, received upon completion of the acquisition, at $21 per share
          (the Option Price).

     (3)  On December 31, 1997, the acquisition was completed, and the Company
          exchanged its remaining shares of Conquest common stock for shares of
          SmarTalk common stock resulting in a realized pre-tax gain of $16,124.
          As of December 31, 1997, the SmarTalk shares were included in
          available for sale securities (note 6) and were valued at the Option
          Price. The option was exercised in January 1998 resulting in the
          Company exchanging its remaining SmarTalk shares for cash.

(6)  Marketable Securities
     ---------------------

     Information about marketable investment securities at December 31, 1998 and
       1997, is as follows:

<TABLE>
<CAPTION>
                                                                                                        
                                                                    1998                       
                                                  ---------------------------------------          
                                                          Unrealized   Unrealized  Market          
                                                   Cost     gains        losses    value           
                                                   ----     -----      ----------  -----
     <S>                                           <C>      <C>        <C>         <C>       
     Available for sale:                           
       Equity securities                           $  4,937     898      (143)      5,692
       Debt securities                                8,918      79       (19)      8,978
                                                   --------     ---      ----      ------
                                                   $ 13,855     977      (162)     14,670
                                                   ========     ===      ====      ====== 
</TABLE>

<TABLE> 
<CAPTION> 
                                                                    1997
                                                  ---------------------------------------    
                                                          Unrealized   Unrealized  Market    
                                                   Cost     gains        losses    value     
                                                   ----     -----      ----------  -----
<S>                                                <C>      <C>        <C>         <C>       
Available for sale:
  Equity securities                                $16,845      2            -     16,847
                                                   =======      =           ==     ======
</TABLE>

                                                                     (Continued)

                                       21
<PAGE>
 
                NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements, Continued



     The carrying value of debt securities at December 31, 1998, by contractual
       maturity, are as follows:

<TABLE> 
               <S>                                                    <C>                                    
               Due in:                                                                           
               One year or less                                       $         -  
                   One to five years                                        7,844
                   Five to ten years                                        1,134
                                                                      -----------
                                                                      $     8,978
                                                                      =========== 
</TABLE>

     Realized gains and losses on the sale of marketable securities in each of
       the three years ended December 31, 1998, were not significant.

(7)  Related Party Transaction
     -------------------------

     In 1998, the Company entered into an agreement to outsource certain data
       processing functions to a third party processor (Processor). The Company
       and the Processor are related by a common shareholder and director.
       Payments to the Processor under this agreement were $1,227 in 1998.

(8)  Unaudited Quarterly Financial Data for 1998 and 1997
     ----------------------------------------------------

     The following are summaries of quarterly financial data for the years ended
       December 31, 1998 and 1997, 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>           
     1998:                                                                                             
       Operating revenues                      $16,096        17,239       16,329      17,124   
       Net operating revenues                    5,691         6,672        5,282       4,766   
       Net earnings                              4,251         4,066        3,204       2,997   
       Earnings per common share:                                                               
         Net earnings                              .28           .27          .21         .21   
                                                                                                
     1997:                                                                                      
       Operating revenues                      $16,587        17,864       15,934      15,823   
       Net operating revenues                    5,637         6,130        5,522       4,828   
       Net earnings                              3,195         3,715        3,454      11,821*  
       Earnings per common share:                                                               
         Net earnings                              .21           .25          .23         .79*   
</TABLE>

      *  The 1997 fourth quarter reflects the net after-tax gain of $9,003
         described in note 5.

                                       22
<PAGE>
 
                                                                      SCHEDULE I
                                                                      ----------


                NORTH PITTSBURGH SYSTEMS, INC. (Parent Company)

                 Condensed Financial Information of Registrant

                           Condensed Balance Sheets

                          December 31, 1998 and 1997

                            (Amounts in Thousands)

<TABLE> 
<CAPTION> 
                                                         1998              1997 
                                                         ----              ----  
<S>                                                    <C>             <C>  
                            Assets
                            ------
Current assets:
     Cash and temporary investments                    $  2,641            3,932
     Marketable securities available for sale            14,670           16,741
     Dividend receivable from subsidiary                  2,248            2,106
     Accounts receivable - other                            151               22
                                                       --------        ---------
                  Total current assets                   19,710           22,801

Property, plant and equipment:
     Land                                                   150              150
     Buildings                                            1,187            1,187
     Equipment                                               21               21
                                                       --------        ---------
                                                          1,358            1,358

        Less accumulated depreciation and amortization      131               76
                                                       --------        ---------
                                                          1,227            1,282

Other assets                                                957            1,702
Investment in subsidiaries                               54,949           52,573
Notes and accounts receivable - subsidiaries              1,175            1,177
                                                       --------        ---------
                                                       $ 78,018           79,535
                                                       ========        =========
</TABLE> 

                                                                     (Continued)

                                       23
<PAGE>
 
                                                           SCHEDULE I, CONTINUED
                                                           ---------------------

                NORTH PITTSBURGH SYSTEMS, INC. (Parent Company)

                 Condensed Financial Information of Registrant

                      Condensed Balance Sheets, Continued

                            (Amounts in Thousands)

<TABLE> 
<CAPTION> 
                                                                          1998           1997  
                                                                          ----           ----   
<S>                                                                 <C>                <C>     
           Liabilities and Shareholders' Equity                                             
           ------------------------------------                                             
                                                                                               
Current liabilities:
     Dividend payable                                               $    2,251            2,101
     Accrued legal settlement                                                -            3,180
     Deferred income taxes                                                 293            5,289
     Accounts payable - subsidiaries                                         3               27
     Federal and state income taxes                                      1,586              236
     Other liabilities                                                      79              142
                                                                    ----------         --------
                  Total current liabilities                              4,212           10,975
                                                                 
Shareholders' equity:                                            
     Common stock                                                        2,350            2,350
     Capital in excess of par value                                      2,215            2,215
     Retained earnings                                                  69,265           64,501
     Less cost of treasury stock                                          (508)            (508)
     Accumulated other comprehensive income - unrealized gain    
        on available for sale securities, net                              484                2
                                                                    ----------         --------
                                                                        73,806           68,560
                                                                    ----------         --------
                                                                    $   78,018           79,535
                                                                    ==========         ========
</TABLE> 

                                                                     (Continued)

                                       24
<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, 1998, 1997 and 1996

                            (Amounts in Thousands)

<TABLE> 
<CAPTION> 
                                                                           1998             1997           1996
                                                                           ----             ----           ----
<S>                                                                       <C>             <C>            <C> 
Revenues:
     Dividends from subsidiaries                                          $  11,009           2,106          13,821
     Interest income                                                            833             542             459
     Nonoperating income                                                        114               6             142
     Net gain on sale of investment                                               -          14,516               -
     Gain on insurance policy                                                   860               -               -
                                                                          ---------       ---------      ----------
                                                                             12,816          17,170          14,422

Expenses:
     General office salaries and expenses                                       405             395             387
     State taxes                                                                121             115              82
     Bad debt expense - note receivable - subsidiary                              -           1,389               -
                                                                          ---------       ---------      ----------
                                                                                526           1,899             469
                                                                          ---------       ---------      ----------

                  Earnings before income taxes and equity earnings           12,290          15,271          13,953

Income taxes                                                                    148           5,366              16
                                                                          ---------       ---------      ----------
                  Earnings before equity earnings                            12,142           9,905          13,937

Equity in (overdistributed) undistributed net earnings
     of subsidiaries                                                          2,376          12,280          (2,207)
                                                                          ---------       ---------      ----------
                  Net earnings                                            $  14,518          22,185          11,730
                                                                          =========       =========      ==========
</TABLE> 

                                                                     (Continued)

                                       25
<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, 1998, 1997 and 1996

                            (Amounts in Thousands)

<TABLE> 
<CAPTION> 
                                                                           1998             1997           1996
                                                                           ----             ----           ----
<S>                                                                     <C>              <C>               <C> 
Cash from operating activities:
     Net earnings                                                       $  14,518          22,185          11,730
     Adjustments to reconcile net earnings
        to net cash provided by operating activities:
           Equity in undistributed earnings of affiliates                  (2,376)        (12,280)          2,207
           Net gain on liquidation of Conquest
               investment                                                       -         (14,516)              -
           Other adjustments                                                  792              22            (157)
           Changes in assets and liabilities:
               Receivables                                                   (127)          4,310             150
               Dividend receivable                                           (142)           (151)          2,045
               Accounts payable - subsidiaries                                (23)             27               -
               Other liabilities                                           (1,894)            231             (83)
               Deferred income taxes                                       (5,330)          5,161               -
                                                                        ---------        --------          ------
                     Total adjustments                                     (9,100)        (17,196)          4,162
                                                                        ---------        --------          ------

                     Net cash provided by operating
                         activities                                         5,418           4,989          15,892
                                                                        ---------        --------          ------

Cash from investing activities:
     Expenditures for property and equipment                                    -               -            (794)
     Investment in affiliates                                                  (3)             (2)              -
     Proceeds from sale of investment                                           -           1,655               -
     Purchase of marketable securities held to maturity                         -               -            (454)
     Proceeds from maturity of marketable
        securities held to maturity                                             -             451           1,014
     Purchases of marketable securities available for sale                (18,060)              -               -
     Proceeds from sale of marketable securities
        available for sale                                                 20,957               -               -
     Notes receivable - subsidiaries                                            -               -          (3,815)
                                                                        ---------        --------          ------
                     Net cash provided by (used for)
                         investing activities                               2,894           2,104          (4,049)
                                                                        ---------        --------         -------
</TABLE> 

                                                                     (Continued)

                                       26
<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> 
                                                                           1998             1997           1996
                                                                           ----             ----           ----
<S>                                                                      <C>                <C>            <C> 
Cash used for financing activities:
     Cash dividends                                                        $ (9,603)          (8,262)        (7,670)
     Purchase of treasury stock                                                   -             (508)             -
                                                                           --------         --------       --------
                     Net cash used for financing
                         activities                                          (9,603)          (8,770)        (7,670)
                                                                           --------         --------       --------

Net (decrease) increase in cash and temporary
     investments                                                             (1,291)          (1,677)         4,173
Cash and temporary investments at beginning of year                           3,932            5,609          1,436
                                                                           --------         --------       --------
Cash and temporary investments at end of year                              $  2,641            3,932          5,609
                                                                           ========         ========       ========
</TABLE> 

                                       27
<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/ H. R. Brown            By   /s/ C. E. Thomas, Jr.
   -------------------------       ---------------------------
      H. R. Brown                        C. E. Thomas, Jr.
      President and Director             Chairman of the Board



Date    3/30/99                 Date      3/30/99
    -----------------------          --------------------------
<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
   Director, Vice President and Treasurer



Date    3/30/99
    -------------------------------



Director:



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



Date    3/30/99
    -------------------------------
<PAGE>
 
                               OTHER INFORMATION

                 EXHIBIT INDEX FOR ANNUAL REPORTS ON FORM 10-K
                 ---------------------------------------------



Exhibit No.             Subject                        Applicability
-----------             -------                        -------------
  (2)          Plan of acquisition, reorganization,    Not Applicable
               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                                 Attached Hereto.
 
  (4)          Instruments defining the rights         Provided in Registration
               of security holders, including          of Securities of Certain
               indentures                              Successor 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
 
 (18)          Letter re change in accounting          Not Applicable
               principles
<PAGE>
 
Exhibit No.             Subject                        Applicability
-----------             -------                        -------------
 (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