##### Table of Contents

---

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

---

FORM
10-K

---

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

For the fiscal year ended December 31,
2002

OR

oTRANSITION 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(State or other jurisdiction ofincorporation or organization) |  | 25-1485389(IRS Employer Identification No.) | 
| | ------------------------------------------------------------------------- |  | ------------------------------------------- | 

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

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

---

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

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

Common Stock, par
value $.15625 per share(Title of Class)

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

YES x              NO o

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

(Cover page continued on next page)







---

##### Table of Contents

Based on the average of the bid and asked prices at the close of the market on March 10, 2003, the aggregate market value of the voting stock held by
non-affiliates of the registrant is $179,903,000. For purpose of making this calculation only, the registrant has defined affiliates to include all directors and officers (who directly or beneficially owned as a group 1,503,831 shares of Common
Stock on March 10, 2003).

The number of shares of the registrants Common Stock (par value $.15625 per share) outstanding as of March 10, 2003 was 15,005,000.

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

Based on the average of the bid and asked
prices at the close of the market on June 28, 2002, the last business day of the registrants most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the registrant was
$216,563,000. For purpose of making this calculation only, the registrant has defined affiliates to include all directors and officers (who directly or beneficially owned as a group 1,549,726 shares of Common Stock on June 28, 2002).

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, 2002.

(End of cover
page)

---





---

##### Table of Contents



TABLE OF CONTENTS

|         |  |                                                           |   |                                                                                       |   
|-------- |  | --------------------------------------------------------- | - | ------------------------------------------------------------------------------------- | --
|         |  |                                                           |   |                                                                                       |   
|PART I   |  |                                                           |  
|         |  |                                                           |   |                                                                                       |   
|         |  | Cautionary Language Concerning Forward-Looking Statements | 1
|         |  | Item 1.                                                   |   | Business                                                                              | 1 
|         |  | Item 2.                                                   |   | Properties                                                                            | 7 
|         |  | Item 3.                                                   |   | Legal Proceedings                                                                     | 8 
|         |  | Item 4.                                                   |   | Submission of Matters to a Vote of Security Holders                                   | 8 
|         |  | Executive Officers of the Registrant                      | 9
|         |  |                                                           |   |                                                                                       |   
|PART II  |  |                                                           |  
|         |  |                                                           |   |                                                                                       |   
|         |  | Item 5.                                                   |   | Market for Registrants Common Equity and Related Stockholder Matters                 | 11
|         |  | Item 6.                                                   |   | Selected Financial Data                                                               | 12
|         |  | Item 7.                                                   |   | Managements Discussion and Analysis of Financial Condition and Results of Operations | 14
|         |  | Item 7A.                                                  |   | Quantitative and Qualitative Disclosure About Market Risk                             | 27
|         |  | Item 8.                                                   |   | Financial Statements and Supplementary Data                                           | 27
|         |  | Item 9.                                                   |   | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  | 27
|         |  |                                                           |   |                                                                                       |   
|PART III |  |                                                           |  
|         |  |                                                           |   |                                                                                       |   
|         |  | Item 10.                                                  |   | Directors and Executive Officers of the Registrant                                    | 28
|         |  | Item 11.                                                  |   | Executive Compensation                                                                | 28
|         |  | Item 12.                                                  |   | Security Ownership of Certain Beneficial Owners and Management                        | 28
|         |  | Item 13.                                                  |   | Certain Relationships and Related Transactions                                        | 28
|         |  | Item 14.                                                  |   | Controls and Procedures                                                               | 28
|         |  |                                                           |   |                                                                                       |   
|PART IV  |  |                                                           |  
|         |  |                                                           |   |                                                                                       |   
|         |  | Item 15.                                                  |   | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       | 29

|SIGNATURES     | 
|-------------- | 
|               | 
|CERTIFICATIONS | 



---

##### Table of Contents

Cautionary Language Concerning Forward-Looking Statements

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

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

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

a change in economic conditions in the markets in
which we operate;

government and regulatory policies, at both the federal and state levels;

unanticipated higher capital spending for, or delays in, the deployment of new technologies;

the pricing and availability of equipment, materials and
inventories;

changes in the competitive environment in which we operate, including the intensity of competitive activity, pricing pressures and new and/or alternative product offerings;

our ability to continue to successfully penetrate our edge-out
markets.

PART I

Item
1.Business

General

North Pittsburgh Systems, Inc.
(the Registrant, the Company, we, us or our), organized May 31, 1985, is a holding company and has no operating function. Its predecessor, North Pittsburgh Telephone Company (North Pittsburgh or NPTC), a telephone public utility incorporated in
1906, became a wholly-owned subsidiary of the Registrant on May 31, 1985. Penn Telecom, Inc. (Penn Telecom or PTI) became a wholly-owned subsidiary of the Registrant on January 30, 1988. Prior to this date, Penn Telecom was a wholly-owned subsidiary
of North Pittsburgh. Penn Telecom is certificated as a Competitive Access Provider (CAP), a Competitive Local Exchange Carrier (CLEC)

1



---

##### Table of Contents

and an Interexchange Carrier (IXC) and has entered into these businesses. Pinnatech, Inc. (Pinnatech), a wholly-owned subsidiary of the Registrant, formed in
1995, principally provides Internet and broadband related services. The Registrant, North Pittsburgh, Penn Telecom and Pinnatech operate under the provisions of the Pennsylvania Business Corporation Law. No significant changes in the mode of
conducting business by the Registrant or its subsidiaries have occurred since the beginning of the fiscal year ended December 31, 2002.

North Pittsburgh Telephone
Company

North Pittsburgh, our incumbent local exchange carrier (ILEC), was founded in 1906 and operates in an approximate 285 square mile territory in
Western Pennsylvania, which includes portions of Allegheny, Armstrong, Butler and Westmoreland Counties. North Pittsburgh provides service to approximately 77,000 business and residential access lines in its territory. Over the past decade, North
Pittsburghs territory has experienced very robust population growth due to the continued expansion of suburban communities into the southern portions of the North Pittsburgh serving area, with the southernmost point of its territory only 12
miles from the City of Pittsburgh. According to the most recent census, the population in North Pittsburghs service territory grew 14.3% from 1990 to 2000.

North Pittsburgh operates a 100% digital switching network, comprised of nine central offices and 93 carrier serving areas (CSAs). The core of the network consists of two main host switches, a Nortel DMS 500 and a Nortel DMS 100. The majority
of the CSAs were built over the past seven years, as North Pittsburgh recently completed an extensive network modernization plan. The current CSA architecture, in which nearly all loop lengths are kept to 12,000 feet or less, has allowed North
Pittsburgh to be able to provide digital subscriber line (DSL) over 99% of its access lines. In addition, fiber has been deployed extensively throughout the network, resulting in a 100% Synchronous Optical Network (SONET) that supports all of the
inter-office and host-remote links as well as the majority of business parks within the North Pittsburgh serving area. We believe that North Pittsburghs network is built for the future, in which the ability to satisfy the growing customer
demand for broadband and multi-megabit services will be a key critical success factor.

Penn Telecom

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

Penn Telecom operates an extensive
SONET optical network with over 300 route miles of fiber optic facilities in the metro market. Penn Telecom has physical collocation in 27 Verizon central offices and one Sprint central office and primarily serves its customers using unbundled
network element (UNE) loops. Twenty-six of these collocations are connected to Penn Telecoms SONET using a combination of leased and owned fiber optic facilities. Penn Telecom has also deployed a next-generation switching system to support its
rapidly growing Integrated Services Digital Network (ISDN) primary rate interface (PRI) service, achieving significant cost reductions over traditional switching systems. In the Pittsburgh market, a carrier hotel operated by Penn Telecom serves as
the hub for the fiber optic network. In addition, Penn Telecom also offers space in the carrier hotel to internet service providers (ISPs), IXCs, other CLECs and other customers who need a carrier-class location to house voice and data equipment as
well as gain access to a number of networks, including Penn Telecoms. In the City of Butler, Penn Telecom has overbuilt a portion of the Sprint distribution plant in the central business district and continues to expand these facilities as it
increases its penetration of the Butler area business market.

2



---

##### Table of Contents

Penn Telecoms sales strategy has been to focus on small to mid-sized business customers (defined as 5 to 500 lines), educational
institutions and up-scale apartment/townhouse communities (also referred to as multiple dwelling units, or MDUs), offering local and long distance voice services as well as DSL. Due to its extensive facilities based network containing fiber, Penn
Telecom is also able to compete against Verizon and other CAPs to offer transport facilities via high capacity special access circuits (from DS-1s up to OC-48s) to IXCs, ISPs and even other CLECs.

In addition to the CLEC operations, Penn Telecom also provides long distance services and maintains an enterprise equipment business providing traditional key and private branch exchange (PBX)
systems to business customers. Prior to its CLEC operations, the majority of Penn Telecoms long distance customers resided in North Pittsburghs market. However, with the growth of its CLEC customer base and the effective bundling of toll
with local dial tone services, Penn Telecom has been able to greatly expand this service offering.

Pinnatech

Pinnatech, an ISP doing business under the Nauticom name, furnishes Internet access and broadband services in Western Pennsylvania. Pinnatech serves the majority of its DSL and other broadband customers over the North
Pittsburgh and Penn Telecom networks. In addition, Pinnatech also provides virtual hosting services, web page design and e-commerce enabling technologies to customers.

Principal Services Rendered

The principal categories of service rendered by North Pittsburgh, Penn Telecom and Pinnatech are as follows:

Local Network Services. Both North Pittsburgh and Penn Telecom provide local (dial tone), custom calling features and local private line
services to residential and business customers in their respective service territories.

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

Long Distance Toll Service. North Pittsburgh provides intrastate, intraLATA long distance toll service to residential and business customers
throughout its service area. Penn Telecom provides interstate and intrastate long distance toll service on a resale basis to residential and business customers throughout Western Pennsylvania.

Internet Access Service. North Pittsburgh, Penn Telecom and Pinnatech all provide broadband DSL service to end user customers and ISPs on both a wholesale and retail basis.
North Pittsburgh and Penn Telecom utilize their own facilities to provide DSL service. Pinnatech is engaged in the resale of DSL services utilizing facilities purchased on a wholesale basis primarily from North Pittsburgh and Penn
Telecom.

Pinnatech provides access to the Internet to end users utilizing dial-up, DSL and other broadband facilities such as Frame Relay and ATM which it
purchases on a wholesale basis primarily from North Pittsburgh and Penn Telecom. In addition, Pinnatech provides virtual hosting services, web

3



---

##### Table of Contents

page design and creation and e-commerce enabling technologies to customers. Internet access service revenues, including revenues recognized by all these
operating companies for DSL service, are classified within other operating revenues on the Companys Consolidated Statement of Earnings.

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. Billing and collection services are provided
to various IXCs, including Penn Telecom.

Telecommunications Equipment. Penn Telecom sells, rents and services telecommunications
equipment to customers generally in the Western Pennsylvania area.

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

Other Services

North Pittsburgh and Alltel Cellular Association of South Carolina, L.P. are Limited Partners, with a partnership interest of 3.6 percent each, and Cellco Partnership, d.b.a.
Verizon Wireless, is both a General and a Limited Partner with partnership interests of 40.0 and 52.8 percent, respectively, in the Pittsburgh SMSA Limited Partnership, which provides wireless service in and around the Pittsburgh Standard
Metropolitan Statistical Area (SMSA) as authorized by the Federal Communications Commission (FCC).

North Pittsburgh, Centennial Cellular Telephone Company of
Lawrence (Centennial) and Venus Cellular Telephone Company, Inc. (Venus) are Limited Partners, each with a partnership interest of 14.29 percent, and Cellco Partnership, d.b.a. Verizon Wireless, is the General Partner with a partnership interest of
57.13 percent, in Pennsylvania RSA 6(I) Limited Partnership, which provides wireless service in a Rural Service Area (RSA) consisting of Clarion and Lawrence Counties and the Northern portions of Armstrong and Butler Counties. Verizon Wireless
purchased its 57.13 percent interest from Alltel Communications, Inc. (Alltel) on December 31, 2002. Alltels sale of its general partnership interest to Verizon Wireless was litigated, with Venus attempting to exercise a right of first refusal
for the purchase of Alltels entire interest. Earlier, North Pittsburgh and Centennial had declined to exercise their rights of first refusal. On October 25, 2002, the Court of Common Pleas of Lawrence County, Pennsylvania, ruled that Alltel
properly terminated Venus right of first refusal and that Alltel and Verizon Wireless were still legally obligated to transfer the partnership interest under the terms of their original purchase agreement. North Pittsburgh did not actively
participate in the litigation.

North Pittsburgh and Venus are Limited Partners with partnership interests of 23.67 and 16.67 percent, respectively, and Cellco
Partnership, d.b.a. Verizon Wireless, is the General Partner with a partnership interest of 59.66 percent, in Pennsylvania RSA 6(II) Limited Partnership, which provides wireless service in an RSA consisting of the Southern portions of Armstrong and
Butler Counties. In September of 2000, Centennial, a former Limited Partner, sold its 14.29 percent partnership interest in a proportionate manner to North Pittsburgh, Venus and Cellco Partnership. North Pittsburgh paid $1,003,000 for the additional
3.38 percent partnership interest it thus acquired, which increased North Pittsburghs overall partnership interest from 20.29 percent to 23.67 percent.

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

4



---

##### Table of Contents

Competitive Environment

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

North Pittsburgh

More specifically, the 1996 Act includes requirements that ILECs negotiate rates, terms and conditions with carriers regarding interconnection, the provisioning of UNEs,
compensation terms for local calls, the resale of telecommunication services and the physical collocation of competitors equipment in the ILECs facilities. As described in greater detail in the Regulatory Matters section of Item 7, North
Pittsburghs designation as a Rural carrier under the 1996 Act had initially exempted it from many of the above mentioned provisions, and North Pittsburgh was granted a temporary suspension of certain interconnection requirements with
non-facilities based carriers. However, the exemption and suspension are subject to the jurisdiction of the Pennsylvania Public Utility Commission (PA PUC), and the PA PUC denied North Pittsburghs request for a further extension of its
suspension on January 15, 2003. Although the denial for a further extension of North Pittsburgh's suspension is currently under legal challenge and North Pittsburgh's rural exemption has yet to be lifted, there is a reasonable risk that some of the
barriers to competitors entry into North Pittsburghs territory will be either limited or removed in the future.

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

North Pittsburgh is currently addressing potential competition by focusing on customer satisfaction, reducing costs, increasing efficiency, restructuring rates and examining new and bundled product
offerings.

Penn Telecom

At the same time, the 1996 Act has enabled us to expand
outside of the North Pittsburgh franchised territory through our Penn Telecom CLEC operations. With North Pittsburghs territory being adjacent to the greater Pittsburgh metropolitan area, we have been able to selectively enter attractive
markets through a CLEC edge-out strategy. As of December 31, 2002, Penn Telecom served 17,137 dial tone access lines and 14,713 access line equivalents1, for a grand total of 31,850 equivalent access lines2 served.

______________

1Access line equivalents represent a conversion of data circuits to an access line basis and is presented for comparability purposes. Equivalents are calculated by
converting data circuits (basic rate interface (BRI), PRI, DSL, DS-1 and DS-3) and SONET-based (optical) services (OC-3) to the equivalent of an access line. While the revenues generated by access line equivalents have a directional relationship
with these counts, growth rates cannot be compared on an equivalent basis.

2Equivalent access lines include dial tone access lines and access line equivalents.

5



---

##### Table of Contents

The telecommunications market within Pittsburgh and its surrounding areas is very competitive, with Penn Telecom competing against not
only the area ILEC (Verizon) but also many of the larger national and regional CLECs. The market north of North Pittsburghs territory in the City of Butler and its surrounding areas is currently relatively less competitive, as Penn
Telecoms only main competitor is the ILEC (Sprint). This region, due to the higher Sprint UNE charges and lack of proximity to the physical points of presence of many CLECs, is currently more isolated from competition. Penn Telecom has been
able to effectively compete in this region by leveraging North Pittsburghs reputation and network to reduce the overall cost of providing service, thereby attracting several of the largest business and municipal facilities. Due to its success
in the area, Penn Telecom is in the process of overbuilding a portion of the Sprint distribution plant, which will further increase Penn Telecoms competitive advantage as well as decrease the long-term cost of providing service.

Other Products/Services

The toll market is very competitive, as all the major IXCs are
present in the North Pittsburgh territory and markets served by Penn Telecom. Wireless carriers also pose a competitive threat to our toll services, especially for those customers who are heavy users and have the flexibility to adapt their calling
patterns to take advantage of the bundled packages offered by many of the wireless carriers. In addition, those cable companies that offer cable service in North Pittsburghs service area are updating their facilities, with some cable companies
outside of North Pittsburghs territory already providing local dial tone and toll services. North Pittsburgh has developed over the last few years, and continues to modify, toll calling plans to best meet the competitive market. In addition,
we have been able to expand our customer base through Penn Telecoms overall growth and success in bundling toll with local dial tone. As of December 31, 2002, 84% of Penn Telecoms CLEC customers subscribed to one of its toll
packages.

The market for Internet and broadband services is also highly competitive. Our DSL product experiences competition from cable modem services, other
ILECs and CLECs (for the provisioning of DSL outside of North Pittsburghs territory) and, to a lesser extent, wireless and satellite broadband products. Pinnatech, our ISP, also faces competition in the dial-up market from most of the national
and regional competitors. Many of our broadband and dial-up competitors have significantly greater market presence, advertising budgets and brand recognition. We compete based on our knowledge of the local area, the quality of our product and the
quality of service that we provide, especially our responsiveness to the needs of small to medium sized businesses.

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

Employees

At December 31, 2002, the Company, through all of its subsidiaries, employed 391 persons.

Other Matters

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

No material part of our overall business is dependent upon a single or few end user customers, the loss of any one or more of whom would have a materially adverse effect on our business. North Pittsburgh and Penn Telecom do provide access
services to major IXCs, with revenues received from several carriers individually exceeding five percent of consolidated revenues. Although we are subject to short term revenue risks, such as in the event of bankruptcy of our carrier customers in
which pre-

6



---

##### Table of Contents

petition receivables (which may represent several months of revenue) are subject to unsecured creditor recovery (if any), these carriers do not present
potential long term revenue risk as access traffic for any potentially insolvent carrier will most likely migrate to the remaining solvent carriers.

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

North Pittsburgh holds
valid, continuing and subsisting rights, certificates, franchises, licenses and renewable permits adequate for the conduct of its business in the territory it serves, none of which contains any burdensome restrictions. North Pittsburgh also has FCC
licenses to operate a private operational telephone maintenance radio service station (call sign WIK 838) expiring on March 20, 2011 and a non-commercial private license for 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 maintaining or renewing these licenses.

Available Information

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

Item 2.Properties

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

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

7



---

##### Table of Contents

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 Company or its subsidiaries, other than ordinary routine litigation or ordinary routine utility matters incidental to the
business and matters as to which we 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, 2002.

8



---

##### Table of Contents

ADDITIONAL ITEM FOR PART I  EXECUTIVE OFFICERS OF THE REGISTRANT

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

Executive Officers of the Registrant:



|Name and Business Experience                                                                                                                                                                                                                                                                                                                                                                                                                                               | Age | Positions and Officeswith Registrant (1), (2) &
(3)                         
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --- | ----------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |     |                                                                             
|Charles E. Thomas, Jr.Registrant and North PittsburghTelephone Company:  Chairman of the Board of Directors since 1998; Director since 1993; Partner in the law firm of Thomas, Thomas, Armstrong & Niesen, Harrisburg, PA, which has been retained as general counsel to the Registrant
since the formation of this firm in 1991; Partner in the law firm of Thomas & Thomas from 1977 to 1990.                                                                           | 60  | Chairman, Board ofDirectors                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |     |                                                                             
|Harry R. BrownRegistrant:  Director since 1989; President since
1998; formally designated Chief Executive Officer on October 23, 2002; Vice President from 1992 to 1998. North Pittsburgh Telephone Company: Director since 1989; President and General Manager since 1998; Vice President  Operations from 1987 to
1998; Assistant Vice President  Operations from 1986 to 1987; Network Engineering Manager from 1984 to 1986; Equipment Supervisor from 1975 to 1984. | 66  | Director, President andChief Executive Officer                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |     |                                                                             
|Allen P. KimbleRegistrant:  Director since 1998; Vice President
since 1989; Treasurer since incorporation in 1985; formally designated Chief Financial and Accounting Officer on October 23, 2002; Secretary from 1993 to 1998. North Pittsburgh Telephone Company: Director since 1998; Vice President since 1989;
Treasurer since 1979; Secretary from 1993 to 1998; Assistant Vice President from 1987 to 1989; Assistant Secretary from 1977 to 1993.                  | 56  | Director, Vice President,Treasurer and ChiefFinancial and
Accounting Officer

9



---

##### Table of Contents



|Name and Business Experience                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Age | Positions and Officeswith Registrant (1), (2) &
(3)
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --- | ---------------------------------------------------
|N. William BarthlowRegistrant:  Vice President since 1994;
Secretary since 1998; Assistant Secretary from 1993 to 1998; Assistant Vice President from 1990 to 1994. North Pittsburgh Telephone Company: Vice President  Marketing and Service since 1999; Vice President  Marketing and Revenues from
1994 to 1999; Secretary since 1998; Assistant Secretary from 1993 to 1998; Assistant Vice President  Revenue Requirements from 1989 to 1994; Revenue Requirements Manager from 1987 to 1989. | 48  | Vice President andSecretary                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |     |                                                    
|Kevin J. AlbaughRegistrant:  Vice President since 1999. North
Pittsburgh Telephone Company: Vice President  Regulatory Affairs since 1999; Manager and Assistant Vice President  Revenues from 1997 to 1998; Revenue Requirements Supervisor from 1993 to 1997.                                                                                                                                                                                                                                     | 51  | Vice President                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |     |                                                    
|Frank A. MacefeRegistrant:  Vice President since 1999. North
Pittsburgh Telephone Company: Vice President  Sales since 1999; Assistant Vice President  Marketing from 1989 to 1998; Marketing Manager from 1979 to 1989; Marketing Supervisor from 1978 to 1979.                                                                                                                                                                                                                                    | 54  | Vice President                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |     |                                                    
|Albert W. WeigandRegistrant:  Vice President since 1999. North
Pittsburgh Telephone Company: Vice President  Operations since 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.                                                                                                                           | 44  | Vice President                                     

10



---

##### Table of Contents

(1)Directors. Messrs. Thomas, Brown and Kimble were elected as Directors at the 2002 Annual Meeting of Shareholders held May 17, 2002 to serve until the 2003 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 16, 2003.

(2)Officers. All of the foregoing officers were elected to their respective offices at a Board of Directors Organizational Meeting which followed the
May 17, 2002 Annual Meeting of Shareholders. Executive employment agreements with Messrs. Brown, Kimble, Barthlow, Albaugh, Macefe and Weigand set forth the terms and conditions of their employment.

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

PART II

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

The Companys Common Stock is registered with
the Securities and Exchange Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 and, effective January 10, 1997, the Companys Common Stock commenced trading on the Nasdaq National Market tier of the Nasdaq Stock Market
under the Symbol NPSI. Prior thereto, the stock was not listed on any Stock Exchange and was considered as being traded on the OTC (Over-the-Counter) market. The Nasdaq high and low sales prices for the Companys Common Stock for
each quarter of 2002 and 2001 are listed below:



|               |  | 2002High |        | 2002Low |   | 2001High |  | 2001Low |       
|-------------- |  | -------- | ------ | ------- | - | -------- |  | ------- | ------
|               |  |          |        |         |   |          |  |         |       
|First Quarter  |  | $        | 18.980 |         | $ | 13.990   |  | $       | 12.313
|Second Quarter |  | 18.200   |        | 12.380  |   | 15.990   |  | 10.250  |       
|Third Quarter  |  | 16.610   |        | 11.910  |   | 15.000   |  | 11.430  |       
|Fourth Quarter |  |          | 14.650 |         |   | 11.830   |  |         | 18.970

Calculated on the basis of the number of
shareholder accounts, the Company had approximately 2,604 common shareholders on March 10, 2003.

11



---

##### Table of Contents

Cash dividends declared per share by the Company on the outstanding shares of Common Stock in 2002 and 2001 were as follows:



|               |  | 2002 |     | 2001 |  
|-------------- |  | ---- | --- | ---- | -
|               |  |      |     |      |  
|First Quarter  |  | $    | .17 |      | $
|Second Quarter |  | .17  |     | .17  |  
|Third Quarter  |  | .17  |     | .17  |  
|Fourth Quarter |  | .17  |     | .17  |  
|               |  |      |     |      |  
|               |  | $    | .68 |      | $
|               |  |      |     |      |  

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

The following summary of Selected Financial Data for the
years 2002  1998 should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report.

12



---

##### Table of Contents

|                                             |  | 2002   |         | 2001   |   | 2000    |   | 1999   |         | 1998   |  
|-------------------------------------------- |  | ------ | ------- | ------ | - | ------- | - | ------ | ------- | ------ | -
|                                             |  |        |         |        |   |         |   |        |         |        |  
|Operating revenues                           |  | $      | 93,656  |        | $ | 89,306  |   | $      | 81,818  |        | $
|Operating expenses                           |  | 70,909 |         | 69,261 |   | 69,108  |   | 55,915 |         | 50,427 |  
|                                             |  |        |         |        |   |         |   |        |         |        |  
|Net operating income                         |  | 22,747 |         | 20,045 |   | 12,710  |   | 19,485 |         | 21,998 |  
|Interest expense                             |  | (3,990 | )       | (3,733 | ) | (3,140  | ) | (2,263 | )       | (1,884 | )
|Interest income                              |  | 530    |         | 1,118  |   | 1,367   |   | 976    |         | 1,308  |  
|Sundry income, net                           |  | 1,350  |         | 406    |   | 2,960   |   | 3,320  |         | 2,360  |  
|                                             |  |        |         |        |   |         |   |        |         |        |  
|Earnings before income taxes                 |  | 20,637 |         | 17,836 |   | 13,897  |   | 21,518 |         | 23,782 |  
|Income tax expense                           |  | 8,519  |         | 7,474  |   | 6,008   |   | 8,833  |         | 9,264  |  
|                                             |  |        |         |        |   |         |   |        |         |        |  
|Net earnings                                 |  | $      | 12,118  |        | $ | 10,362  |   | $      | 7,889   |        | $
|                                             |  |        |         |        |   |         |   |        |         |        |  
|Average common shares outstanding            |  | 15,005 |         | 15,005 |   | 15,005  |   | 15,005 |         | 15,005 |  
|                                             |  |        |         |        |   |         |   |        |         |        |  
|Basic and diluted earnings per share         |  | $      | .81     |        | $ | .69     |   | $      | .53     |        | $
|                                             |  |        |         |        |   |         |   |        |         |        |  
|Dividends declared per share of Common Stock |  | $      | .68     |        | $ | .68     |   | $      | .67     |        | $
|                                             |  |        |         |        |   |         |   |        |         |        |  
|Total assets                                 |  | $      | 150,403 |        | $ | 168,889 |   | $      | 160,954 |        | $
|                                             |  |        |         |        |   |         |   |        |         |        |  
|Long-term debt                               |  | $      | 27,767  |        | $ | 47,202  |   | $      | 45,377  |        | $
|                                             |  |        |         |        |   |         |   |        |         |        |  
|Long-term obligations under capital lease    |  | $      | 6,611   |        | $ | 7,607   |   | $      | 7,137   |        | $
|                                             |  |        |         |        |   |         |   |        |         |        |  

Certain prior year amounts have been reclassified to conform with the
current years presentation. In the current year, we have reclassed certain intraLATA settlement amounts due to other telecommunication providers from a contra revenue to operating expenses. The reclassifications increased both operating
revenues and operating expenses by $2,343, $2,862, $3,967, $5,078 and $6,050 for the years 2002, 2001, 2000, 1999 and 1998, respectively. The reclassification had no effect on net operating income.

13



---

##### Table of Contents

Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations (Amounts in Thousands Except Per Share Data and Operating Statistics)

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

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

Results of Operations: 2002 vs. 2001

Net earnings for 2002 were $12,118, or $.81 per share,
compared to net earnings of $10,362, or $.69 per share, for 2001. These fluctuations were attributable to the following factors:

Operating
Revenues

Total operating revenues increased $4,350, or 4.9%, during 2002. This increase was primarily the result of increases in local network services
revenues of $3,108 (15.4%), long distance and access services revenues of $1,089 (1.9%) and other operating revenues of $1,014 (14.8%), offset partially by a decrease in directory advertising, billing and other services revenues of $851 (36.6%) and
a minimal decrease in telecommunication equipment sales of $10 (0.4%).

Increases in local network services revenues of $3,108, or 15.4%, were attributable to
several factors, one of which was North Pittsburghs Chapter 30 filing with the PA PUC, which became effective in December of 2001. As a result of this revenue neutral filing, North Pittsburgh increased local rates, with the corresponding
offset occurring through a decrease in intrastate access rates. The revenue shift from long distance and access services revenues to local network services revenues was approximately $1,600 for 2002. Penn Telecoms local dial tone and vertical
features revenues also increased by $1,290 due to continued successful penetration south of North Pittsburghs territory in the City of Pittsburgh and surrounding areas as well as north of North Pittsburghs territory in the City of Butler
and its surrounding areas. Penn Telecoms access lines installed increased from 8,912 as of December 31, 2001 to 17,137 as of December 31, 2002. In addition, revenues at Penn Telecom for PRI circuits grew approximately $350 as circuits
increased from 137 as of December 31, 2001 to 301 as of December 31, 2002.

The increase in long distance and access services revenues of $1,089, or 1.9%, was
attributable to an increase in high capacity circuits sold (special access revenues), offset partially by a decrease in access revenues and a decrease in toll revenues. Special access revenues increased $715 at North Pittsburgh and $1,112 at Penn
Telecom, mostly as a result of large increases in the number of DS-1 and DS-3 circuits sold. At Penn Telecom, the number of DS-1s, DS-3s and OC-3s installed have increased from 203, 18 and 2, respectively, as of December 31, 2001, to 447, 22 and 3,
respectively, as of December 31, 2002. Access revenues decreased approximately $650, mostly as a result of the North Pittsburgh Chapter 30 filing which, as previously described, shifted approximately $1,600 from intrastate access revenues to local
network services revenues. In addition, at North Pittsburgh, intrastate access minutes of use (MOUs) have been declining, mostly as a result of wireless substitution. These decreases at North Pittsburgh were partially offset by the growth in access
revenues at Penn Telecom as the number of Penn Telecom lines in service nearly doubled. Overall toll

14



---

##### Table of Contents

revenues decreased $116 due to a decrease in intraLATA toll revenues at North Pittsburgh, partially offset by a growth in both intraLATA and interLATA toll
revenues at Penn Telecom. The decrease in intraLATA toll revenues at North Pittsburgh was mostly a result of a decrease in market share and loss of MOUs to such competition as wireless and alternative communication technologies such as e-mail. In
addition, the average billed rate for existing customers declined due to increased subscriptions to lower cost calling plans, which were developed over the past several years to meet the competitive environment. This decrease at North Pittsburgh was
partially offset by an increase in both intraLATA and interLATA toll revenues at Penn Telecom due to the successful bundling of toll with local calling packages. As of December 31, 2002, 84% of Penn Telecoms CLEC customers subscribed to one of
its toll packages.

The increase in other operating revenues of $1,014, or 14.8%, was primarily due to the growth in DSL revenues of approximately $1,625 as
combined DSL lines (both wholesale and retail) increased from 4,800 as of December 31, 2001 to 7,490 as of December 31, 2002. This increase was partially offset by higher write-offs associated with carrier bankruptcies, most notably WorldCom and
Global Crossings.

The decrease in directory advertising, billing and other services revenues of $851, or 36.6%, was mostly due to a decrease of $766 in
directory advertising revenue and a decrease of $136 in carrier billing and collection revenues. Directory advertising revenues decreased from $1,817 in 2001 to $1,051 in 2002. North Pittsburghs five-year agreement with its former directory
partner expired with the 2001 directory. As the terms proposed by the former directory partner for the next contract greatly decreased North Pittsburghs share of the income generated by the directory, North Pittsburgh negotiated a five-year
contract with a new partner, at terms more advantageous to North Pittsburgh. However, as the former partner continued to publish its directory, the competitive environment increased, resulting in lower revenues generated by North Pittsburghs
2002 directory. We believe that 2003 directory advertising revenues will also decrease, but at a much reduced rate of between $100 to $200, with revenue levels moderating thereafter. With respect to carrier billing and collection revenues, North
Pittsburgh has contracts with several IXCs and other telecommunications companies under which it earns fees for performing billing and collection services on behalf of these companies. North Pittsburgh has seen the volume of services and calls
billed on behalf of these companies steadily decrease over the past several years. This decrease is a result of more companies bringing these functions in-house as well as a decrease in overall message volume for those carriers remaining with North
Pittsburgh, due to such factors as wireless substitution. Although we would expect carrier billing and collection revenues to continue to decrease in future years, the impact would not be material as the annual revenue recognized from such services
for 2002 was only $403, or 0.4%, of overall revenue.

Operating Expenses and Net Operating Income

Total operating expenses increased $1,648, or 2.4%, during 2002. The change was primarily the result of increases in network and other operating expenses of $599 (1.3%), state and local taxes of $479
(17.0%), depreciation and amortization expenses of $528 (3.0%) and telecommunications equipment expenses of $42 (2.4%).

The increase in network and other
operating expenses of $599, or 1.3%, was due to an increase in operational expenses at Penn Telecom of $1,383 from 2001. The increase was mostly due to the underlying growth in Penn Telecoms CLEC variable costs associated with the overall
growth in access line equivalents and revenue. UNE costs in 2002 for non-facilities based access lines, broadband circuit costs and DSL costs increased approximately $1,050 from 2001 to support the overall growth in the network, access lines, high
capacity circuits and DSL lines in service. As a result of the more rapid growth in lines than in the prior year as well as increases in the overall size of the network, installation and repair expenses increased $217. In addition, personnel and
sales expenses grew approximately $838 in order to support the revenue and organizational growth. These increases were partially offset by an approximate $500 charge incurred in 2001 due to the expensing of

15



---

##### Table of Contents

operational support system evaluation charges in accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. In addition, office and renovation expense decreased $134, as 2001 included a major renovation to a Penn Telecom facility, and 2002 had a $104 increase in performance assurance payments received from Verizon, which
are recorded as a reduction in operating expenses.

At North Pittsburgh, network and other operating expenses for 2002 decreased $331 from 2001 due to several
factors, one of which was a $519 decrease in intraLATA toll terminating access charge expense. A decline in MOUs generated by North Pittsburgh toll customers and a decrease in terminating access rates charged by ILECs within the LATA produced the
decrease. In addition, with the completion during 2001 of the five-year modernization of North Pittsburghs network, maintenance expense has decreased from prior year levels as legacy equipment has been upgraded or replaced. These costs savings
were partially offset by an increase in pension expense, healthcare expense and corporate insurance premiums. Also, the prior year period included a charge of approximately $730 to reduce inventory to the lower of cost or market.

At Pinnatech, network and other operating expenses for 2002 decreased $485 from 2001. The decrease was partially a result of approximately $250 in Nauticom Sports Network
(NSN) charges incurred by Pinnatech in 2001. Although the NSN was closed in December of 2000, several contracts were settled for higher amounts than originally accrued for in the restructuring reserve and other miscellaneous charges were incurred
during 2001. In addition, Pinnatech had a lower employee base during 2002, which resulted in a reduction of $72 in salary and related benefits expense. The downsizing also reduced 2002 office and leasing expense by $165.

The increase in state and local taxes of $479, or 17.0%, was mostly attributable to a $478 increase in public utility realty tax assessment (PURTA) expense in 2002 at North
Pittsburgh as 2001 included a favorable settlement of previous years overpayments.

The increase in depreciation and amortization expenses of $528, or
3.0%, was the result of the increase in the depreciable asset base (gross property, plant and equipment) of 3.9% over 2001.

Overall, the increase in total
operating revenues of $4,350, coupled with the increase in total operating expenses of $1,648, resulted in a 13.5% increase in net operating income in 2002 as compared to 2001.

Other Items

Interest expense increased from the prior year by $257 due to the accelerated amortization of $510 of debt
issuance costs related to the prepayment of Rural Telephone Bank (RTB) notes in December of 2002. Interest income decreased $588 in 2002 primarily due to the liquidation of available for sale debt securities in April of 2001 and the general decrease
in short-term money market rates for temporary investments. The $944 change in Sundry Income, Net was primarily due to a $1,466 increase in equity income from our investments in three wireless partnerships. The growth in equity income was partially
offset by an increase in costs expended by the Company in exploring strategic alternatives and business arrangements. Associated costs totaled $1,220 during 2002 as compared to $784 incurred in 2001. In addition, we recorded in 2002 an investment
loss of $140 associated with the other-than-temporary decline in value of several equity securities.

Results of Operations: 2001 vs. 2000

Operating Revenues

Total operating revenues increased $7,488 (9.2%) during 2001.
This increase was primarily the result of increases in local network services of $4,710 (30.5%), long distance and access services of

16



---

##### Table of Contents

$1,148 (2.0%), telecommunications equipment sales of $338 (15.9%) and other operating revenues of $1,694 (32.9%), offset partially by a decrease in directory
advertising, billing and other services of $402 (14.7%).

Increases in local network service revenues of $4,710, or 30.5%, were attributable to several
factors, one of which was a rate band reclass at North Pittsburgh which received PA PUC approval and became effective in December of 2000. As the density of customers in North Pittsburghs serving area and immediate surrounding territories
covered by extended area service agreements increased during the late 1990s and 2000, several of the exchanges in North Pittsburghs territory grew into the next rate band and qualified for an increase in local rates, which contributed
approximately $1,350 of the $2,219 increase in North Pittsburghs basic area revenues. The remainder of the increase was due to a higher average number of lines in service than the prior year as well as North Pittsburghs revenue neutral
Chapter 30 filing, which became effective in December of 2001 and added approximately $150, with a corresponding decrease in intrastate access rates. In addition, vertical feature revenues at North Pittsburgh increased $313 in 2001. Also, Penn
Telecoms basic area and vertical features revenues increased $1,637 due to growth in its CLEC edge-out markets. Penn Telecoms access lines installed increased from 3,915 as of December 31, 2000, to 8,912 as of December 31, 2001. In
addition, Penn Telecoms PRI revenues increased as circuits grew from approximately 30 circuits to 137 circuits over the same period.

The increase in
long distance and access service revenues of $1,148, or 2.0%, was attributable to an increase in high capacity circuits sold (special access revenues), offset partially by a decrease in access revenues and a decrease in toll revenues. Special access
revenues increased $1,372 at North Pittsburgh and $1,118 at Penn Telecom, mostly as a result of large increases in the number of DS-1 and DS-3 circuits sold. Access revenues decreased approximately $340, mostly as a result of a decrease in North
Pittsburghs intraLATA access revenues. This decrease was partially offset by an increase in access revenues at Penn Telecom due to the large year over year growth in access lines. Toll revenues decreased $966 due to a decrease in intraLATA
toll revenues at North Pittsburgh, partially offset by a growth in both intraLATA and interLATA toll revenues at Penn Telecom. The decrease in intraLATA toll revenues at North Pittsburgh was mostly a result of a decrease in market share and loss of
MOUs to such competition as wireless and alternative communication technologies such as e-mail. In addition, there was a decrease in the average billed rate due to the development of additional calling plans to meet the competitive environment. This
decrease was partially offset by an increase in both intraLATA and interLATA toll revenues at Penn Telecom due to the successful bundling of toll with local calling packages. As of December 31, 2001, 75% of Penn Telecoms CLEC customers
subscribed to one of its toll packages.

Telecommunications equipment sales increased $338, or 15.9%, due to an increase in PBX and additional equipment sales.
The majority of the increase was due to partially depressed sales for the year ended December 31, 2000, as a result of accelerated purchases in 1998 and 1999 to address potential Year 2000 concerns.

The increase in other operating revenues of $1,694, or 32.9%, was primarily due to the growth in DSL revenues of $1,435 as combined DSL lines (both wholesale and retail) increased from 2,360 as of
December 31, 2000, to 4,800 as of December 31, 2001. In addition, net uncollectible revenue charges decreased due to improved cash collection from both retail customers as well as carriers.

The decrease in directory advertising, billing and other services of $402, or 14.7%, was mostly due to a decrease of $350 in carrier billing and collection revenues.

Operating Expenses and Net Revenues

Total operating expenses for 2001 increased
$153 (0.2%) over the preceding year. The change was primarily the result of increases in depreciation and amortization expenses of $581 (3.5%) and

17



---

##### Table of Contents

telecommunications equipment expenses of $173 (11.1%), offset partially by decreases in network and other operating expenses of $226 (0.5%) and state and
local taxes of $375 (11.8%).

The growth in depreciation and amortization expenses of $581, or 3.5%, was the direct result of the growth in fixed assets to
serve current and future customer needs.

The increase in telecommunications equipment expenses of $173, or 11.1%, was a direct result of the increase in
telecommunications equipment sales of 15.9%.

The decrease in network and other operating expenses of $226, or 0.5%, was due to decreases in expenses at North
Pittsburgh and Pinnatech, partially offset by increases in expenses at Penn Telecom. At North Pittsburgh, network and other operating expenses for 2001 decreased by approximately $2,700 from 2000 due to several factors, one of which was a cost
reduction program instituted in the first quarter of 2001. The cost reduction program involved not only the elimination of direct external expenses such as a large reduction in the use of outside contractors, but also involved improving operating
procedures. Internal processes and procedures were re-engineered to maximize both labor and material usage as well as inventory levels. In addition, with the completion of the five-year modernization of North Pittsburghs network during 2001,
maintenance expense decreased from prior year levels as legacy equipment was upgraded or replaced. Another factor contributing to the decrease was a $1,105 reduction in intraLATA toll terminating access charge expense. A decline in MOUs generated by
North Pittsburgh toll customers as well as a decrease in terminating access rates charged by ILECs within the LATA produced the decrease.

At Pinnatech,
network and other operating expenses for 2001 decreased approximately $2,100 from prior year levels. The decrease was a result of the cessation of costs related to the operating activities and eventual shut down of the NSN in December of
2000.

The decreases in network and other operating expenses at North Pittsburgh and Pinnatech were mostly offset by increases in expenses at Penn Telecom.
CLEC variable costs, such as the leasing of UNEs for non-facilities based access lines, increased with the overall growth in access lines and revenue. Collocation costs increased as Penn Telecom expanded into additional incumbent central offices
during 2001. Personnel and operating costs also increased in order to support the revenue growth and overall growth of the network. In addition, Penn Telecom incurred an approximate $500 charge associated with the expensing of operational support
system evaluation charges in 2001.

The decrease in state and local taxes of $375, or 11.8%, was mostly attributable to a reduction in PURTA expense in 2001
from settlement of previous years overpayments as well as a decrease in Pennsylvania capital stock tax due to a 17% reduction in millage rates from the prior year.

Overall, the increase in total operating revenues of $7,488, coupled with the increase in total operating expenses of $153, resulted in a 57.7% increase in net operating revenues in 2001 as compared to 2000.

Other Items

Interest expense increased in 2001 by $593 due to increased
debt borrowings. Interest income decreased $249 in 2001 primarily due to the liquidation of available for sale debt securities and the general decrease in short term money market rates for temporary investments during 2001. The $2,554 change in
Sundry Income, Net was primarily due to a $1,996 decrease in realized gains on the sale of securities as the majority of our available for sale equity portfolio was liquidated in the prior year, a $70 decrease in dividend income from not holding
those equity securities in 2001, $213 in non-operating expenses associated with tax adjustments to wireless parternships prior years returns and $784 in costs expended by the Company in exploring strategic alternatives and
business

18



---

##### Table of Contents

arrangements. These factors were partially offset by a $567 increase in equity income from our investments in three wireless partnerships.

Liquidity and Capital Resources



|                                              |  | December 31,2002 |        | December 31,2001 |  
|--------------------------------------------- |  | ---------------- | ------ | ---------------- | -
|                                              |  |                  |        |                  |  
|                                              |  |                  |        |                  |  
|Cash and temporary investments                |  | $                | 22,244 |                  | $
|Working capital                               |  | $                | 21,737 |                  | $
|Long-term debt (including current maturities) |  | $                | 30,852 |                  | $

Cash and temporary
investments were $22,244 at December 31, 2002 as compared to $35,299 at December 31, 2001. The decrease was a result of the retirement of the notes payable to the RTB after the expiration of the notes prepayment penalty periods. We made $1,040
in scheduled principal payments and $16,349 in accelerated payments during 2002 for the RTB notes. Excluding the $16,349 in accelerated debt payments made in December of 2002, we had an underlying $3,294 increase in cash during 2002. This increase
was the result of $28,355 in cash generated from operating activities for 2002 exceeding all investing and financing activities. We internally funded 100% of the $10,804 in property and equipment additions and expended $15,255 for financing
activities (excluding the debt prepayment described above), including cash dividends and the scheduled repayments of debt and capital lease obligations, during 2002.

Temporary excess funds were invested in short-term cash equivalents with maturity dates scheduled to coincide with tax payment due dates, debt principal payments, dividend payment dates and other predictable cash needs. We expect to continue
the investment of such excess funds throughout 2003, which should enable us to satisfactorily meet all short-term obligations.

Working capital levels at
December 31, 2002 decreased $11,200 from December 31, 2001, mostly due to the decrease in cash as a result of our prepayment of the RTB notes.

The decrease in
long-term debt was a result of the scheduled repayment of $4,126 of principal and accelerated prepayment of $16,349 of principal in 2002. As mentioned above, we funded 100% of our 2002 expenditures for property and equipment from operations cash
flows and cash reserves. Therefore, no additional advances were requested from our available debt facilities. In 1996, North Pittsburgh was granted approval for a loan from the Federal Financing Bank (FFB) guaranteed by the RUS in the maximum
principal amount of $75,000. The total amount outstanding at December 31, 2002 to the FFB under this loan was $30,852, with all advances having a maturity date of December 31, 2012. The unadvanced amount of this facility as of December 31, 2002 was
$34,764. North Pittsburgh can make draws against this facility through June 30, 2012 for qualified capital expenditure projects, as defined in the loan agreement, to furnish and improve telephone service in rural areas. As of December 31, 2002,
North Pittsburgh had approximately $5,368 of qualified capital expenditures that were eligible to be drawn against this facility.

The notes payable to the FFB
are secured by a supplemental Mortgage Agreement executed by North Pittsburgh, which provides that substantially all of the assets of North Pittsburgh, which approximate a net book value of $111,000, are subject to a lien or a security interest.
Such agreement contains restrictions regarding dividends and other distributions by North Pittsburgh. Under these restrictions, unless certain working capital levels, net worth levels, and interest expense ratios are maintained, North Pittsburgh is
not permitted to pay dividends on its capital stock (other than in shares of capital stock), or 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 a result of these restrictions, $7,550 of North Pittsburghs retained earnings were available for dividends to the Registrant as of December 31, 2002. Taking into consideration the North Pittsburgh restrictions, consolidated
retained

19



---

##### Table of Contents

earnings ofapproximately $33,957 were available for dividends and other distributions to our shareholders as of
December 31, 2002.

North Pittsburgh also has available through June of 2004 a $10,000 line of credit with the Rural Telephone Finance Cooperative at a rate of
prime plus 11⁄2%. No borrowings have taken place against the line of credit.

A summary of our contractual obligations and commitments as of December 31,
2002 is as follows:



|           |  | Debt Principal |  | Capital Lease* | 
|---------- |  | -------------- |  | -------------- | 
|           |  |                |  |                | 
|2003       |  | $3,085         |  | $  1,592       | 
|2004       |  | 3,085          |  | 1,592          | 
|2005       |  | 3,085          |  | 1,450          | 
|2006       |  | 3,085          |  | 1,272          | 
|2007       |  | 3,085          |  | 1,254          | 
|Thereafter |  | 15,427         |  | 3,108          | 

*Represents total minimum lease commitments (interest and executory costs are included).

Consolidated capital expenditure commitments for the purchase and installation of new equipment at December 31, 2002 amounted to approximately $824, with such amount being part of
the 2003 construction program, which is projected to be in the range of $11,500 to $12,500.

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

Critical Accounting Policies

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

Revenue Recognition

Revenues are recognized when local network, long distance, and access services are provided. Local
service and intrastate long distance and access service revenues are subject to the jurisdiction of the PA PUC. North Pittsburgh participates in interstate pooling arrangements with other telephone companies. Such pools are funded by access service
charges regulated by the FCC. Revenue earned through pooling is initially recorded based on estimates. North Pittsburgh has settled substantially all access service arrangements through 2000. Revenues from equipment sales are recorded after
equipment has been installed and accepted by the customer.

Impairment of Long-Lived Assets

Based upon the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we review assets for impairment whenever events or
changes in circumstances indicate that the carrying value of the assets may not be recoverable. A determination of impairment (if any) is made based on estimates of future undiscounted

20



---

##### Table of Contents

cash flows. We adopted SFAS No. 144 effective January 1, 2002. Prior to this standard, we reviewed our long-lived assets according to the provisions of SFAS
No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. We have determined, based on our reviews under the aforementioned standards in the year(s) in which they were effective, that there had
been no impairment to the carrying value of such assets in 2002, 2001 or 2000.

Valuation of Accounts Receivable

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

Income Taxes

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

Pension and Other Postretirement Benefits

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

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

WorldCom Bankruptcy

On July 21, 2002, WorldCom petitioned the U.S.
Bankruptcy Court for the Southern District of New York for bankruptcy protection under Chapter 11 of the US Bankruptcy Code. The pre-petition amounts which were due to us from WorldCom can be broken down into three sub-classes as follows: $66
outstanding in total to Penn Telecom; $505 in intrastate revenues outstanding to North Pittsburgh; and $658 in interstate revenues outstanding to North Pittsburgh.

In the interstate jurisdiction, North Pittsburgh participates in a revenue pooling process administered by the National Exchange Carrier Association (NECA). Uncollectible pre-petition interstate amounts, which totaled $658 for North
Pittsburgh, were submitted to NECA for reimbursement via the pooling mechanism. North Pittsburgh was able to recover the majority of the receivables submitted from the pool. However, as noted in our discussion in our Quarterly Report on Form 10-Q
for the period ended September 30, 2002 (the 10-Q), there exists the possibility that North Pittsburgh may not be able to retain 100% of the uncollectibles submitted and recovered. As also described in the 10-Q, due to the NECA pooling mechanisms,
there exists a remote possibility that North Pittsburgh may ultimately be liable to reimburse the NECA pool in the future for an amount greater than its own receivables submitted and recovered from the pool.

The remaining amounts not subject to the interstate pooling recovery mechanisms (Penn Telecoms receivables of $66 and North Pittsburghs intrastate receivables of $505) were charged as a
reduction in revenues in 2002.

As of the date of this filing, we do not believe that North Pittsburghs exposure to the NECA pooling process will have a
material effect on our results of operations for 2003. As pool earnings for 2002 exceeded the authorized rate of 11.25%, North Pittsburgh had recorded as of December 31, 2002 an accrual of $924 for the potential liability associated with the 2002
overearnings. Any future material claims by other NECA members against the NECA pool for WorldCom write-offs, which would lower

21



---

##### Table of Contents

North Pittsburghs overall settlement for the period submitted, would also lower the earnings of the pool. As such, North Pittsburghs $924
liability for any overearnings would also be reduced, although the amount may not be dollar for dollar.

In addition, the initial projected impact on the NECA
pool may not be as great as originally assessed due to favorable developments in the credit markets, with many offers for assignment of WorldCom receivables above 40 cents on the dollar. NECA, acting as an agent for many of its participants,
negotiated a claim sale agreement on March 3, 2003 with Deutsche Bank for 45 cents on the dollar. North Pittsburgh, acting as an early participant, achieved a recovery of $582. Of the total amount recovered, the $329 which represented a recovery of
interstate receivables will be remitted back to the NECA pool (as North Pittsburgh had already collected its entire write-off from the pool in August of 2002) and the $253 which represented a recovery of intrastate receivables will be recognized in
the first quarter of 2003. We are still in the process of reviewing offers for Penn Telecoms WorldCom receivables.

NSN Restructuring

In the fourth quarter of 2000, we shutdown the NSN. The sports network division of Pinnatech had been providing broadcasts of high school and small college sporting events as well
as other sports programming. During 2000, the NSN had expanded its coverage from Western Pennsylvania into several other states. Although the growth in the popularity of the site and concept met managements expectations, the revenue generating
model, based mostly on advertising revenues, failed to support the projected level of continued capital investment and operating expenses.

A pretax charge of
$972 was recorded during 2000 in network and other operating expenses to cover the restructuring costs associated with the shutdown of the NSN. The total charges reduced net income by $632.

The business restructuring charge of $972 included restructuring liabilities of $671 and asset impairments of $301. The restructuring liabilities consisted of $432 for employee severance payments and
related taxes for 30 people who were involuntarily terminated, $122 for future operating lease expense associated with a leased facility under contract which will no longer be used and $117 for other charges associated with the restructuring. As of
December 31, 2000, all employees had been terminated and all severance payments and related taxes had been paid.

During 2001, total net cash expenditures
related to NSN were $331. An additional net $277 was recorded as expense in 2001, due primarily to the settlement of a contract for satellite equipment and airtime above our original estimate and the inability to generate the expected sub-lease
contracts for the facility under lease, offset partially by the sale of NSN fixed assets with a net book value of $31 for a gain.

During 2002, total NSN
related cash expenditures were $41, and a $12 reduction in expense was recorded due to the reversal of miscellaneous accruals. As of December 31, 2002, the remaining restructuring accrual liability, relating solely to future operating lease
payments, was $101.

Regulatory Matters

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

22



---

##### Table of Contents

In 1996, Congress passed the 1996 Act, which has the goal of opening the telecommunications industry to further competition for all
services. The 1996 Act prohibits state legislative or regulatory restrictions or barriers to entry regarding the provision of local telephone service. It also requires most ILECs to interconnect with the networks of other telecommunications
carriers, unbundle their services into network elements, offer their telecommunications services at wholesale rates 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.

The FCC has issued a number of Rulemakings
that continue to implement the requirements of the 1996 Act. The clear intent of the 1996 Act was 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, 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.

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 a number of other rural companies in Pennsylvania, was granted a temporary suspension until July
10, 2002 of certain interconnection requirements in the 1996 Act applicable to ILECs as they relate to non-facilities based competition. In that proceeding, however, facilities based competition was permitted in the North Pittsburgh service area.
North Pittsburgh, along with a number of other rural companies in Pennsylvania, filed a Petition with the PA PUC on June 7, 2002 requesting an additional three (3) year extension of the suspension to July 10, 2005.

On January 15, 2003, the PA PUC denied the request for the extension of the suspension. In response to the PA PUC denial, North Pittsburgh on January 30, 2003 filed a Petition for
Clarification and Modification of the denial order. The Petition asked for clarification and modification of portions of the order in regard to the potential future issues dealing with burden of proof when reviewing whether to remove a rural
exemption. In addition, on February 14, 2003, North Pittsburgh and other rural companies also filed a Petition for Review in the Commonwealth Court of Pennsylvania which requests that the court reverse the PA PUC decision as the order was not
supported by the evidence, was contrary to law and was arbitrary and capricious. The PA PUC acted on the Petition for Clarification and Modification on March 21, 2003 granting it in part and confirming that the burden of proof in a proceeding
challenging a rural exemption rests with the competitor. The PA PUC also clarified that total economic burden in a Section 251 proceeding includes consideration of the economic burden typically associated with competitive entry. If the PA PUCs
March 21, 2003 Order is not appealed, consideration will be given to withdrawing the Petition for Review of the January 15, 2003 Order which was filed with the Commonwealth Court.

The provision of interstate toll and access services by North Pittsburgh and Penn Telecom is subject to the regulatory scrutiny of the FCC. Terms, conditions and rates for interstate toll and access services are filed
in interstate tariffs for review and approval by the FCC. However, beginning August 1, 2001, the FCC has no longer required non-dominant interstate toll providers, including Penn Telecom, to file tariffs for their interstate toll services. Penn
Telecom now informs its toll customers of the rates, terms and conditions through written notice.

In October of 2001, the FCC adopted an Order referred to as
the Multi Association Group, or MAG Order, that modified the interstate access charge rules and universal service support system for rate-of-return (ROR) ILECs. North Pittsburgh is subject to this Order. According to the FCC, the new rules, which
went into effect January 1, 2002, are intended to accomplish the following three (3) goals: 1) align the interstate access rate structure more closely with the manner in which costs for access are incurred; 2) replace implicit support for universal
service with explicit support that is portable to all eligible telecommunications carriers on a competitively neutral basis; and 3) provide certainty and stability for small and mid-sized local telephone companies serving rural and high-cost areas
by permitting these carriers to continue to set interstate access rates based on a ROR of 11.25%, thereby encouraging investment in rural America.

23



---

##### Table of Contents

The MAG Order had the following effects: 1) increased flat rate charges referred to as Subscriber Line Charges (SLCs) that are billed to
residential and business customers; and 2) decreased per minute of use switched access charges billed to interexchange toll providers that originate and terminate traffic on a ILECs network.

The MAG Order also created a new universal service support mechanism, Interstate Common Line Support (ICLS). The ICLS replaces the Carrier Common Line (CCL) charge, which was previously billed to
interexchange toll providers. The ICLS was phased in beginning July of 2002 and the CCL will be eliminated as of July of 2003. The initial effect of the implementation of the MAG Order on North Pittsburgh is expected to be revenue
neutral.

At the same time the MAG Order was adopted, the FCC also issued a Further Notice of Proposed Rulemaking seeking comment on an incentive regulation
plan for ILECs which are now under ROR regulation in the interstate jurisdiction. Because the outcome of this proceeding is not yet known, we are not able to predict the effect that it may have on our operations and revenues.

In February of 2002, the FCC issued a Notice of Proposed Rulemaking (NPRM) regarding the possible classification of wireline broadband Internet access as an information service
rather than a telecommunications service. Should the FCC adopt this proposed ruling, it may remove network based broadband offerings such as DSL services from regulation under the FCC. However, in the NPRM, the FCC also asked whether it should
extend universal service fund (USF) requirements to not only facilities based wireline Broadband Internet Service Providers (BISPs) but also wireless, cable TV and satellite BISPs.

Should the FCC extend a USF contribution requirement to all BISPs, North Pittsburgh, Penn Telecom and Pinnatech would be affected. Because the outcome of this proceeding is unknown at this time, we are unable to
determine the effect such action may have on our operations and revenues.

In February of 2002, the FCC also issued a Further Notice of Proposed Rulemaking
regarding the possible reformation of the system for assessing and recovering USF funds. In that proceeding, the FCC has asked for comment on whether it should assess carrier contributions based on the number and capacity of connections that
contributing carriers provide to customers, rather than on the current method, which is based on the interstate revenues they earn.

Should the FCC reform the
current system for assessing and recovering USF funds, North Pittsburgh, Penn Telecom and Pinnatech would be affected by the change. Because the outcome of this proceeding is unknown at this time, we are unable to determine the effect such action
may have on our operations and revenues.

On February 20, 2003, the FCC released its decision regarding the Triennial Review of the 1996 Act. The decision
dealt with several issues that may affect North Pittsburgh and Penn Telecom. Generally, it appears that the decision eliminates unbundling requirements for ILECs in regard to broadband services provided over fiber facilities but continues unbundled
access to mass market narrowband loops. In addition, ILECs are not required to unbundle packet switching services. Also, the FCC found that the high frequency portion of the loop, also referred to as line sharing, is no longer required to be
provided as an UNE and will therefore be phased out over three years. The FCC also found that ILECs will no longer have to offer the local switching UNE for business customers served by high-capacity loops. The States have 90 days to rebut this
finding. For mass market customers served by narrowband loops, the FCC set out specific criteria that States shall apply to determine if switching should no longer be available as an UNE. Upon a State ruling eliminating switching as an UNE for mass
market customers, the FCC set forth a three-year period for carriers to transition off Unbundled Network Element Platform (UNE-P), which is a service that bundles UNE switching with other UNEs such as UNE loop to provide the entire local service
platform. The actual FCC order explaining the decision in detail has not yet been released. Without knowing the actual final details of the order, we

24



---

##### Table of Contents

are unable to gauge the eventual effect that the decision will have on North Pittsburgh and Penn Telecom. In that North Pittsburgh is not yet required to
offer UNEs to competitors, there should be no immediate effect on North Pittsburgh due to the decision. In regard to Penn Telecom, because it does not currently utilize either line sharing or UNE-P, it is believed that the decision will initially
have little effect on Penn Telecoms operations or revenues.

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

The provision of intrastate toll and access services is subject to regulatory scrutiny by the PA PUC. Terms, conditions and rates for intrastate toll
and access services are filed in intrastate tariffs for PA PUC review and approval.

On September 30, 1999, the PA PUC issued an Order dealing with a variety
of issues impacting LECs in Pennsylvania. Referred to as the Global Order, it dealt with certain issues that affected North Pittsburgh. Specifically, the Order allowed North Pittsburgh to rebalance and lower access charges in order to prepare North
Pittsburgh to meet competition in its serving area. The reduction in access charges was offset in part by reimbursements from an interim PA Universal Service Fund (PA USF) that is funded by all telecommunications providers (excluding wireless) in
the State. Because the rebalancing and reduction of access charges were offset by reimbursement from the fund, North Pittsburgh has not experienced any significant impact on operations or revenues as a result of the Global Order. The PA PUC, in the
Global Order, indicated that it would commence another proceeding on or after January 2, 2001 to examine further changes to the PA USF and possible additional access charge reform. By Secretarial Letter dated February 1, 2002, the PA PUC granted a
coalition of rural telephone companies, including North Pittsburgh, a ninety (90) day extension until April 15, 2002 in which to submit a proposal to the PA PUC outlining proposed changes in access charges and the fund along with a timeline for
these changes. The rural coalition submitted its proposal on April 15, 2002. Other parties also submitted proposals, including Sprint.

Upon review of the
initial proposals filed in the access charge reform proceeding, the rural coalition and Sprint, through negotiation, combined and then filed a Joint Access Proposal in Response to the Access Charge Investigation on December 16, 2002. The Joint
Access Proposal was supported in filed statements by the PA Office of Consumer Advocate, the PA Office of Small Business Advocate and the PA PUC Office of Trial Staff. Under the Joint Access Proposal, the PA USF would generally continue through 2005
with only minor changes. The proposed plan allows for all the local exchange companies in Pennsylvania, with the exception of Verizon and Verizon North, to continue gradual revenue neutral rate rebalancings. As proposed, companies would be allowed
to reduce access charges and offset the reductions through increases in local rates or by increased disbursements from the PA USF. Action by the PA PUC on the Joint Access Proposal is expected before the end of 2003. Because the outcome of the
proceeding is unknown, we are unable to determine the effect on our operations and revenues.

25



---

##### Table of Contents

The 1996 Act, FCC and PA PUC regulatory proceedings and the thrust toward 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 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. At the same time, Penn Telecom continues its CLEC edge-out strategy in the Pittsburgh metropolitan area and the City of Butler and its surrounding areas, while taking advantage of the
opportunities afforded by the 1996 Act and the introduction of competition into the toll, local wireline and broadband markets.

Transactions with Related
Parties

In 1998, we entered into an agreement to outsource certain data processing functions to a third party processor (Processor). We are related to the
Processor by a common shareholder and director. Payments to the Processor under this agreement were $3,689, $3,196 and $2,807 in 2002, 2001 and 2000, respectively. During 2002, 2001 and 2000, we paid approximately $628, $42 and $106, respectively,
to the law firm of a member of the Board of Directors for various legal services. As of December 31, 2002, we had amounts of $253 and $35 outstanding to the Processor and law firm, respectively. As of December 31, 2001, we had amounts of $241 and
$275 outstanding to the Processor and law firm, respectively.

In addition, in the ordinary course of business, we both provide and receive telecommunication
transport services from Boulevard, a competitive access provider jointly owned by us and a company in the Armstrong Group (which is related by a common shareholder and director). Total revenues recognized from providing services to Boulevard were
approximately $27, $71 and $50, and total expenses incurred from receiving services from Boulevard were approximately $217, $357 and $765, for 2002, 2001 and 2000, respectively. We also provide in the ordinary course of business telecommunication
and transport services to other member companies of the Armstrong Group, with total revenues recognized of approximately $264, $182 and $62, for 2002, 2001 and 2000, respectively. As of December 31, 2002, we had accounts receivable of approximately
$1 and $17 from Boulevard and companies in the Armstrong Group, respectively. No amounts were outstanding to Boulevard as of December 31, 2002 and 2001.

Regulatory
Assets

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

Recent Accounting Pronouncements

In July, 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 142, Goodwill and Other Intangible Assets. The pronouncement was effective for our fiscal year beginning January 1, 2002. As of December 31, 2002, we had a net book value of $561 in equity method goodwill (recorded under
Investments) as the result of the purchase of additional interest in the Pennsylvania RSA 6(II) Limited Partnership in September of 2000. SFAS No. 142 discontinues the amortization of equity method goodwill and prescribes that we
continue to test for impairment in accordance with Accounting Principles Board (APB) Opinion 18. We noted no impairment during our review of the equity method goodwill and associated investment during 2002. As the annual amortization of the goodwill
before the adoption of SFAS No. 142 was only $30, the cessation of the amortization in 2002 did not have a significant impact on the consolidated financial statements.

26



---

##### Table of Contents

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

Item 7A.Quantitative and Qualitative Disclosure About Market Risk (Amounts in Thousands)

Our limited exposure to market risk for
changes in interest rates relates primarily to our long-term debt obligations. We primarily enter into debt obligations to support capital expenditures. We currently have no cash flow exposure due to rate changes for long-term debt obligations, as
all obligations contain fixed rates. As of December 31, 2002, we had debt obligations of $30,852 with an average interest rate of 5.46%. Based on borrowing rates currently available for loans with similar terms and maturities, the estimated fair
value of long-term debt as of December 31, 2002 was $27,459. The only exposure to market risk for changes in interest rates would be in the event that we prepay our debt, at which time a debt premium or discount would be calculated based on current
RUS borrowing rates.

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

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.

Item
9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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

27



---

##### Table of Contents

PART III

Item 10.Directors and Executive Officers of the Registrant

and

Item 11.Executive Compensation

and

Item 12.Security Ownership of Certain Beneficial Owners and Management

and

Item 13.Certain Relationships and Related Transactions

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

Item 14.Controls and Procedures

Under the supervision and with the participation of the Companys management, including the
Companys Chief Executive Officer and Chief Financial and Accounting Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures within ninety (90) days of the filing date of this
annual report on Form 10-K, and, based on their evaluation, the Chief Executive Officer and Chief Financial and Accounting Officer have concluded that these disclosure controls and procedures are effective. There were no significant changes in the
Companys internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

28



---

##### Table of Contents

PART IV

Item
15.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, 2002 and 2001

Consolidated Statements of Earnings for the Years Ended December 31, 2002, 2001 and
2000

Consolidated Statements of Shareholders Equity and Comprehensive Income for the Years Ended December 31, 2002, 2001 and 2000

Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000

Notes to Consolidated Financial Statements

2.Financial Statement Schedules

CondensedFinancial
Information of Registrant for the Years Ended December 31, 2002, 2001 and 2000

Valuation and Qualifying Accounts and ReservesYears
Ended December 31, 2002, 2001 and 2000

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 Exhibit Index for Annual Reports on Form 10-K



|Exhibit No. |  | Subject                                                                     |  | Applicability                                                                                                       | 
|----------- |  | --------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------- | 
|(2)         |  | Plan of acquisition, reorganization, arrangement, liquidation or succession |  | Not Applicable                                                                                                      | 
|            |  |                                                                             |  |                                                                                                                     | 
|(3)(i)      |  | Articles of Incorporation                                                   |  | Provided in Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and Incorporated Herein by Reference. | 
|            |  |                                                                             |  |                                                                                                                     | 
|(3)(ii)     |  | By-Laws                                                                     |  | Provided in Annual Report on Form 10-K for the year ended December 31, 1998 and Incorporated Herein by Reference.   | 
|            |  |                                                                             |  |                                                                                                                     | 



29



---

##### Table of Contents

|Exhibit No. |  | Subject                                                                                                                                                              |  | Applicability                                                                                                                                | 
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------- | 
|(4)         |  | Instruments defining the rights of security holders, including indentures                                                                                            |  | Provided in Registration of Securities of Certain 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                                                                                                                                                   |  | Provided in Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and Incorporated Herein by
Reference.                     | 
|            |  |                                                                                                                                                                      |  |                                                                                                                                              | 
|(11)        |  | Statement re computation of per share earnings                                                                                                                       |  | Attached Hereto                                                                                                                              | 
|            |  |                                                                                                                                                                      |  |                                                                                                                                              | 
|(12)        |  | Statement re computation of ratios                                                                                                                                   |  | Not Applicable                                                                                                                               | 
|            |  |                                                                                                                                                                      |  |                                                                                                                                              | 
|(13)        |  | Annual report to security holders, Form 10-Q or quarterly report to security holders                                                                                 |  | Not Applicable                                                                                                                               | 
|            |  |                                                                                                                                                                      |  |                                                                                                                                              | 
|(16)        |  | Letter re change in certifying accountant                                                                                                                            |  | Not Applicable                                                                                                                               | 
|            |  |                                                                                                                                                                      |  |                                                                                                                                              | 
|(18)        |  | Letter re change in accounting principles                                                                                                                            |  | Not Applicable                                                                                                                               | 
|            |  |                                                                                                                                                                      |  |                                                                                                                                              | 
|(21)        |  | Subsidiaries of the Registrant                                                                                                                                       |  | Attached Hereto                                                                                                                              | 
|            |  |                                                                                                                                                                      |  |                                                                                                                                              | 
|(22)        |  | Published report regarding matters submitted to vote of security holders                                                                                             |  | Not Applicable                                                                                                                               | 
|            |  |                                                                                                                                                                      |  |                                                                                                                                              | 
|(23)        |  | Consent of experts and counsel                                                                                                                                       |  | Not Applicable                                                                                                                               | 
|            |  |                                                                                                                                                                      |  |                                                                                                                                              | 
|(24)        |  | Power of attorney                                                                                                                                                    |  | Not Applicable                                                                                                                               | 
|            |  |                                                                                                                                                                      |  |                                                                                                                                              | 
|(99.1)      |  | Certification of Annual Report by the President and Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002                                |  | Attached Hereto                                                                                                                              | 
|            |  |                                                                                                                                                                      |  |                                                                                                                                              | 
|(99.2)      |  | Certification of Annual Report by the Vice President, Treasurer and Chief Financial and Accounting Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |  | Attached Hereto                                                                                                                              | 

(b)Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended December 31, 2002.

30



---

##### Table of Contents

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

|                    |  |   
|------------------- |  | --
|Date March 28, 2003 |  | By
|                    |  |   
|                    |  |   



|                    |  |   
|------------------- |  | --
|Date March 28, 2003 |  | By
|                    |  |   
|                    |  |   

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.



|                    |  |   
|------------------- |  | --
|Date March 28, 2003 |  | By
|                    |  |   
|                    |  |   



|                    |  |   
|------------------- |  | --
|Date March 28, 2003 |  | By
|                    |  |   
|                    |  |   





---

##### Table of Contents

CERTIFICATION PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, H. R. Brown, certify
that:

1.I have reviewed this annual report on Form 10-K of North
Pittsburgh Systems, Inc.;

2.Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by
this annual report;

3.Based on my knowledge, the financial statements,
and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual
report;

4.The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b)evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and

(c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.The registrants other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):

(a)all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrants internal controls; and

6.The registrants other
certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



|Date: March 28, 2003 |  |  |                                                 
|-------------------- |  |  | ------------------------------------------------
|                     |  |  | /s/ H. R. BROWN                                 
|                     |  |  |                                                 
|                     |  |  | H. R. BrownPresident and Chief Executive Officer





---

##### Table of Contents

CERTIFICATION PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, A. P. Kimble, certify that:

1.I have reviewed this annual report on Form 10-K of North Pittsburgh Systems, Inc.;

2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:

(a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this annual report is being prepared;

(b)evaluated
the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date); and

(c)presented in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;

5.The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent
functions):

(a)all significant deficiencies in the
design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal
controls; and

(b)any fraud, whether or not material,
that involves management or other employees who have a significant role in the registrants internal controls; and

6.The registrants other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



|                     |  |  |                                                                                
|-------------------- |  |  | -------------------------------------------------------------------------------
|Date: March 28, 2003 |  |  | /s/ A. P. KIMBLE                                                               
|                     |  |  |                                                                                
|                     |  |  | A. P. KimbleVice President, Treasurer and ChiefFinancial and
Accounting Officer







---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC.AND SUBSIDIARIES

Consolidated Financial Statementsand Schedule (Form 10-K)

December 31, 2002, 2001, and 2000

(With Independent Auditors Report Thereon)







---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES

Table of Contents

|                                                                                                                               | Page
|------------------------------------------------------------------------------------------------------------------------------ | ----
|                                                                                                                               |     
|Independent Auditors Report                                                                                                   | 1   
|                                                                                                                               |     
|Consolidated Financial Statements:                                                                                             |     
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                                                   | 2   
|Consolidated Statements of Earnings for the years ended December 31, 2002, 2001, and
2000                                      | 4   
|Consolidated Statements of Shareholders Equity and Comprehensive Income for the years ended
December 31, 2002, 2001, and 2000 | 5   
|Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001, and
2000                                    | 6   
|Notes to Consolidated Financial Statements                                                                                     | 8   
|                                                                                                                               |     
|Consolidated Financial Statement Schedules:                                                                                    |     
|I   Condensed Financial Information of Registrant for the years ended
December 31, 2002, 2001, and  2000                       | 23  
|II  Valuation and Qualifying Accounts and Reserves for the years ended December 31,
2002, 2001, and  2000                      | 27  







---

##### Table of Contents

Independent Auditors Report

The Board of
DirectorsNorth Pittsburgh Systems, Inc.:

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

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2002 and 2001 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the
information set forth therein.



|                                          |  |  | 
|----------------------------------------- |  |  | 
|/s/ KPMG, LLP.                            |  |  | 
|Pittsburgh, PennsylvaniaFebruary 21, 2003 |  |  | 







---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESConsolidated Balance SheetsDecember
31, 2002 and 2001(Amounts in thousands)



|                                                                                                  |  | 2002    |         | 2001    |        
|------------------------------------------------------------------------------------------------- |  | ------- | ------- | ------- | -------
|                                                                                                  |  |         |         |         |        
|                                                                                                  |  |         |         |         |        
|Assets                                                                                            |  |         |         |         |        
|Current assets:                                                                                   |  |         |         |         |        
|Cash and temporary investments                                                                    |  | $       | 22,244  |         | 35,299 
|Marketable securities available for sale (note 2)                                                 |  | 361     |         | 244     |        
|Accounts receivable:                                                                              |  |         |         |         |        
|Customers, net of allowance for doubtful accounts of $470 and $415 in 2002 and 2001,
respectively |  | 5,274   |         | 5,404   |        
|Access service settlements and other                                                              |  | 7,729   |         | 8,532   |        
|Prepaid expenses                                                                                  |  | 644     |         | 496     |        
|Inventories of construction and operating materials and supplies                                  |  | 2,160   |         | 2,548   |        
|Deferred income taxes (note 7)                                                                    |  | 1,882   |         | 1,249   |        
|                                                                                                  |  |         |         |         |        
|Total current assets                                                                              |  | 40,294  |         | 53,772  |        
|                                                                                                  |  |         |         |         |        
|Property, plant, and equipment (note 4):                                                          |  |         |         |         |        
|Land                                                                                              |  | 475     |         | 475     |        
|Buildings                                                                                         |  | 13,697  |         | 13,531  |        
|Equipment                                                                                         |  | 181,294 |         | 173,714 |        
|Assets held under capital lease (note 5)                                                          |  | 10,363  |         | 10,363  |        
|                                                                                                  |  |         |         |         |        
|                                                                                                  |  | 205,829 |         | 198,083 |        
|Less accumulated depreciation and amortization                                                    |  | 114,721 |         | 99,660  |        
|                                                                                                  |  |         |         |         |        
|                                                                                                  |  | 91,108  |         | 98,423  |        
|                                                                                                  |  |         |         |         |        
|Construction-in-progress                                                                          |  | 3,131   |         | 2,875   |        
|                                                                                                  |  |         |         |         |        
|Total property, plant, and equipment, net                                                         |  | 94,239  |         | 101,298 |        
|                                                                                                  |  |         |         |         |        
|Investments (note 3)                                                                              |  | 13,526  |         | 11,891  |        
|Intangible asset (note 6)                                                                         |  | 1,039   |         |        |        
|Deferred financing cost                                                                           |  |        |         | 590     |        
|Other assets                                                                                      |  | 1,305   |         | 1,338   |        
|                                                                                                  |  |         |         |         |        
|                                                                                                  |  | $       | 150,403 |         | 168,889
|                                                                                                  |  |         |         |         |        

(Continued)



2



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESConsolidated Balance SheetsDecember
31, 2002 and 2001(Amounts in thousands)



|                                                                             |  | 2002   |         | 2001   |      
|---------------------------------------------------------------------------- |  | ------ | ------- | ------ | -----
|                                                                             |  |        |         |        |      
|                                                                             |  |        |         |        |      
|Liabilities and Shareholders Equity                                         |  |        |         |        |      
|Current liabilities:                                                         |  |        |         |        |      
|Current portion of long  term debt (note 4)                                 |  | $      | 3,085   |        | 4,125
|Obligation under capital lease (note 5)                                      |  | 996    |         | 926    |      
|Accounts payable                                                             |  | 7,215  |         | 7,764  |      
|Dividend payable                                                             |  | 2,551  |         | 2,551  |      
|Other accrued liabilities (note 9)                                           |  | 2,950  |         | 3,864  |      
|Federal and state income taxes (note 7)                                      |  | 1,760  |         | 1,605  |      
|                                                                             |  |        |         |        |      
|Total current liabilities                                                    |  | 18,557 |         | 20,835 |      
|                                                                             |  |        |         |        |      
|Long-term debt (note 4)                                                      |  | 27,767 |         | 47,202 |      
|Obligation under capital lease (note 5)                                      |  | 6,611  |         | 7,607  |      
|Deferred income taxes (note 7)                                               |  | 9,974  |         | 10,483 |      
|Accrued pension and postretirement benefits (note 6)                         |  | 10,919 |         | 6,713  |      
|Other liabilities (note 9)                                                   |  | 1,683  |         | 1,707  |      
|                                                                             |  |        |         |        |      
|Total liabilities                                                            |  | 75,511 |         | 94,547 |      
|                                                                             |  |        |         |        |      
|Shareholders equity:                                                        |  |        |         |        |      
|Capital stock  common stock, par value $0.15625.                            |  |        |         |        |      
|Authorized 50,000 shares; issued 15,040 shares and outstanding 15,005 shares |  | 2,350  |         | 2,350  |      
|Capital in excess of par value                                               |  | 2,215  |         | 2,215  |      
|Retained earnings (note 4)                                                   |  | 72,257 |         | 70,342 |      
|Less cost of treasury stock (35 shares)                                      |  | (508   | )       | (508   | )    
|Accumulated other comprehensive loss (notes 2, 6, and 7)                     |  | (1,422 | )       | (57    | )    
|                                                                             |  |        |         |        |      
|Total shareholders equity                                                   |  | 74,892 |         | 74,342 |      
|                                                                             |  |        |         |        |      
|                                                                             |  | $      | 150,403 |        |      
|                                                                             |  |        |         |        |      

See accompanying notes to consolidated financial
statements.



3



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESConsolidated Statements of EarningsYears ended December 31, 2002, 2001, and 2000(Amounts in thousands, except per share data)



|                                                   |  | 2002   |        | 2001   |        | 2000   |       
|-------------------------------------------------- |  | ------ | ------ | ------ | ------ | ------ | ------
|                                                   |  |        |        |        |        |        |       
|                                                   |  |        |        |        |        |        |       
|Operating revenues:                                |  |        |        |        |        |        |       
|Local network services                             |  | $      | 23,250 |        | 20,142 |        | 15,432
|Long distance and access services                  |  | 58,635 |        | 57,546 |        | 56,398 |       
|Directory advertising, billing, and other services |  | 1,473  |        | 2,324  |        | 2,726  |       
|Telecommunication equipment sales                  |  | 2,448  |        | 2,458  |        | 2,120  |       
|Other operating revenues                           |  | 7,850  |        | 6,836  |        | 5,142  |       
|                                                   |  |        |        |        |        |        |       
|                                                   |  | 93,656 |        | 89,306 |        | 81,818 |       
|Operating expenses:                                |  |        |        |        |        |        |       
|Network and other operating expenses (note 9)      |  | 47,977 |        | 47,378 |        | 47,604 |       
|Depreciation and amortization (note 1)             |  | 17,863 |        | 17,335 |        | 16,754 |       
|State and local taxes                              |  | 3,294  |        | 2,815  |        | 3,190  |       
|Telecommunication equipment expenses               |  | 1,775  |        | 1,733  |        | 1,560  |       
|                                                   |  |        |        |        |        |        |       
|                                                   |  | 70,909 |        | 69,261 |        | 69,108 |       
|                                                   |  |        |        |        |        |        |       
|Net operating income                               |  | 22,747 |        | 20,045 |        | 12,710 |       
|                                                   |  |        |        |        |        |        |       
|Other expense (income), net:                       |  |        |        |        |        |        |       
|Interest expense                                   |  | 3,990  |        | 3,733  |        | 3,140  |       
|Interest income                                    |  | (530   | )      | (1,118 | )      | (1,367 | )     
|Sundry income, net                                 |  | (1,350 | )      | (406   | )      | (2,960 | )     
|                                                   |  |        |        |        |        |        |       
|                                                   |  | 2,110  |        | 2,209  |        | (1,187 | )     
|                                                   |  |        |        |        |        |        |       
|Earnings before income taxes                       |  | 20,637 |        | 17,836 |        | 13,897 |       
|                                                   |  |        |        |        |        |        |       
|Provision for income taxes (note 7)                |  | 8,519  |        | 7,474  |        | 6,008  |       
|                                                   |  |        |        |        |        |        |       
|Net earnings                                       |  | $      | 12,118 |        | 10,362 |        | 7,889 
|                                                   |  |        |        |        |        |        |       
|Average common shares outstanding                  |  | 15,005 |        | 15,005 |        | 15,005 |       
|                                                   |  |        |        |        |        |        |       
|Basic and diluted earnings per share               |  | $      | 0.81   |        | 0.69   |        | 0.53  
|Dividends per share                                |  | $      | 0.68   |        | 0.68   |        | 0.67  

See accompanying notes to
consolidated financial statements.



4



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESConsolidated Statements of Shareholders Equity and
Comprehensive IncomeYears ended December 31, 2002, 2001, and 2000(Amounts in thousands)



|                                                                            |  | Commonstock |  | Capital inexcess of par value |  | Retainedearnings |   | Treasurystock |   | Accumulatedothercomprehensiveincome (loss) |   | Totalshareholdersequity |  
|--------------------------------------------------------------------------- |  | ----------- |  | ----------------------------- |  | ---------------- | - | ------------- | - | ------------------------------------------ | - | ------------------------ | -
|                                                                            |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Balances at December 31, 1999                                               |  | $2,350      |  | 2,215                         |  | 72,347           |   | (508          | ) | 843                                        |   | 77,247                   |  
|                                                                            |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Comprehensive income:                                                       |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Net income                                                                  |  |             |  |                               |  | 7,889            |   |               |   |                                            |   | 7,889                    |  
|Other comprehensive income:                                                 |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Unrealized holding gains (losses) arising during the
period                 |  |             |  |                               |  |                  |   |               |   | 344                                        |   |                          |  
|Less reclassification adjustments for net gains included in net
income      |  |             |  |                               |  |                  |   |               |   | (1,233                                     | ) |                          |  
|                                                                            |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Net unrealized change in investment securities, net of
tax effect of $(631) |  |             |  |                               |  |                  |   |               |   | (889                                       | ) | (889                     | )
|                                                                            |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Comprehensive income                                                        |  |             |  |                               |  |                  |   |               |   |                                            |   | 7,000                    |  
|                                                                            |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Dividends declared on common stock                                          |  |             |  |                               |  | (10,053          | ) |               |   |                                            |   | (10,053                  | )
|                                                                            |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Balances at December 31, 2000                                               |  | 2,350       |  | 2,215                         |  | 70,183           |   | (508          | ) | (46                                        | ) | 74,194                   |  
|                                                                            |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Comprehensive income:                                                       |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Net income                                                                  |  |             |  |                               |  | 10,362           |   |               |   |                                            |   | 10,362                   |  
|Other comprehensive income:                                                 |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Unrealized holding gains (losses) arising during the period                 |  |             |  |                               |  |                  |   |               |   | 24                                         |   |                          |  
|Less reclassification adjustments for net gains included
in net income      |  |             |  |                               |  |                  |   |               |   | (35                                        | ) |                          |  
|                                                                            |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Net unrealized change in investment securities, net of tax effect of
$(7)   |  |             |  |                               |  |                  |   |               |   | (11                                        | ) | (11                      | )
|                                                                            |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Comprehensive income                                                        |  |             |  |                               |  |                  |   |               |   |                                            |   | 10,351                   |  
|                                                                            |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Dividends declared on common stock                                          |  |             |  |                               |  | (10,203          | ) |               |   |                                            |   | (10,203                  | )
|                                                                            |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Balances at December 31, 2001                                               |  | 2,350       |  | 2,215                         |  | 70,342           |   | (508          | ) | (57                                        | ) | 74,342                   |  
|                                                                            |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Comprehensive income:                                                       |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Net income                                                                  |  |             |  |                               |  | 12,118           |   |               |   |                                            |   | 12,118                   |  
|Other comprehensive income:                                                 |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Unrealized holding gains (losses) arising during the
period                 |  |             |  |                               |  |                  |   |               |   | (56                                        | ) |                          |  
|Less reclassification adjustments for net losses included in net
income     |  |             |  |                               |  |                  |   |               |   | 84                                         |   |                          |  
|                                                                            |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Net unrealized change in investment securities, net of
tax effect of $19    |  |             |  |                               |  |                  |   |               |   | 28                                         |   | 28                       |  
|Minimum pension liability adjustment, net of tax effect of $(988)           |  |             |  |                               |  |                  |   |               |   | (1,393                                     | ) | (1,393                   | )
|                                                                            |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Comprehensive income                                                        |  |             |  |                               |  |                  |   |               |   |                                            |   | 10,753                   |  
|                                                                            |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Dividends declared on common stock                                          |  |             |  |                               |  | (10,203          | ) |               |   |                                            |   | (10,203                  | )
|                                                                            |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  
|Balances at December 31, 2002                                               |  | $2,350      |  | 2,215                         |  | 72,257           |   | (508          | ) | (1,422                                     | ) | 74,892                   |  
|                                                                            |  |             |  |                               |  |                  |   |               |   |                                            |   |                          |  

See accompanying notes to consolidated financial
statements.



5



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESConsolidated Statements of Cash FlowsYears ended December 31, 2002, 2001, and 2000(Amounts in thousands)



|                                                                                    |  | 2002    |        | 2001    |   | 2000    |  
|----------------------------------------------------------------------------------- |  | ------- | ------ | ------- | - | ------- | -
|                                                                                    |  |         |        |         |   |         |  
|Cash from operating activities:                                                     |  |         |        |         |   |         |  
|Net earnings                                                                        |  | $       | 12,118 |         |   | 10,362  |  
|Adjustments to reconcile net earnings to net cash provided by operating
activities: |  |         |        |         |   |         |  
|Depreciation and amortization                                                       |  | 17,863  |        | 17,335  |   | 16,754  |  
|Loss (gain) on sale of marketable securities                                        |  | 1       |        | (59     | ) | (2,056  | )
|Equity income of affiliated companies                                               |  | (2,809  | )      | (1,378  | ) | (926    | )
|Investment tax credit amortization                                                  |  | (18     | )      | (24     | ) | (29     | )
|Deferred income taxes                                                               |  | (174    | )      | 529     |   | 16      |  
|Changes in assets and liabilities:                                                  |  |         |        |         |   |         |  
|Accounts receivable                                                                 |  | 933     |        | (774    | ) | (419    | )
|Inventories of construction and operating materials and supplies                    |  | 388     |        | 2,235   |   | (29     | )
|Deferred financing costs, prepaid expenses, and other assets                        |  | 475     |        | 48      |   | 219     |  
|Accounts payable                                                                    |  | (549    | )      | 772     |   | (94     | )
|Other accrued liabilities                                                           |  | (920    | )      | 895     |   | 504     |  
|Accrued pension and postretirement benefits                                         |  | 786     |        | 695     |   | 1,124   |  
|Federal and state income taxes                                                      |  | 155     |        | 1,621   |   | (321    | )
|Other, net                                                                          |  | 106     |        |        |   |        |  
|                                                                                    |  |         |        |         |   |         |  
|Total adjustments                                                                   |  | 16,237  |        | 21,895  |   | 14,743  |  
|                                                                                    |  |         |        |         |   |         |  
|Net cash provided by operating activities                                           |  | 28,355  |        | 32,257  |   | 22,632  |  
|                                                                                    |  |         |        |         |   |         |  
|Cash used for investing activities:                                                 |  |         |        |         |   |         |  
|Expenditures for property and equipment                                             |  | (10,804 | )      | (13,068 | ) | (24,208 | )
|Purchase of marketable securities available for sale                                |  | (178    | )      | (1,044  | ) | (6,983  | )
|Proceeds from sale of marketable securities available for sale                      |  | 2       |        | 5,868   |   | 19,515  |  
|Investments in affiliated entities                                                  |  |        |        |        |   | (1,003  | )
|Distributions from affiliated entities                                              |  | 1,174   |        | 657     |   | 374     |  
|                                                                                    |  |         |        |         |   |         |  
|Net cash used for investing activities                                              |  |         | (9,806 | )       |   | (7,587  | )

(Continued)



6



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESConsolidated Statements of Cash FlowsYears ended December 31, 2002, 2001, and 2000(Amounts in thousands)



|                                                                                                                                                                                                                  |  | 2002    |         | 2001   |        | 2000    |       
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------- | ------- | ------ | ------ | ------- | ------
|                                                                                                                                                                                                                  |  |         |         |        |        |         |       
|Cash used for financing activities:                                                                                                                                                                               |  |         |         |        |        |         |       
|Cash dividends                                                                                                                                                                                                    |  | $       | (10,203 | )      |        | (10,203 | )     
|Retirement of debt                                                                                                                                                                                                |  | (20,475 | )       | (3,822 | )      | (2,982  | )     
|Proceeds from issuance of debt                                                                                                                                                                                    |  |        |         | 6,253  |        | 10,309  |       
|Payment of capital lease obligation                                                                                                                                                                               |  | (926    | )       | (839   | )      | (991    | )     
|                                                                                                                                                                                                                  |  |         |         |        |        |         |       
|Net cash used for financing activities                                                                                                                                                                            |  | (31,604 | )       | (8,611 | )      | (3,567  | )     
|                                                                                                                                                                                                                  |  |         |         |        |        |         |       
|Net (decrease) increase in cash and temporary investments                                                                                                                                                         |  | (13,055 | )       | 16,059 |        | 6,760   |       
|Cash and temporary investments at beginning of year                                                                                                                                                               |  | 35,299  |         | 19,240 |        | 12,480  |       
|                                                                                                                                                                                                                  |  |         |         |        |        |         |       
|Cash and temporary investments at end of year                                                                                                                                                                     |  | $       | 22,244  |        | 35,299 |         | 19,240
|                                                                                                                                                                                                                  |  |         |         |        |        |         |       
|Supplemental disclosures of cash flow information:                                                                                                                                                                |  |         |         |        |        |         |       
|Interest paid                                                                                                                                                                                                     |  | $       | 3,513   |        | 3,641  |         | 2,910 
|Income taxes paid                                                                                                                                                                                                 |  | $       | 8,546   |        | 4,950  |         | 6,342 
|Supplemental disclosure of noncash financing activities:                                                                                                                                                          |  |         |         |        |        |         |       
|Capital lease obligations of $1,488 and $8,875 were incurred during 2001 and 2000, respectively, when
a subsidiary of the Company entered into a lease for new equipment. No obligation was incurred during 2002. |  |         |         |        |        |         |       

See accompanying notes to consolidated financial
statements.



7



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESNotes to Consolidated Financial StatementsDecember 31, 2002, 2001, and 2000(Amounts in thousands, except per share data)

(1)Summary of Significant Accounting Policies

(a)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. 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 accounting principles generally accepted in the United States of America 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.

(b)Revenue Recognition

Revenues are recognized when local network, long distance, and access services are provided. Local service and intrastate long distance, and access service revenues are subject to the jurisdiction of the Pennsylvania Public Utility 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 2000. Revenues from equipment sales are recorded after equipment has been installed and accepted by the customer.

Directory advertising revenues are recognized ratably over the 12 month period related to the directory publication.

(c)Marketable Securities

Marketable securities available for sale are recorded at fair value, based on quoted market prices. Changes in value of available for sale securities are included as a separate component of shareholders equity and comprehensive income
(loss). Costs of investments sold are determined on the basis of specific identification.

(d)Investments

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

(Continued)



8



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESNotes to Consolidated Financial StatementsDecember 31, 2002, 2001, and 2000(Amounts in thousands, except per share data)

(e)Property, Plant, and Equipment

Property, plant, and equipment is recorded at cost.
Retirements relating to replacements of telephone plant and equipment at NPTC 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. When other property is retired or otherwise disposed of, any gain or loss is recognized in income.

Depreciation on telephone plant and equipment 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 and equipment in service amounted to 8.8% in both 2002 and 2001 and 9.3% in 2000.

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

(f)Impairment of Long-Lived
Assets

Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, provides a
single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held for sale, and broadens the scope of businesses to be disposed of that qualify for reporting as discontinued
operations and changes the timing of recognizing losses on such operations. The Company adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not affect the Company's financial statements.

In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to
be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be
disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount of fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for
sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Prior to the adoption of SFAS No. 144, the Company
accounted for long-lived assets in accordance with SFAS No. 121,Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The Company has determined that there has
been no impairment to the carrying value of such assets in 2002, 2001, or 2000.

(g)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.

(Continued)



9



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESNotes to Consolidated Financial StatementsDecember 31, 2002, 2001, and 2000(Amounts in thousands, except per share data)

(h)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 principally represent amounts due from interexchange carriers.

Management reviews accounts receivable to determine which are doubtful of collection. In making the determination of the appropriate allowance for doubtful accounts, management
considers the Companys accounts receivable aging schedules, history of write-offs, relationships with its customers and the overall credit worthiness of its customers.

(i)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.

(j)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. Under conditions of the Companys loan agreement with the Rural Utilities Service (RUS), the
Company had cash of $63 and $245 for 2002 and 2001, respectively, that was restricted in use.

(k)Pension and Other Postretirement Benefits

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

(l)Comprehensive Income

Comprehensive income consists of net income and other gains and losses affecting shareholders equity that, under generally accepted accounting principles, are excluded from net income. Other gains and losses excluded from net income for
the Company included net unrealized gains (losses) on securities and minimum pension liability equity adjustments, both net of income taxes. Comprehensive income is presented in the Consolidated Statements of Shareholders Equity and
Comprehensive Income.

(Continued)



10



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESNotes to Consolidated Financial StatementsDecember 31, 2002, 2001, and 2000(Amounts in thousands, except per share data)

(m)Earnings Per Share

Basic earnings per share are calculated based upon the weighted average
number of common shares actually outstanding, and diluted earnings per share are 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.

(n)Advertising
Expense

Advertising costs are expensed as incurred. Advertising expense charged to operations was $2,258, $2,848, and $3,239 in 2002, 2001, and 2000,
respectively.

(o)Fair Value of Financial
Instruments

The carrying values of the Companys cash, receivables, and payables are estimated to be substantially the same as the fair values as
of December 31, 2002, 2001, and 2000.

(p)Reclassifications

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

In the current year, the Company has reclassed certain intraLATA settlement amounts due to other telecommunication providers from a contra revenue, recorded in Long distance and
access services, to Network and other operating expenses. The reclasses increased both the aforementioned revenue and expense accounts by $2,343, $2,862, and $3,967 for the years 2002, 2001, and 2000, respectively. The reclasses had no effect on net
operating income.

(q)Recent Accounting
Pronouncements

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142,Goodwill and Other Intangible
Assets. The pronouncement was effective for the Companys year beginning January 1, 2002. As of December 31, 2002, the Company had a net book value of $561 in equity method goodwill (recorded under Investments) as a
result of the purchase of additional interest in the Pennsylvania RSA 6(II) Limited Partnership in September 2000. SFAS No. 142 discontinues the amortization of equity method goodwill and prescribes that the Company continues to test for impairment
in accordance with Accounting Principles Board (APB) Opinion 18. The Company noted no impairment during its review of the equity method goodwill and associated investment during 2002. As the annual amortization of the goodwill before the adoption of
SFAS No. 142 was $30, the cessation of the amortization in 2002 did not have a significant impact on the consolidated financial statements.

In June 2001, the
FASB issued SFAS No. 143,Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which
it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be

(Continued)



11



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESNotes to Consolidated Financial StatementsDecember 31, 2002, 2001, and 2000(Amounts in thousands, except per share data)

adjusted at the end of each period to
reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to have a material effect on
the Companys consolidated financial statements.

(2)Marketable
Securities

Information about marketable investment securities at December 31, 2002 and 2001 is as follows:



|                    |  |      |  | 2002            |  |                  | 
|------------------- |  | ---- |  | --------------- |  | ---------------- | 
|                    |  |      |  |                 |  |                  | 
|                    |  | Cost |  | Unrealizedgains |  | Unrealizedlosses | 
|                    |  |      |  |                 |  |                  | 
|Available for sale: |  |      |  |                 |  |                  | 
|Equity securities   |  | $412 |  | 5               |  | (56)             | 



|                    |  |      |  | 2001            |  |                  | 
|------------------- |  | ---- |  | --------------- |  | ---------------- | 
|                    |  |      |  |                 |  |                  | 
|                    |  | Cost |  | Unrealizedgains |  | Unrealizedlosses | 
|                    |  |      |  |                 |  |                  | 
|Available for sale: |  |      |  |                 |  |                  | 
|Equity securities   |  | $340 |  | 4               |  | (100)            | 

Proceeds, gross realized gains and gross
realized losses from the sale of debt and equity securities were $2, $0, and $1, respectively, for the year ended December 31, 2002, were $5,868, $113, and $54, respectively, for the year ended December 31, 2001, and were $19,515, $2,940,
and $884, respectively, for the year ended December 31, 2000.

(3)Investments

The Companys investments at December 31, 2002 and 2001 consist of the following:



|                                             |  | 2002 |        | 2001 |       
|-------------------------------------------- |  | ---- | ------ | ---- | ------
|                                             |  |      |        |      |       
|Investments at equity:                       |  |      |        |      |       
|Investments in wireless limited partnerships |  | $    | 12,887 |      |       
|Boulevard Communications, LLP                |  |      | 639    |      |       
|                                             |  |      |        |      |       
|Total investments                            |  | $    | 13,526 |      | 11,891
|                                             |  |      |        |      |       

The Company owns partnership interests of 3.6%,
14.29%, and 23.67%, respectively, in the Pittsburgh SMSA, Pennsylvania RSA 6(I), and Pennsylvania RSA 6(II) wireless limited partnerships. In addition, the Company has a 50% ownership interest in Boulevard Communications, LLP (Boulevard), a
competitive access provider operating in western Pennsylvania.

The Company had no capital calls to maintain its ownership percentages in its limited
partnership investments in 2002, 2001, and 2000. The Company did invest $1,003 in 2000 to acquire additional ownership in the Pennsylvania RSA 6(II) wireless limited partnership. The Company received distributions from affiliated entities of $1,174,
$657, and $374 in 2002, 2001, and 2000, respectively.

(Continued)



12



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESNotes to Consolidated Financial StatementsDecember 31, 2002, 2001, and 2000(Amounts in thousands, except per share data)

The summary combined unaudited financial
positions for the wireless partnerships as of September 30, 2002 and 2001 and Boulevard as of December 31, 2002 and 2001 are as follows:



|                                           |  | 2002    |         | 2001    |        
|------------------------------------------ |  | ------- | ------- | ------- | -------
|                                           |  |         |         |         |        
|Financial Position                         |  |         |         |         |        
|Current assets                             |  | $       | 49,999  |         | 32,172 
|Property, plant, and equipment, net        |  | 215,442 |         | 220,601 |        
|Other long-term assets                     |  | 130     |         | 196     |        
|                                           |  |         |         |         |        
|Total assets                               |  | $       | 265,571 |         | 252,969
|                                           |  |         |         |         |        
|Current liabilities                        |  | $       | 7,988   |         | 43,497 
|Long-term debt                             |  |        |         | 76      |        
|                                           |  |         |         |         |        
|Total liabilities                          |  | 7,988   |         | 43,573  |        
|                                           |  |         |         |         |        
|Stockholders equity                       |  | 257,583 |         | 209,396 |        
|                                           |  |         |         |         |        
|Total liabilities and stockholders equity |  | $       | 265,571 |         | 252,969
|                                           |  |         |         |         |        

The summary combined unaudited results of operations
for the wireless partnerships for the years ended September 30, 2002, 2001 and 2000 and for Boulevard for the years ended December 31, 2002, 2001 and 2000 are as follows:



|                      |  | 2002    |         | 2001    |         | 2000  
|--------------------- |  | ------- | ------- | ------- | ------- | ------
|                      |  |         |         |         |         |       
|Results of Operations |  |         |         |         |         |       
|Sales                 |  | $       | 274,651 |         | 203,791 |       
|Gross profit          |  | 139,137 |         | 108,761 |         | 94,234
|Operating income      |  | 47,775  |         | 22,388  |         | 13,837
|Net income            |  |         | 48,315  |         | 21,699  |       

(4)Long-Term Debt

Long-term debt as of December 31, 2002 and 2001 was as
follows:



|                                                          |  | 2002   |        | 2001   |       
|--------------------------------------------------------- |  | ------ | ------ | ------ | ------
|                                                          |  |        |        |        |       
|Notes payable to Rural Telephone Bank                     |  | $      |       |        | 17,389
|Notes payable to Federal Financing Bank, maturing in 2012 |  | 30,852 |        | 33,938 |       
|                                                          |  |        |        |        |       
|                                                          |  | 30,852 |        | 51,327 |       
|Less current portion of long-term debt                    |  | 3,085  |        | 4,125  |       
|                                                          |  |        |        |        |       
|Long-term debt                                            |  | $      | 27,767 |        | 47,202
|                                                          |  |        |        |        |       

Annual principal payments of $3,085 are required
over the next five years as calculated on the outstanding indebtedness at December 31, 2002.

(Continued)



13



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESNotes to Consolidated Financial StatementsDecember 31, 2002, 2001, and 2000(Amounts in thousands, except per share data)

During 2002, the Company retired the
remaining notes payable to the Rural Telephone Bank (RTB) after the expiration of the notes prepayment penalty periods. The Company made $1,040 in scheduled principal payments and $16,349 in accelerated payments to the RTB during 2002. The
notes had an interest rate of 6.5%. As a result of the prepayment, the Company wrote off the remaining $510 in capitalized debt issuance costs associated with these notes.

In 1996, NPTC was granted approval for a loan from the Federal Financing Bank (FFB) guaranteed by the RUS in the maximum principal amount of $75,000. The total amount outstanding at December 31, 2002 to the FFB
under this loan was $30,852, with all advances having a maturity date of December 31, 2012. The notes payable to the FFB carry interest rates ranging from 4.3% to 6.7% (weighted average of 5.46%). The unadvanced amount of this facility as of
December 31, 2002 was $34,764. NPTC can make draws against this facility through June 30, 2012 for qualified capital expenditure projects, as defined in the loan agreement, to furnish and improve telephone service in rural areas. As of
December 31, 2002, NPTC had approximately $5,368 of qualified capital expenditures that were eligible to be drawn against this facility.

The notes
payable to the FFB are secured by a supplemental Mortgage Agreement executed by NPTC which provides that substantially all of the assets of NPTC, which approximates a net book value of $111 million, are subject to a lien or a security interest.
Such agreement contains restrictions regarding dividends and other distributions by NPTC. Under these restrictions, unless certain working capital levels, net worth levels, and interest expense ratios 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 a result of the
NPTC restrictions, $7,550 of NPTCs retained earnings were available for dividends to the Company as of December 31, 2002. Taking into consideration the NPTC restrictions, consolidated retained earnings of the Company of approximately
$33,957 were available for dividends and other distributions to shareholders as of December 31, 2002.

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, 2002 is $27,459. This is based on a current borrowing rate of 6.7%.

NPTC also has available through June of 2004 a $10,000 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 2002 or 2001.

(5)Capital Lease

The Company has a capital lease for equipment used in its operations. Amortization of the assets held under the capital lease is included within depreciation and amortization
expense. The capital lease amount included in property, plant, and equipment is as follows:



|                         |  | 2002   |        | 2001 |       
|------------------------ |  | ------ | ------ | ---- | ------
|                         |  |        |        |      |       
|Capital lease            |  | $      | 10,363 |      | 10,363
|Accumulated amortization |  | (1,369 | )      | (793 | )     
|                         |  |        |        |      |       
|Total                    |  | $      | 8,994  |      |       
|                         |  |        |        |      |       

(Continued)



14



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESNotes to Consolidated Financial StatementsDecember 31, 2002, 2001, and 2000(Amounts in thousands, except per share data)

The following table displays the aggregate
minimum lease commitments under the capital lease as of December 31, 2002:



|2003                                       |  | $      | 1,592 | 
|------------------------------------------ |  | ------ | ----- | 
|2004                                       |  | 1,592  |      
|2005                                       |  | 1,450  |      
|2006                                       |  | 1,272  |      
|2007                                       |  | 1,254  |      
|Thereafter                                 |  | 3,108  |      
|                                           |  |        |      
|Total minimum lease commitments            |  | 10,268 |      
|Less interest and executory costs          |  | 2,661  |      
|                                           |  |        |      
|Present value of minimum lease commitments |  | 7,607  |      
|Less current installments                  |  | 996    |      
|                                           |  |        |      
|Long-term obligation at December 31, 2002  |  | $      | 6,611 | 
|                                           |  |        |       | 

(6)Retirement Plan and Other Postretirement Benefit Plans

Substantially all employees
of NPTC 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 NPTC are provided healthcare and life insurance benefits until the retiree reaches 65 years of age under an unfunded plan.

(Continued)



15



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESNotes to Consolidated Financial StatementsDecember 31, 2002, 2001, and 2000(Amounts in thousands, except per share data)

The following table sets forth the
Plans change in benefit obligation, change in plan assets, and reconciliation of funded status at December 31, 2002 and 2001:



|                                                                  |  | Pension benefits |         |        | Other postretirement  benefits |  
|----------------------------------------------------------------- |  | ---------------- | ------- | ------ | ------------------------------ | -
|                                                                  |  |                  |         |        |                                |  
|                                                                  |  | 2002             |         | 2001   |                                |  
|                                                                  |  |                  |         |        |                                |  
|Change in benefit obligation:                                     |  |                  |         |        |                                |  
|Benefit obligation at beginning of year                           |  | $                | 34,796  |        | 30,668                         |  
|Service cost                                                      |  | 1,091            |         | 885    |                                |  
|Interest cost                                                     |  | 2,383            |         | 2,245  |                                |  
|Plan amendments                                                   |  |                 |         | 123    |                                |  
|Benefits paid                                                     |  | (1,415           | )       | (1,381 | )                              |  
|Actuarial loss                                                    |  | 4,317            |         | 2,256  |                                |  
|                                                                  |  |                  |         |        |                                |  
|Benefit obligation at end of year                                 |  | $                | 41,172  |        | 34,796                         |  
|                                                                  |  |                  |         |        |                                |  
|Change in plan assets:                                            |  |                  |         |        |                                |  
|Fair value at beginning of year                                   |  | $                | 31,485  |        | 33,798                         |  
|Actual return on plan assets                                      |  | (1,501           | )       | (932   | )                              |  
|Employer contributions                                            |  | 625              |         |       |                                |  
|Benefits paid                                                     |  | (1,415           | )       | (1,381 | )                              |  
|                                                                  |  |                  |         |        |                                |  
|Fair value at end of year                                         |  | $                | 29,194  |        | 31,485                         |  
|                                                                  |  |                  |         |        |                                |  
|Reconciliation of funded status:                                  |  |                  |         |        |                                |  
|Funded status                                                     |  | $                | (11,978 | )      | (3,311                         | )
|Unrecognized actuarial loss                                       |  | 10,322           |         | 2,009  |                                |  
|Unrecognized transition (asset)                                   |  | (458             | )       | (611   | )                              |  
|Unrecognized prior service cost                                   |  | 1,039            |         | 1,255  |                                |  
|                                                                  |  |                  |         |        |                                |  
|Net amount at year-end                                            |  | $                | (1,075  | )      | (658                           | )
|                                                                  |  |                  |         |        |                                |  
|Amounts recognized in the consolidated balance sheets consist
of: |  |                  |         |        |                                |  
|Accrued benefit liability                                         |  | $                | (4,411  | )      | (658                           | )
|Intangible asset                                                  |  | 1,039            |         |       |                                |  
|Accumulated other comprehensive loss                              |  | 2,297            |         |       |                                |  
|                                                                  |  |                  |         |        |                                |  
|Net amount recognized at year-end                                 |  | $                | (1,075  | )      | (658                           | )
|                                                                  |  |                  |         |        |                                |  

(Continued)



16



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESNotes to Consolidated Financial StatementsDecember 31, 2002, 2001, and 2000(Amounts in thousands, except per share data)

Assumptions used in the calculations as of
December 31, 2002, 2001, and 2000, are:



|                              |  | Pension benefits |      | Other postretirement  benefits |     
|----------------------------- |  | ---------------- | ---- | ------------------------------ | ----
|                              |  |                  |      |                                |     
|                              |  | 2002             |      | 2001                           |     
|                              |  |                  |      |                                |     
|Weighted average assumptions: |  |                  |      |                                |     
|Discount rate                 |  | %                | 6.50 |                                | 7.00
|Expected return on assets     |  | 8.00             |      | 8.00                           |     
|Rate of compensation increase |  |                  | 4.50 |                                | 4.50

Net periodic benefit costs include the
following:



|                                         |  | Pension benefits |       | Other postretirement  benefits |    
|---------------------------------------- |  | ---------------- | ----- | ------------------------------ | ---
|                                         |  |                  |       |                                |    
|                                         |  | 2002             |       | 2001                           |    
|                                         |  |                  |       |                                |    
|Components of net periodic benefit cost: |  |                  |       |                                |    
|Service cost                             |  | $                | 1,091 |                                | 885
|Interest cost                            |  | 2,383            |       | 2,245                          |    
|Expected return on plan assets           |  | (2,495           | )     | (2,645                         | )  
|Amortization of prior service cost       |  | 216              |       | 207                            |    
|Amortization of transition (asset)       |  | (153             | )     | (153                           | )  
|Recognized actuarial (gain) or loss      |  |                 |       | (34                            | )  
|                                         |  |                  |       |                                |    
|Net periodic benefit cost                |  | $                | 1,042 |                                | 505
|                                         |  |                  |       |                                |    
|Additional (gain) or loss due to:        |  |                  |       |                                |    
|Curtailment                              |  | $                |      |                                |   
|Special termination benefits             |  |                 |       |                               |    
|                                         |  |                  |       |                                |    
|                                         |  | $                |      |                                |   
|                                         |  |                  |       |                                |    

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 2002 was 12.0%. The rates were assumed to decrease gradually to 5% by the year 2011 and remain at that level thereafter. Assumed
health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in the assumed health care trend rate would have the following effects:



|                                                                 |  | Onepercentagepoint increase |     | Onepercentagepoint decrease |     
|---------------------------------------------------------------- |  | --------------------------- | --- | --------------------------- | ----
|                                                                 |  |                             |     |                             |     
|Effect on total of service and interest cost components for 2002 |  | $                           | 80  |                             | (68 
|Effect on 2002 postretirement benefit obligation                 |  |                             | 808 |                             | (714

NPTC also has a nonqualified supplemental pension
plan covering certain former and current employees which provides for incremental pension payments to the extent that income tax regulations limit the

(Continued)



17



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESNotes to Consolidated Financial StatementsDecember 31, 2002, 2001, and 2000(Amounts in thousands, except per share data)

amount payable from NPTCs qualified
defined benefit retirement plan. The projected benefit obligation relating to such unfunded plan was approximately $1,124, $746, and $128 at December 31, 2002, 2001, and 2000, respectively. Pension expense for the plan was $91 in 2002, $113 in
2001, and $2 in 2000. The amounts accrued in the consolidated balance sheet were $407, $237, and $96 at December 31, 2002, 2001, and 2000, respectively.

The Company also sponsors 401(k) savings plans covering substantially all employees. For employees who are not covered by collective bargaining agreements, the Company contributes either to the 401(k) plans or, in the case of one subsidiary,
to employee individual retirement accounts (IRAs), based on a specified percentage of employee contributions. Contributions charged to expense were $418, $391, and $274 in 2002, 2001, and 2000, respectively.

(7)Income Taxes

The components
of income tax expense (benefit) are:



|                               |  | 2002  |       | 2001  |       | 2000  |      
|------------------------------ |  | ----- | ----- | ----- | ----- | ----- | -----
|                               |  |       |       |       |       |       |      
|Current:                       |  |       |       |       |       |       |      
|Federal                        |  | $     | 6,045 |       | 4,426 |       | 3,830
|State                          |  | 2,666 |       | 2,543 |       | 2,191 |      
|                               |  |       |       |       |       |       |      
|                               |  | 8,711 |       | 6,969 |       | 6,021 |      
|Deferred:                      |  |       |       |       |       |       |      
|Federal                        |  | 460   |       | 1,124 |       | 390   |      
|State                          |  | (634  | )     | (595  | )     | (374  | )    
|                               |  |       |       |       |       |       |      
|                               |  | (174  | )     | 529   |       | 16    |      
|Deferred investment tax credit |  | (18   | )     | (24   | )     | (29   | )    
|                               |  |       |       |       |       |       |      
|                               |  | $     | 8,519 |       |       | 7,474 |      
|                               |  |       |       |       |       |       |      

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



|                                                          |  | 2002  |       | 2001  |       | 2000  |      
|--------------------------------------------------------- |  | ----- | ----- | ----- | ----- | ----- | -----
|                                                          |  |       |       |       |       |       |      
|Statutory federal income tax                              |  | $     | 7,223 |       | 6,242 |       | 4,864
|State taxes on income (net of federal income tax benefit) |  | 1,340 |       | 1,158 |       | 902   |      
|Change in beginning of year valuation allowance           |  | (20   | )     | 215   |       | 451   |      
|Investment tax credit                                     |  | (18   | )     | (24   | )     | (29   | )    
|Tax-exempt interest                                       |  |      |       | (6    | )     | (34   | )    
|Other                                                     |  | (6    | )     | (111  | )     | (146  | )    
|                                                          |  |       |       |       |       |       |      
|Income tax expense                                        |  | $     | 8,519 |       |       | 7,474 |      
|                                                          |  |       |       |       |       |       |      

(Continued)



18



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESNotes to Consolidated Financial StatementsDecember 31, 2002, 2001, and 2000(Amounts in thousands, except per share data)

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



|                                                                              |  | 2002 |      | 2001 |     | 2000 |     
|----------------------------------------------------------------------------- |  | ---- | ---- | ---- | --- | ---- | ----
|                                                                              |  |      |      |      |     |      |     
|Deferred tax expense (exclusive of the effects of the other components
below) |  | $    | (154 | )    | 314 |      | (435
|Increase/(decrease) in beginning of year valuation allowance                  |  | (20  | )    | 215  |     | 451  |     
|                                                                              |  |      |      |      |     |      |     
|                                                                              |  | $    | (174 | )    | 529 |      | 16  
|                                                                              |  |      |      |      |     |      |     

Additional deferred tax assets (liabilities) of
$(19) and $7 were recorded in 2002 and 2001, respectively, related to unrealized gains and losses on marketable securities classified as available for sale (note 2) and $988 and $0 in 2002 and 2001, respectively, related to minimum pension
liability adjustments.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
at December 31, 2002 and 2001, are presented below:



|                                                                                  |  | 2002   |        | 2001   |       
|--------------------------------------------------------------------------------- |  | ------ | ------ | ------ | ------
|                                                                                  |  |        |        |        |       
|Deferred tax assets:                                                              |  |        |        |        |       
|Postretirement benefits                                                           |  | $      | (2,531 | )      | (2,414
|Deferred compensation                                                             |  | (546   | )      | (504   | )     
|Compensated absences, principally due to accrual for financial reporting purposes |  | (300   | )      | (292   | )     
|Accounts receivable                                                               |  | (1,560 | )      | (917   | )     
|State net operating loss carryforwards                                            |  | (2,058 | )      | (2,292 | )     
|Pension                                                                           |  | (916   | )      |       |       
|Other                                                                             |  | (212   | )      | (477   | )     
|Net unrealized loss on available for sale securities                              |  | (21    | )      | (40    | )     
|                                                                                  |  |        |        |        |       
|Total gross deferred tax assets                                                   |  | (8,144 | )      | (6,936 | )     
|Less valuation allowance                                                          |  | 800    |        | 820    |       
|                                                                                  |  |        |        |        |       
|Net deferred tax assets                                                           |  | (7,344 | )      | (6,116 | )     
|                                                                                  |  |        |        |        |       
|                                                                                  |  |        |        |        |       
|Deferred tax liabilities:                                                         |  |        |        |        |       
|Plant and equipment, principally due to differences in depreciation               |  | 14,117 |        | 13,701 |       
|Pension                                                                           |  |       |        | 93     |       
|Amortization of deferred financing costs                                          |  |       |        | 107    |       
|Other                                                                             |  | 1,319  |        | 1,449  |       
|                                                                                  |  |        |        |        |       
|Total gross deferred tax liability                                                |  | 15,436 |        | 15,350 |       
|                                                                                  |  |        |        |        |       
|Net deferred tax liability                                                        |  | $      | 8,092  |        | 9,234 
|                                                                                  |  |        |        |        |       
|Unamortized investment tax credit                                                 |  | $      | 40     |        | 58    
|                                                                                  |  |        |        |        |       

(Continued)



19



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESNotes to Consolidated Financial StatementsDecember 31, 2002, 2001, and 2000(Amounts in thousands, except per share data)

The valuation allowance for deferred tax
assets relates to state loss carryforwards of subsidiaries. The valuation allowance for deferred tax assets as of December 31, 2002 and 2001 was $800 and $820, respectively. For the year ended December 31, 2002, there was a net
decrease in the valuation allowance in the amount of $20. For the year ended December 31, 2001, there was a net increase in the valuation allowance in the amount of $215. 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, 2002. 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.

At December 31, 2002, the Company has net operating loss carryforwards for state income tax purposes of $27,251 which are available to offset
future state taxable income. These loss carryforwards will expire as follows:



|2005 |  | $      | 582   | 
|---- |  | ------ | ----- | 
|2006 |  | 153    |      
|2019 |  | 538    |      
|2020 |  | 10,672 |      
|2021 |  | 10,184 |      
|2022 |  |        | 5,122 | 

(8)Related Party Transactions

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 $3,689, $3,196, and $2,807
in 2002, 2001, and 2000, respectively. During 2002, 2001, and 2000, the Company paid approximately $628, $42, and $106, respectively, to a member of the board of directors law firm for various legal services. As of December 31, 2002, the
Company had amounts of $253 and $35 outstanding to the Processor and law firm, respectively. As of December 31, 2001, the Company had amounts of $241 and $275 outstanding to the Processor and law firm, respectively.

In addition, in the ordinary course of business, the Company both provides and receives telecommunication transport services from Boulevard, a competitive access provider jointly
owned by the Company and a company in the Armstrong Group (which is related by a common shareholder and director). Total revenues recognized from providing services to Boulevard were approximately $27, $71, and $50, and total expenses incurred from
receiving services from Boulevard were approximately $217, $357, and $765 for 2002, 2001, and 2000, respectively. The Company also provides in the ordinary course of business telecommunication and transport services to other member companies of the
Armstrong Group, with total revenues recognized of approximately $264,

(Continued)



20



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESNotes to Consolidated Financial StatementsDecember 31, 2002, 2001, and 2000(Amounts in thousands, except per share data)

$182, and $62 for 2002, 2001, and 2000,
respectively. As of December 31, 2002, the Company had accounts receivable of approximately $1 and $17 from Boulevard and companies in the Armstrong Group, respectively. No amounts were outstanding to Boulevard as of December 31, 2002 and
2001.

(9)Business Restructuring

In the fourth quarter of 2000, a pretax charge of $972 was recorded in network and other operating expenses to cover the restructuring costs associated with the shut down of the Nauticom Sports
Network (NSN). The total charges reduced net income by $632.

The business restructuring charge of $972 included restructuring liabilities of $671 and asset
impairments of $301. The restructuring liabilities consisted of $432 for employee severance payments and related taxes for 30 people who were involuntarily terminated, $122 for future operating lease expense associated with a leased facility under
contract which will no longer be used and $117 for other charges associated with the restructuring. As of December 31, 2000, all employees had been terminated and all severance payments and related taxes had been paid, making the remaining
restructuring accrual liability $239 as of December 31, 2000.

During 2001, total net cash expenditures related to NSN were $331. An additional net $277
was recorded as expense in 2001, due primarily to the settlement of a contract for satellite equipment and airtime above the Companys original estimate and the inability to generate the expected sub-lease contracts for the facility under
lease, offset partially by the sale of NSN fixed assets with a net book value of $31 for a gain. As of December 31, 2001, the remaining restructuring accrual liability was $154.

During 2002, total NSN related cash expenditures were $41, and a $12 reduction in expense was recorded due to the reversal of miscellaneous accruals. As of December 31, 2002, the remaining restructuring accrual
liability, relating solely to future operating lease payments, was $101.

(Continued)



21



---

##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIESNotes to Consolidated Financial StatementsDecember 31, 2002, 2001, and 2000(Amounts in thousands, except per share data)

(10)Unaudited Quarterly Financial Data for 2002 and 2001

The following are summaries of quarterly
financial data for the years ended December 31, 2002 and 2001, as reported by the Company:



|                                            |  | Unaudited (in thousands, except per share data) |       
|------------------------------------------- |  | ----------------------------------------------- | ------
|                                            |  |                                                 |       
|                                            |  | Firstquarter                                    |       
|                                            |  |                                                 |       
|                                            |  |                                                 |       
|2002:                                       |  |                                                 |       
|Operating revenues                          |  | $                                               | 23,154
|Net operating income                        |  | 5,995                                           |       
|Net earnings                                |  | 3,246                                           |       
|Basic and diluted earnings per common share |  | 0.22                                            |       
|                                            |  |                                                 |       
|2001:                                       |  |                                                 |       
|Operating revenues                          |  | $                                               | 21,744
|Net operating income                        |  | 3,204                                           |       
|Net earnings                                |  | 1,474                                           |       
|Basic and diluted earnings per common share |  | 0.10                                            |       



22



---

##### Table of Contents

Schedule I

NORTH PITTSBURGH SYSTEMS,
INC. (Parent Company)Condensed Financial Information of RegistrantCondensed Balance SheetsDecember 31, 2002 and 2001(Amounts in thousands)



|                                               |  | 2002   |        | 2001   |       
|---------------------------------------------- |  | ------ | ------ | ------ | ------
|                                               |  |        |        |        |       
|                                               |  |        |        |        |       
|Assets                                         |  |        |        |        |       
|Current assets:                                |  |        |        |        |       
|Cash and temporary investments                 |  | $      | 4,684  |        | 173   
|Accounts receivable from subsidiary            |  | 6      |        | 134    |       
|                                               |  |        |        |        |       
|Total current assets                           |  | 4,690  |        | 307    |       
|                                               |  |        |        |        |       
|Property, plant, and equipment:                |  |        |        |        |       
|Land                                           |  | 150    |        | 150    |       
|Buildings                                      |  | 1,212  |        | 1,187  |       
|Equipment                                      |  | 21     |        | 21     |       
|                                               |  |        |        |        |       
|                                               |  | 1,383  |        | 1,358  |       
|Less accumulated depreciation and amortization |  | 290    |        | 250    |       
|                                               |  |        |        |        |       
|                                               |  | 1,093  |        | 1,108  |       
|Deferred income taxes                          |  | 207    |        | 370    |       
|Other assets                                   |  | 1,059  |        | 1,036  |       
|Investment in subsidiaries                     |  | 71,235 |        | 51,247 |       
|Notes and accounts receivable  subsidiaries   |  |       |        | 25,250 |       
|                                               |  |        |        |        |       
|                                               |  | $      | 78,284 |        | 79,318
|                                               |  |        |        |        |       

(Continued)



23



---

##### Table of Contents

Schedule I

NORTH PITTSBURGH SYSTEMS,
INC. (Parent Company)Condensed Financial Information of RegistrantCondensed Balance SheetsDecember 31, 2002 and 2001(Amounts in thousands)



|                                     |  | 2002   |        | 2001   |       
|------------------------------------ |  | ------ | ------ | ------ | ------
|                                     |  |        |        |        |       
|                                     |  |        |        |        |       
|Liabilities and Shareholders
Equity |  |        |        |        |       
|Current liabilities:                 |  |        |        |        |       
|Dividend payable                     |  | $      | 2,551  |        | 2,551 
|Accounts payable  subsidiaries      |  |       |        | 1      |       
|Federal and state income taxes       |  | 739    |        | 1,967  |       
|Other liabilities                    |  | 102    |        | 457    |       
|                                     |  |        |        |        |       
|Total current liabilities            |  | 3,392  |        | 4,976  |       
|                                     |  |        |        |        |       
|Shareholders equity:                |  |        |        |        |       
|Common stock                         |  | 2,350  |        | 2,350  |       
|Capital in excess of par value       |  | 2,215  |        | 2,215  |       
|Retained earnings                    |  | 72,257 |        | 70,342 |       
|Less cost of treasury stock          |  | (508   | )      | (508   | )     
|Accumulated other comprehensive loss |  | (1,422 | )      | (57    | )     
|                                     |  |        |        |        |       
|                                     |  | 74,892 |        | 74,342 |       
|                                     |  |        |        |        |       
|                                     |  | $      | 78,284 |        | 79,318
|                                     |  |        |        |        |       

See accompanying independent auditors
report.

(Continued)



24



---

##### Table of Contents

Schedule I

NORTH PITTSBURGH SYSTEMS,
INC. (Parent Company)Condensed Financial Information of RegistrantCondensed Statements of OperationsYears ended December 31, 2002, 2001, and 2000(Amounts in thousands)



|                                                                                        |  | 2002   |        | 2001   |        | 2000   |      
|--------------------------------------------------------------------------------------- |  | ------ | ------ | ------ | ------ | ------ | -----
|                                                                                        |  |        |        |        |        |        |      
|Revenues:                                                                               |  |        |        |        |        |        |      
|Dividends from subsidiaries                                                             |  | $      | 21,254 |        | 10,403 |        | 7,352
|Interest income                                                                         |  | 143    |        | 1,815  |        | 1,549  |      
|Nonoperating income                                                                     |  |       |        |       |        | 134    |      
|Gain on sale of marketable securities                                                   |  |       |        | 59     |        | 2,056  |      
|                                                                                        |  |        |        |        |        |        |      
|                                                                                        |  | 21,397 |        | 12,277 |        | 11,091 |      
|Expenses:                                                                               |  |        |        |        |        |        |      
|General office salaries and expenses                                                    |  | 540    |        | 507    |        | 463    |      
|State taxes                                                                             |  | 70     |        | 81     |        | 111    |      
|Nonoperating expenses                                                                   |  | 1,152  |        | 717    |        |       |      
|                                                                                        |  |        |        |        |        |        |      
|                                                                                        |  | 1,762  |        | 1,305  |        | 574    |      
|                                                                                        |  |        |        |        |        |        |      
|                                                                                        |  |        |        |        |        |        |      
|Earnings before income taxes and equity in overdistributed net earnings of subsidiaries |  | 19,635 |        | 10,972 |        | 10,517 |      
|Income tax (benefit) expense                                                            |  | (680   | )      | 222    |        | 1,269  |      
|                                                                                        |  |        |        |        |        |        |      
|                                                                                        |  |        |        |        |        |        |      
|Earnings before equity in overdistributed net earnings of subsidiaries                  |  | 20,315 |        | 10,750 |        | 9,248  |      
|                                                                                        |  |        |        |        |        |        |      
|Equity in overdistributed net earnings of subsidiaries                                  |  | (8,197 | )      | (388   | )      | (1,359 | )    
|                                                                                        |  |        |        |        |        |        |      
|Net earnings                                                                            |  | $      | 12,118 |        | 10,362 |        | 7,889
|                                                                                        |  |        |        |        |        |        |      

See accompanying independent auditors
report.

(Continued)



25



---

##### Table of Contents

Schedule I

NORTH PITTSBURGH SYSTEMS,
INC. (Parent Company)Condensed Financial Information of RegistrantCondensed Statements of Cash FlowsYears ended December 31, 2002, 2001, and 2000(Amounts in thousands)



|                                                                                                                                                                                                                                                                                      |  | 2002    |         | 2001    |         | 2000    |       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------- | ------- | ------- | ------- | ------- | ------
|                                                                                                                                                                                                                                                                                      |  |         |         |         |         |         |       
|Cash from operating activities:                                                                                                                                                                                                                                                       |  |         |         |         |         |         |       
|Net Earnings                                                                                                                                                                                                                                                                          |  | $       | 12,118  |         | 10,362  |         | 7,889 
|Adjustments to reconcile net earnings to net cash provided by operating
activities:                                                                                                                                                                                                   |  |         |         |         |         |         |       
|Equity in overdistributed earnings of affiliates                                                                                                                                                                                                                                      |  | 8,197   |         | 388     |         | 1,359   |       
|Gain on sale of marketable securities                                                                                                                                                                                                                                                 |  |        |         | (59     | )       | (2,056  | )     
|Other adjustments                                                                                                                                                                                                                                                                     |  | 17      |         | 13      |         | 13      |       
|Changes in assets and liabilities:                                                                                                                                                                                                                                                    |  |         |         |         |         |         |       
|Receivables                                                                                                                                                                                                                                                                           |  | 128     |         | 96      |         | (61     | )     
|Accounts payable  subsidiaries                                                                                                                                                                                                                                                       |  | (1      | )       | (7      | )       | (12     | )     
|Other liabilities                                                                                                                                                                                                                                                                     |  | (355    | )       | 373     |         | 19      |       
|Federal and state income taxes                                                                                                                                                                                                                                                        |  | (1,228  | )       | 541     |         | 1,019   |       
|Deferred income taxes                                                                                                                                                                                                                                                                 |  | 163     |         | (319    | )       | 9       |       
|                                                                                                                                                                                                                                                                                      |  |         |         |         |         |         |       
|Total adjustments                                                                                                                                                                                                                                                                     |  | 6,921   |         | 1,026   |         | 290     |       
|                                                                                                                                                                                                                                                                                      |  |         |         |         |         |         |       
|Net cash provided by operating activities                                                                                                                                                                                                                                             |  | 19,039  |         | 11,388  |         | 8,179   |       
|                                                                                                                                                                                                                                                                                      |  |         |         |         |         |         |       
|Cash from investing activities:                                                                                                                                                                                                                                                       |  |         |         |         |         |         |       
|Expenditures for property and equipment                                                                                                                                                                                                                                               |  | (25     | )       |        |         |        |       
|Purchases of marketable securities available for sale                                                                                                                                                                                                                                 |  |        |         | (917    | )       | (6,871  | )     
|Proceeds from sale of marketable securities available for sale                                                                                                                                                                                                                        |  |        |         | 5,868   |         | 19,515  |       
|Notes receivable  subsidiaries                                                                                                                                                                                                                                                       |  |        |         | (7,385  | )       | (15,035 | )     
|Investments in subsidiaries                                                                                                                                                                                                                                                           |  | (4,300  | )       |        |         |        |       
|                                                                                                                                                                                                                                                                                      |  |         |         |         |         |         |       
|Net cash used for investing activities                                                                                                                                                                                                                                                |  | (4,325  | )       | (2,434  | )       | (2,391  | )     
|                                                                                                                                                                                                                                                                                      |  |         |         |         |         |         |       
|Cash used for financing activities:                                                                                                                                                                                                                                                   |  |         |         |         |         |         |       
|Cash dividends                                                                                                                                                                                                                                                                        |  | $       | (10,203 | )       | (10,203 | )       | (9,903
|                                                                                                                                                                                                                                                                                      |  |         |         |         |         |         |       
|Net cash used for financing activities                                                                                                                                                                                                                                                |  | (10,203 | )       | (10,203 | )       | (9,903  | )     
|                                                                                                                                                                                                                                                                                      |  |         |         |         |         |         |       
|Net increase (decrease) in cash and temporary investments                                                                                                                                                                                                                             |  | 4,511   |         | (1,249  | )       | (4,115  | )     
|Cash and temporary investments at beginning of year                                                                                                                                                                                                                                   |  | 173     |         | 1,422   |         | 5,537   |       
|                                                                                                                                                                                                                                                                                      |  |         |         |         |         |         |       
|Cash and temporary investments at end of year                                                                                                                                                                                                                                         |  | $       | 4,684   |         | 173     |         | 1,422 
|                                                                                                                                                                                                                                                                                      |  |         |         |         |         |         |       
|Supplemental disclosure of noncash investing activities:                                                                                                                                                                                                                              |  |         |         |         |         |         |       
|The $25,250 of notes receivable from subsidiaries as of December 31, 2001
were converted into equity investments in those subsidiaries during 2002. Total actual cash extended to those subsidiaries during 2002, as noted in the cash from investing activities section, was $4,300. |  |         |         |         |         |         |       

See accompanying independent
auditors report.

(Continued)



26



---

##### Table of Contents

Schedule II

NORTH PITTSBURGH SYSTEMS,
INC. AND SUBSIDIARIESValuation and Qualifying Accounts and ReservesYears ended December 31, 2002, 2001, and 2000(Amounts in thousands)



|Description                                                                             |  | Balance atbeginning ofperiod |  | Additionscharged toexpenses |   | Deductions |  | Balance atend of period | 
|--------------------------------------------------------------------------------------- |  | ---------------------------- |  | --------------------------- | - | ---------- |  | ----------------------- | 
|                                                                                        |  |                              |  |                             |   |            |  |                         | 
|Allowance for doubtful accounts deducted from accounts receivable in
the balance sheet: |  |                              |  |                             |   |            |  |                         | 
|2002                                                                                    |  | $415                         |  | 769                         |   | 714        |  | 470                     | 
|2001                                                                                    |  | 559                          |  | 442                         |   | 586        |  | 415                     | 
|2000                                                                                    |  | 356                          |  | 788                         |   | 585        |  | 559                     | 
|Valuation allowance for deferred tax assets:                                            |  |                              |  |                             |   |            |  |                         | 
|2002                                                                                    |  | 820                          |  | (20                         | ) |           |  | 800                     | 
|2001                                                                                    |  | 605                          |  | 215                         |   |           |  | 820                     | 
|2000                                                                                    |  | 154                          |  | 451                         |   |           |  | 605                     | 

See accompanying independent auditors
report.

27