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FORM 10-Q



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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended March 31, 2005



OR



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



For the transition period from  to



Commission File Number 0-13716



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NORTH PITTSBURGH SYSTEMS, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Pennsylvania                                                   |  | 25-1485389                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



4008 Gibsonia Road,
Gibsonia, Pennsylvania 15044-9311

(Address of principal executive offices)

(Zip Code)



724.443.9600

(Registrants telephone number, including area code)



No Change

(Former name, former address and former fiscal year, if changed since last report)



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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, and (2) has been subject to such filing requirements for the past 90
days.    YES  x    NO ̈



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



The number of shares of the registrants Common Stock (par value $.15625
per share) outstanding as of May 6, 2005 was 15,005,000.



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##### Table of Contents

TABLE OF CONTENTS



|           |  |                                                                                                   |  | 
|---------- |  | ------------------------------------------------------------------------------------------------- |  | 
|PART I     |  | Financial Information                                                                             |  | 
|           |  |                                                                                                  
|           |  | Report of Independent Registered Public Accounting Firm                                           |  | 
|           |  |                                                                                                  
|Item 1.    |  | Financial Statements (Unaudited)                                                                  |  | 
|           |  |                                                                                                  
|           |  | Condensed Consolidated Statements of IncomeFor the three months ended March 31, 2005 and 2004     |  | 
|           |  |                                                                                                  
|           |  | Condensed Consolidated Balance SheetsMarch 31, 2005 and December 31, 2004                         |  | 
|           |  |                                                                                                  
|           |  | Condensed Consolidated Statements of Cash FlowsFor the three months ended March 31, 2005 and 2004 |  | 
|           |  |                                                                                                  
|           |  | Notes to Condensed Consolidated Financial Statements                                              |  | 
|           |  |                                                                                                  
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations             |  | 
|           |  |                                                                                                  
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                        |  | 
|           |  |                                                                                                  
|Item 4.    |  | Controls and Procedures                                                                           |  | 
|           |  |                                                                                                  
|PART II    |  | Other Information                                                                                 |  | 
|           |  |                                                                                                  
|Item 6.    |  | Exhibits                                                                                          |  | 
|           | 
|SIGNATURES |  |                                                                                                  



2



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##### Table of Contents

PART I



FINANCIAL INFORMATION



Report of Independent Registered Public Accounting Firm



The Board of Directors and Shareholders

North Pittsburgh Systems, Inc.:



We have reviewed the condensed consolidated balance sheet of North Pittsburgh Systems, Inc. and subsidiaries (the Company)
as of March 31, 2005, the related condensed consolidated statements of income for the three-month periods ended March 31, 2005 and 2004, and the related condensed consolidated statements of cash flows for the three-month periods ended March 31, 2005
and 2004. These condensed consolidated financial statements are the responsibility of the Companys management.



We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.



Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.



We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheet of North Pittsburgh Systems, Inc. and subsidiaries as of December 31, 2004, and the related consolidated statements of income, shareholders equity and comprehensive income, and cash flows for the year then ended
(not presented herein); and in our report dated March 4, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of
December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.



/s/ KPMG LLP



Pittsburgh, Pennsylvania

May 6, 2005



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##### Table of Contents

PART I



FINANCIAL INFORMATION



Item 1. Financial Statements



NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES



Condensed Consolidated Statements of Income (Unaudited)

(Amounts in Thousands  Except Per Share Data)



|                                                                                                        |  |                                     |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                        |  | For the Three Months Ended March 31 |       
|                                                                                                        |  | 2005                                |        |   | 2004 |  
|Operating revenues:                                                                                     |  |                                     |        |   |      |   |        |  
|Local network services                                                                                  |  | $                                   | 7,869  |   |      | $ | 7,032  |  
|Long distance and access services                                                                       |  |                                     | 15,911 |   |      |   | 16,651 |  
|Directory advertising, billing and other services                                                       |  |                                     | 355    |   |      |   | 357    |  
|Telecommunication equipment sales                                                                       |  |                                     | 325    |   |      |   | 615    |  
|Other operating revenues                                                                                |  |                                     | 3,201  |   |      |   | 2,791  |  
|                                                                                                        |  |                                     |        |   |      |   |        |  
|Total operating revenues                                                                                |  |                                     | 27,661 |   |      |   | 27,446 |  
|                                                                                                        |  |                                    
|Operating expenses:                                                                                     |  |                                     |        |   |      |   |        |  
|Network and other operating expenses (exclusive of deprecation and amortization shown separately below) |  |                                     | 14,635 |   |      |   | 14,156 |  
|Depreciation and amortization                                                                           |  |                                     | 4,882  |   |      |   | 4,629  |  
|State and local taxes                                                                                   |  |                                     | 1,086  |   |      |   | 1,118  |  
|Telecommunication equipment expenses                                                                    |  |                                     | 245    |   |      |   | 421    |  
|                                                                                                        |  |                                     |        |   |      |   |        |  
|Total operating expenses                                                                                |  |                                     | 20,848 |   |      |   | 20,324 |  
|                                                                                                        |  |                                     |        |   |      |   |        |  
|Net operating income                                                                                    |  |                                     | 6,813  |   |      |   | 7,122  |  
|                                                                                                        |  |                                    
|Other income (expense), net:                                                                            |  |                                     |        |   |      |   |        |  
|Interest expense                                                                                        |  |                                     | (418   | ) |      |   | (493   | )
|Interest income                                                                                         |  |                                     | 252    |   |      |   | 62     |  
|Equity income of affiliated companies                                                                   |  |                                     | 1,320  |   |      |   | 804    |  
|Sundry expense, net                                                                                     |  |                                     | (7     | ) |      |   | (15    | )
|                                                                                                        |  |                                     |        |   |      |   |        |  
|Total other income (expense), net                                                                       |  |                                     | 1,147  |   |      |   | 358    |  
|                                                                                                        |  |                                     |        |   |      |   |        |  
|Income before income taxes                                                                              |  |                                     | 7,960  |   |      |   | 7,480  |  
|                                                                                                        |  |                                    
|Provision for income taxes                                                                              |  |                                     | 3,271  |   |      |   | 3,083  |  
|                                                                                                        |  |                                     |        |   |      |   |        |  
|Net income                                                                                              |  | $                                   | 4,689  |   |      | $ | 4,397  |  
|                                                                                                        |  |                                     |        |   |      |   |        |  
|Weighted average common shares outstanding                                                              |  |                                     | 15,005 |   |      |   | 15,005 |  
|                                                                                                        |  |                                     |        |   |      |   |        |  
|Basic and diluted earnings per share                                                                    |  | $                                   | .31    |   |      | $ | .29    |  
|                                                                                                        |  |                                     |        |   |      |   |        |  
|Dividends per share                                                                                     |  | $                                   | .18    |   |      | $ | .18    |  
|                                                                                                        |  |                                     |        |   |      |   |        |  



See accompanying notes
to unaudited condensed consolidated financial statements.



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##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES



Condensed Consolidated Balance Sheets

(Amounts in Thousands)



|                                                                                 |  |                           |         |              |   |        
|-------------------------------------------------------------------------------- |  | ------------------------- | ------- | ------------ | - | -------
|                                                                                 |  | (Unaudited) March 31 2005 |         | Dec. 31 2004
|ASSETS                                                                           |  |                           |         |              |   |        
|Current Assets:                                                                  |  |                           |         |              |   |        
|Cash and temporary investments                                                   |  | $                         | 44,006  |              | $ | 42,569 
|Marketable securities available for sale                                         |  |                           | 478     |              |   | 487    
|Accounts receivable:                                                             |  |                           |         |              |   |        
|Customers, net of allowance for doubtful accounts of $554 and $565, respectively |  |                           | 5,549   |              |   | 5,320  
|Access service settlements and other                                             |  |                           | 6,521   |              |   | 7,027  
|Unbilled revenues                                                                |  |                           | 595     |              |   | 591    
|Prepaid expenses                                                                 |  |                           | 825     |              |   | 748    
|Inventories                                                                      |  |                           | 1,647   |              |   | 1,539  
|Prepaid taxes other than income taxes                                            |  |                           | 1,245   |              |   |       
|Deferred income taxes                                                            |  |                           | 1,165   |              |   | 1,199  
|                                                                                 |  |                           |         |              |   |        
|Total current assets                                                             |  |                           | 62,031  |              |   | 59,480 
|                                                                                 |  |                           |         |              |   |        
|Property, plant and equipment:                                                   |  |                           |         |              |   |        
|Land                                                                             |  |                           | 475     |              |   | 475    
|Buildings                                                                        |  |                           | 14,258  |              |   | 14,107 
|Equipment                                                                        |  |                           | 201,722 |              |   | 200,484
|Assets held under capital lease                                                  |  |                           | 10,498  |              |   | 10,498 
|                                                                                 |  |                           |         |              |   |        
|                                                                                 |  |                           | 226,953 |              |   | 225,564
|                                                                                 |  |                          
|Less accumulated depreciation and amortization                                   |  |                           | 152,988 |              |   | 148,730
|                                                                                 |  |                           |         |              |   |        
|                                                                                 |  |                           | 73,965  |              |   | 76,834 
|                                                                                 |  |                          
|Construction in progress                                                         |  |                           | 3,433   |              |   | 3,212  
|                                                                                 |  |                           |         |              |   |        
|Total property, plant and equipment, net                                         |  |                           | 77,398  |              |   | 80,046 
|                                                                                 |  |                          
|Investments                                                                      |  |                           | 14,512  |              |   | 13,902 
|Intangible asset                                                                 |  |                           | 824     |              |   | 824    
|Other assets                                                                     |  |                           | 1,248   |              |   | 1,248  
|                                                                                 |  |                           |         |              |   |        
|Total assets                                                                     |  | $                         | 156,013 |              | $ | 155,500
|                                                                                 |  |                           |         |              |   |        



(Continued)



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##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES



Condensed Consolidated Balance Sheets

(Amounts in Thousands)



|                                                                                    |  |                          |         |   |              |   |         |  
|----------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ------------ | - | ------- | -
|                                                                                    |  | (Unaudited) March 312005 |         |   | Dec. 31 2004 |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                |  |                          |         |   |              |   |         |  
|Current liabilities:                                                                |  |                          |         |   |              |   |         |  
|Current portion of long-term debt                                                   |  | $                        | 3,085   |   |              | $ | 3,085   |  
|Obligation under capital lease                                                      |  |                          | 1,016   |   |              |   | 1,086   |  
|Accounts payable                                                                    |  |                          | 5,559   |   |              |   | 6,322   |  
|Advance billings                                                                    |  |                          | 1,763   |   |              |   | 1,714   |  
|Dividend payable                                                                    |  |                          | 2,701   |   |              |   | 2,701   |  
|Other accrued liabilities                                                           |  |                          | 3,315   |   |              |   | 3,702   |  
|Federal and state income taxes                                                      |  |                          | 3,729   |   |              |   | 1,713   |  
|                                                                                    |  |                          |         |   |              |   |         |  
|Total current liabilities                                                           |  |                          | 21,168  |   |              |   | 20,323  |  
|                                                                                    |  |                          |         |   |              |   |         |  
|Long-term debt                                                                      |  |                          | 20,826  |   |              |   | 21,597  |  
|Obligation under capital lease                                                      |  |                          | 4,358   |   |              |   | 4,588   |  
|Deferred income taxes                                                               |  |                          | 8,298   |   |              |   | 8,490   |  
|Accrued pension and postretirement benefits                                         |  |                          | 11,660  |   |              |   | 13,038  |  
|Other liabilities                                                                   |  |                          | 859     |   |              |   | 603     |  
|                                                                                    |  |                          |         |   |              |   |         |  
|Total liabilities                                                                   |  |                          | 67,169  |   |              |   | 68,639  |  
|                                                                                    |  |                          |         |   |              |   |         |  
|Shareholders equity:                                                               |  |                          |         |   |              |   |         |  
|Capital stock: authorized 50,000 shares:                                            |  |                          |         |   |              |   |         |  
|Common stock, par value $.15625; issued 15,040 shares and outstanding 15,005 shares |  |                          | 2,350   |   |              |   | 2,350   |  
|Preferred stock, par value $1.00; none issued                                       |  |                          |        |   |              |   |        |  
|Capital in excess of par value                                                      |  |                          | 2,215   |   |              |   | 2,215   |  
|Retained earnings                                                                   |  |                          | 86,815  |   |              |   | 84,827  |  
|Less cost of treasury stock (35 shares)                                             |  |                          | (508    | ) |              |   | (508    | )
|Accumulated other comprehensive loss                                                |  |                          | (2,028  | ) |              |   | (2,023  | )
|                                                                                    |  |                          |         |   |              |   |         |  
|Total shareholders equity                                                          |  |                          | 88,844  |   |              |   | 86,861  |  
|                                                                                    |  |                          |         |   |              |   |         |  
|Total liabilities and shareholders equity                                          |  | $                        | 156,013 |   |              | $ | 155,500 |  
|                                                                                    |  |                          |         |   |              |   |         |  



See accompanying notes
to unaudited condensed consolidated financial statements.



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##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES



Condensed Consolidated Statements of Cash Flows (Unaudited)

(Amounts in Thousands)



|                                                                           |  |                                     |        |   |      |   |        |  
|-------------------------------------------------------------------------- |  | ----------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                           |  | For the Three Months Ended March 31 |       
|                                                                           |  | 2005                                |        |   | 2004 |  
|Cash from operating activities:                                            |  |                                     |        |   |      |   |        |  
|Net income                                                                 |  | $                                   | 4,689  |   |      | $ | 4,397  |  
|Adjustments to reconcile net income to net cash from operating activities: |  |                                     |        |   |      |   |        |  
|Depreciation and amortization                                              |  |                                     | 4,882  |   |      |   | 4,629  |  
|Equity income of affiliated companies                                      |  |                                     | (1,320 | ) |      |   | (804   | )
|Changes in assets and liabilities:                                         |  |                                     |        |   |      |   |        |  
|Accounts receivable and unbilled revenues                                  |  |                                     | 273    |   |      |   | 836    |  
|Inventories                                                                |  |                                     | (108   | ) |      |   | (108   | )
|Prepaid expenses and other assets                                          |  |                                     | (77    | ) |      |   | 276    |  
|Prepaid taxes other than income taxes                                      |  |                                     | (1,245 | ) |      |   | (1,161 | )
|Accounts payable and advanced billings                                     |  |                                     | (714   | ) |      |   | (225   | )
|Other accrued liabilities                                                  |  |                                     | (131   | ) |      |   | (228   | )
|Accrued pension and postretirement benefits                                |  |                                     | (1,378 | ) |      |   | (515   | )
|Federal and state income taxes                                             |  |                                     | 2,016  |   |      |   | 1,227  |  
|Deferred income taxes                                                      |  |                                     | (154   | ) |      |   | (250   | )
|Other, net                                                                 |  |                                     | 64     |   |      |   | 25     |  
|                                                                           |  |                                     |        |   |      |   |        |  
|Total adjustments                                                          |  |                                     | 2,108  |   |      |   | 3,702  |  
|                                                                           |  |                                     |        |   |      |   |        |  
|Net cash from operating activities                                         |  |                                     | 6,797  |   |      |   | 8,099  |  
|                                                                           |  |                                     |        |   |      |   |        |  
|Cash used for investing activities:                                        |  |                                     |        |   |      |   |        |  
|Expenditures for property and equipment                                    |  |                                     | (2,298 | ) |      |   | (3,048 | )
|Purchase of marketable securities available for sale                       |  |                                     |       |   |      |   | (25    | )
|Distributions from affiliated companies                                    |  |                                     | 710    |   |      |   | 597    |  
|                                                                           |  |                                     |        |   |      |   |        |  
|Net cash used for investing activities                                     |  |                                     | (1,588 | ) |      |   | (2,476 | )
|                                                                           |  |                                     |        |   |      |   |        |  
|Cash used for financing activities:                                        |  |                                     |        |   |      |   |        |  
|Cash dividends                                                             |  |                                     | (2,701 | ) |      |   | (2,551 | )
|Payments of capital lease obligation                                       |  |                                     | (300   | ) |      |   | (261   | )
|Retirement of debt                                                         |  |                                     | (771   | ) |      |   | (771   | )
|                                                                           |  |                                     |        |   |      |   |        |  
|Net cash used for financing activities                                     |  |                                     | (3,772 | ) |      |   | (3,583 | )
|                                                                           |  |                                     |        |   |      |   |        |  
|Net increase in cash and temporary investments                             |  |                                     | 1,437  |   |      |   | 2,040  |  
|                                                                           |  |                                    
|Cash and temporary investments at beginning of period                      |  |                                     | 42,569 |   |      |   | 32,026 |  
|                                                                           |  |                                     |        |   |      |   |        |  
|Cash and temporary investments at end of period                            |  | $                                   | 44,006 |   |      | $ | 34,066 |  
|                                                                           |  |                                     |        |   |      |   |        |  
|Supplemental disclosure of cash flow information:                          |  |                                     |        |   |      |   |        |  
|Interest paid                                                              |  | $                                   | 431    |   |      | $ | 498    |  
|Income taxes paid                                                          |  | $                                   | 1,412  |   |      | $ | 2,108  |  



See accompanying notes
to unaudited condensed consolidated financial statements.



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##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES



Notes to Condensed Consolidated Financial Statements (Unaudited)

(Amounts in Thousands)



(1) Basis of Presentation and Consolidation



The condensed consolidated financial statements included herein have been
prepared by North Pittsburgh Systems, Inc. (hereafter referred to as the Registrant, the Company, we, us or our), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Consolidated herein are the financial
results of the Companys wholly owned subsidiaries, North Pittsburgh Telephone Company (North Pittsburgh), Penn Telecom, Inc. (Penn Telecom) and Pinnatech, Inc. (Pinnatech). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Nevertheless, the Company believes that its disclosures herein are adequate to make
the information presented not misleading and, in the opinion of management, all adjustments necessary to present fairly the results of operations for the interim periods have been reflected. These condensed consolidated financial statements should
be read in conjunction with the financial statements and the notes thereto included in the Companys latest Annual Report on Form 10-K filed with the Securities and Exchange Commission.



The preparation of the condensed consolidated financial statements 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 condensed
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 condensed consolidated financial statements.



Certain amounts in the Companys 2004 condensed consolidated financial statements have been reclassified to conform with the presentation of its 2005 condensed consolidated financial statements.



(2) Comprehensive Income



Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, establishes requirements for disclosure of comprehensive income. The objective of SFAS No. 130 is to report all changes in equity that result from transactions and economic events other than transactions with owners.
Comprehensive income is the total of net income and all other non-owner changes in equity. The reconciliation of net income to comprehensive income is as follows:



|                                                                                                   |  |                                     |       |   |      |   |      
|-------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ----- | - | ---- | - | -----
|                                                                                                   |  | For the Three Months Ended March 31
|                                                                                                   |  | 2005                                |       |   | 2004
|Net income                                                                                         |  | $                                   | 4,689 |   |      | $ | 4,397
|Unrealized gain (loss) on marketable securities including reclassification adjustments, net of tax |  |                                     | (5    | ) |      |   | 3    
|                                                                                                   |  |                                     |       |   |      |   |      
|Comprehensive income                                                                               |  | $                                   | 4,684 |   |      | $ | 4,400
|                                                                                                   |  |                                     |       |   |      |   |      



(3) Postretirement Benefits



Substantially all employees of North Pittsburgh
are covered by a noncontributory, defined benefit retirement plan (Pension Plan). The benefits are based on each employees years of service and compensation. North Pittsburgh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 Pension Plan are held in a trust and are invested in a variety of equity and fixed income securities.



Pursuant to North Pittsburghs collective bargaining agreement
negotiated during 2004, eligibility for the Pension Plan is limited to those employees whose active service with North Pittsburgh commenced prior to November 1, 2004. Any employees hired on or after November 1, 2004 are not eligible to participate
in the Pension Plan. Instead, for those employees covered by the collective bargaining agreement but hired on or after November 1, 2004, North Pittsburgh will contribute an amount equal to 2% of the employees gross wages into a union sponsored
401(k) plan. All employees hired by North Pittsburgh on or after November 1, 2004 who are not covered by the collective bargaining agreement are eligible to participate in North Pittsburghs 401(k) plan in which the Company makes a matching
contribution based on a specified percentage of employee contributions.



Eligible retirees of North Pittsburgh are provided healthcare benefits under an unfunded plan until the retiree reaches Medicare eligibility (currently 65 years of age) and life insurance benefits based on a specified percentage of
pre-retirement salary until the retiree reaches the age of 65, at which time the coverage is limited to $5. The costs associated with these plans are reflected in the Other Postretirement Benefits columns that follow.



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##### Table of Contents

Components of Net Periodic Benefit Cost:



The following table summarizes the components of net periodic benefit cost:



|                                   |  |                                            |      |   |                                                         |   |      |      |  |   |      |   |  |   |     |  
|---------------------------------- |  | ------------------------------------------ | ---- | - | ------------------------------------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | --- | -
|                                   |  | Pension BenefitsThree Months EndedMarch 31 |      |   | Other PostretirementBenefits-Three MonthsEnded March 31 |  
|                                   |  | 2005                                       |      |   | 2004                                                    |   |      | 2005 |  |   | 2004 |  
|Service cost                       |  | $                                          | 371  |   |                                                         | $ | 331  |      |  | $ | 87   |   |  | $ | 88  |  
|Interest cost                      |  |                                            | 724  |   |                                                         |   | 690  |      |  |   | 168  |   |  |   | 170 |  
|Expected return on plan assets     |  |                                            | (795 | ) |                                                         |   | (716 | )    |  |   |     |   |  |   |    |  
|Amortization of prior service cost |  |                                            | 35   |   |                                                         |   | 31   |      |  |   | (1   | ) |  |   | (1  | )
|Amortization of transition asset   |  |                                            | (38  | ) |                                                         |   | (38  | )    |  |   |     |   |  |   |    |  
|Recognized actuarial loss          |  |                                            | 133  |   |                                                         |   | 116  |      |  |   | 55   |   |  |   | 60  |  
|                                   |  |                                            |      |   |                                                         |   |      |      |  |   |      |   |  |   |     |  
|Net periodic benefit cost          |  | $                                          | 430  |   |                                                         | $ | 414  |      |  | $ | 309  |   |  | $ | 317 |  
|                                   |  |                                            |      |   |                                                         |   |      |      |  |   |      |   |  |   |     |  



North Pittsburgh also
has a nonqualified supplemental pension plan covering former and current employees, which provides for incremental pension payments to the extent that income tax regulations limit the amount payable from North Pittsburghs qualified defined
benefit Pension Plan. Pension expense for the supplemental plan for the three-month periods ended March 31, 2005 and 2004 was $63 and $55, respectively.



Employer Contributions:



The Company previously disclosed in its financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2004 (2004 Form
10-K), that it expected to make discretionary contributions totaling $2,500 to its Pension Plan in 2005. Due to elective additional tax-deductible contributions made in both 2003 and 2004, no minimum contribution is required for the Pension Plan in
2005. However, the Company made a tax-deductible discretionary contribution of $2,000 in January of 2005 and may make an additional contribution of up to $500 during the second quarter of 2005, contingent upon an assessment of the tax-deductibility
of the expected contribution.



Contributions for the other
postretirement benefit plans are made on a pay-as-you-go basis, with total contributions of $180 having been made during the three-month period ended March 31, 2005. The $180 of contributions for the first quarter of 2005 were in line with the
expected annual contributions of $719 disclosed in the Companys 2004 Form 10-K.



(4) Transactions with Related Parties



Since
1998, we have had an agreement to obtain certain data processing functions from a third party processor (Processor), which is a member of the Armstrong Group of Companies (the Armstrong Group). We are related to the Armstrong Group by a common
shareholder and director. Payments to the Processor under this agreement were $942 and $822 for the three-month periods ended March 31, 2005 and 2004, respectively. Also, we paid $65 and $44 in each of those same periods to the law firms of two
members of the Board of Directors for various legal services. As of March 31, 2005, we had amounts outstanding of $279 and $73 to the Processor and law firms, respectively.



In addition, in the ordinary course of business, we both provide and receive telecommunication transport services from
Boulevard Communications, LLP (Boulevard), a competitive access provider jointly owned by us and a company in the Armstrong Group. Total revenues recognized from providing services to Boulevard were approximately $6 and $7, and total expenses
incurred from receiving services from Boulevard were approximately $44 and $50, for the three-month periods ended March 31, 2005 and 2004, respectively. We also provide, in the ordinary course of business, telecommunications and transport services
to other member companies of the Armstrong Group, with total revenues recognized of approximately $73 for each of those respective periods. The amounts outstanding from and/or due to Boulevard and the companies in the Armstrong Group were negligible
as of March 31, 2005.



(5) Recent Accounting Pronouncements



The Financial Accounting Standards Board (FASB) issued Interpretation No.
46 (FIN 46), Consolidation of Variable Interest Entities, in January 2003 and amended the Interpretation in December 2003. A variable interest entity (VIE) is an entity in which its voting equity investors lack the characteristics of
having a controlling financial interest or where the existing capital at risk is insufficient to permit the entity to finance its activities without receiving additional financial support from other parties. FIN 46 requires the consolidation of
entities which are determined to be VIEs when the reporting company determines itself to be the primary beneficiary (the entity that will



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absorb a majority of the VIEs expected losses, receive a majority of the VIEs residual returns, or both). The
amended Interpretation became effective for the first interim or annual reporting period ending after March 15, 2004, with the exception of special purpose entities for which the statement was effective for periods ending after December 15, 2003. We
have completed a review of our partnership investments and have determined that those entities do not qualify as VIEs.



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



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PART I



Item 2. Managements Discussion and Analysis of Financial Condition

and Results of Operations

(Amounts in Thousands Except Per Share Data and Operating Statistics)



Cautionary Language Concerning Forward-Looking Statements



In addition to historical information, this Quarterly Report on Form 10-Q 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 following list of risks and uncertainties is not exhaustive, some factors, in addition to those contained throughout this document, that could affect future operating results, financial position and cash
flows and could cause actual results to differ materially from those expressed in or implied by the forward-looking statements are:



| |  |  | 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.
| | - |  | -----------------------------------------------------------------------



We also refer you to the section titled Factors Affecting Our Prospects under Item 1 of our 2004 Form 10-K for additional discussions
concerning items which pose risks and uncertainties that could affect our future results.



Overview



We are a
telecommunications company with annualized revenues of over $100 million. Our original core business, which dates back to 1906, consisted primarily of providing telecommunications services in our Incumbent Local Exchange Carrier (ILEC) territory,
which today covers approximately 285 square miles and is located north of the City of Pittsburgh. In 1995, as the Internet was still in its relatively early stages, we purchased a small Internet Service Provider (ISP) as a segue into that area of
the communications market place. During 1999, we began to expand our business beyond our ILEC territory via a Competitive Local Exchange Carrier (CLEC) edge-out strategy. In addition, from 1997 through 2001, we invested approximately $83 million in
our ILEC territory to upgrade the majority of our network and to deploy a Carrier Serving Area (CSA) architecture in order to allow us to offer advanced broadband products.



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



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



General Description of Our Company and Business



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



North Pittsburgh Telephone Company



North Pittsburgh, our 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. We provide service to approximately 71,800 business and residential access lines in our ILEC territory.
Over the past decade, our ILEC territory has experienced very robust population growth due to the continued expansion of suburban communities into our serving area, with the southernmost point of our territory only 12 miles from the City of
Pittsburgh. According to the most recent census, the population in our ILEC service territory grew 14.3% from 1990 to 2000. Although no formal census has been published since 2000, business and new home growth has remained robust in our territory
over the last several years and census estimates, which are published on a yearly basis, continue to show population growth.



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



Penn Telecom



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



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



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



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CLECs. As of March 31, 2005, Penn Telecom served 37,708 dial tone access lines and 21,662 access line
equivalents1, for a grand total of 59,370 equivalent access lines2.



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



Pinnatech



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



For a more complete understanding of our business, industry, principal services rendered, properties and other interests, we
suggest you read our 2004 Form 10-K. There have been no significant changes in the mode of conducting business or the properties owned by the Company or its subsidiaries since the filing of that Form 10-K report. Current updates to the regulatory
environment under which our subsidiaries operate can be found below in the Regulatory Environment section of this Managements Discussion and Analysis of Financial Condition and Results of Operations.



Industry Dynamics



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



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



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



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



Regulation and Competition



The
telecommunications industry was greatly impacted by the passage of the Telecommunications Act of 1996 (the 1996 Act), which was the legislative instrument that opened the industry to significantly greater competition. The degree and pace at which
markets have been experiencing competition have varied, with most of the original regulatory barriers to entry removed in the markets served by the countrys largest local exchange carriers, also referred to as the Regional Bell Operating
Companies (RBOCs). Smaller rural companies, such as our ILEC, North

---

|1 | Access line equivalents represent a conversion of data circuits to an access line basis and
are 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 and OC-48) 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.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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Pittsburgh, were given regulatory relief in the form of exemptions and temporary suspensions from many of the competitive
portions of the 1996 Act in order to allow state regulators sufficient time to examine the public policy implications of allowing competition in rural areas, and if deemed in the public interest, to allow smaller companies to gradually prepare for
competition and to restructure rates. Although we still maintain in our ILEC territory some of the regulatory protections against non-facilities based competition, we expect that over time these protections will be reduced or eliminated.



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



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



Highlights and Outlook



Revenues for the first quarter of 2005 increased $215, or 0.8%, over the first quarter of 2004. The majority of this growth was attributable to our ability to continue to effectively penetrate our edge-out markets as well as expand our
broadband service offerings. As experienced for full year 2004, in which our revenue growth rate of 2.6% was lower than recent historical rates, our ability to grow end-user revenues by adding customers in our CLEC markets and expanding our
broadband service offerings has been mostly offset by decreases in access revenues. The phase down of Penn Telecoms interstate access rates in conjunction with the FCCs Access Charge Reform Order, decreases in access and transit rates
charged for wireless traffic and decreases in the National Exchange Carrier Association (NECA) average schedule formulas used to determine North Pittsburghs interstate revenue requirement, as well as some regulatory modifications and other
events which have diminished the Companys ability to earn above the historical allowable rate of return, have caused access revenues to decrease. In addition, a $290 decrease in telecommunication equipment sales, which is our only notable
revenue source that is non-recurring in nature and therefore subject to greater fluctuation on a quarterly basis, also negatively impacted our revenue growth rate for the first quarter of 2005 as compared to the prior year comparable quarter.



Although the revenue growth rate of 0.8% for the first quarter
of 2005 is currently below the 2.6% growth rate experienced for full year 2004, several of the decreases in intercarrier compensation rates described above occurred in June and July of 2004, respectively. As such, the impact of those access rate
decreases on our revenue growth rate should not be as great in the second half of 2005, as the majority of the comparable 2004 period would have also been subject to the same access rate decreases. We do caution, however, that further modifications
to intercarrier compensation and universal service rules and regulatory policies, which we are unable to reasonably predict, could result in further decreases in our access revenues.



We expect that competition for all of our service offerings will continue to intensify, resulting in further pressures on
operating revenues and margins. We expect that revenue growth will continue to be driven by the addition of new customers in our edge-out markets and by further broadband penetration. We have also started to focus to an even greater extent on
bundled product offerings, which we anticipate will drive value to our customers and serve as a tool for retention of our existing customer base.



Total operating expenses for the first quarter of 2005 increased $524, or 2.6%, over the first quarter of 2004. The increase in operating expenses was
predominately due to increases in the direct costs associated with the growth in access lines and access line equivalents, such as fees paid for leasing unbundled network elements in the portions of our edge-out markets that we do not wholly
provision over our own facilities and fees paid to terminate the increased local, toll and Internet traffic generated by our growing customer base. In addition, depreciation expense increased as a result of an increase in our depreciable asset base.



For the remainder of 2005, we expect our operating costs to
increase at a slightly greater rate than the 2.0% increase experienced for full year 2004 (the 2.0% figure for 2004 excludes the impact of $2,725 in charges associated with a workforce reduction in 2003, which impacted year over year comparable
results). The positive year over year benefits of the decreases in depreciation expense and cost of contracted operational support system (OSS) services experienced in 2004 were mostly the result of 2003 including the higher depreciation and OSS
costs, respectively. For 2005 comparative purposes, both years will include the benefits of the reduced costs. We also have begun to implement several new software systems, including a workforce management system and an automated switch provisioning
system, and we expect to



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implement a new billing and OSS platform at our CLEC later in the year. We believe that these systems will improve our
cost structure and operational efficiencies over the long-term. However, it is typical that the implementation costs for such projects will exceed the cost savings in the first year. In addition, we anticipate rolling out our new VoIP product in
2005. We expect, however, that the costs associated with the roll-out in the first year will likely exceed the first year benefits.



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



Our cost structure is heavily weighted towards labor and depreciation. As such, there is not a great deal of direct correlation between our revenues and our largest operating expenses. We have taken steps to address our overall labor costs,
including the workforce reduction program implemented in 2003 and using our excess cash reserves to make additional contributions into the North Pittsburgh Pension Plan over the past several years. In addition, pursuant to a renegotiated collective
bargaining agreement in 2004 covering our North Pittsburgh subsidiary, future hires are not eligible to participate in the North Pittsburgh Pension Plan. Although we will not see any immediate benefits from this in 2005 and estimate only modest
benefits in the next few years thereafter, the long-term impact should be a reduction in postretirement benefit expenses, which currently exceed $3,000 per year.



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



In addition, we have benefited from
investments made in the last two decades in wireless partnerships, all of which today are majority owned and operated by Verizon Wireless. Instead of deploying the majority of our investment capital into forming and operating our own wireless
business, which would be at a tremendous disadvantage competing in a market dominated by national carriers with billions of dollars in capital resources, we alternatively invested in three wireless partnerships covering Pittsburgh and other portions
of Western Pennsylvania. Total equity income recorded from our investments in the wireless partnerships increased $525 in the first quarter of 2005 over the prior year comparable period.



Our financial condition and balance sheet have continually improved over the last several years through prudent investment
strategies and strong cash flows generated from operating activities. Unlike many telecommunication companies that have substantially leveraged their businesses, we have a greater amount of cash and temporary investments on hand ($44,006) than our
total debt outstanding ($23,911). Our financial condition gives us the ability to invest in new products and/or opportunities and the flexibility to continue to evaluate ways to create greater shareholder value, whether through our dividend policy,
stock repurchases or other investment opportunities.



The
following discussion should be read in conjunction with our condensed consolidated financial statements, and the notes thereto, included in this quarterly report and with our audited financial statements, and notes thereto, included in our 2004 Form
10-K.



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Results of Operations for the Three Months Ended March 31, 2005 and 2004



Net income for the three-month period ended March 31, 2005 was $4,689, or
$.31 per share, compared to net income of $4,397, or $.29 per share, for the comparable prior year period. The increase in net income was attributable to the following factors:



Operating Revenues



Total operating revenues increased $215, or 0.8%, in the three-month period ended March 31, 2005 over the comparable period in 2004. This increase was the
result of increases in local network services revenues of $837 (11.9%) and other operating revenues of $410 (14.7%), offset partially by decreases in long distance and access services revenues of $740 (4.4%) directory advertising, billing and other
services revenues of $2 (0.6%) and telecommunication equipment sales of $290 (47.2%).



Increases in local network services revenues of $837, or 11.9%, were primarily attributable to the following factors:



| |  |  | Local dial tone revenues increased $431, partially as a result of total access lines (including CLEC) growing by 5,536 lines, or 5.3%, from 104,000 access lines as of March 31, 2004
to 109,536 access lines as of March 31, 2005. More specifically, the total growth was a result of a 7,695 access line increase in our edge-out markets offset partially by a 2,159 access line decrease in our ILEC market. Also contributing to the
increase was an approximate $360 increase in local dial tone revenues due to a revenue neutral rate re-balancing at North Pittsburgh during January of 2005, which increased local residential and business rates and decreased intrastate access rates.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Vertical feature revenues (which include revenues from custom calling features such as voicemail, caller ID, call waiting, etc.) increased $129, mostly as a result of the growth in
access lines and the up-selling of these features in bundled packages.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Local reciprocal compensation revenues increased $163 as we benefited from being able to bill for traffic above the growth cap set in the original FCC Order on Intercarrier
Compensation for ISP-Bound Traffic pursuant to the forbearance granted by the FCC in October of 2004 in the Petition of Core Communications, Inc. We expect local reciprocal compensation revenues to increase in 2005 at a rate higher than that
experienced in 2004 (a $160 increase was experienced for the full year) because 2004 included only approximately two and one half months of the benefit associated with being able to bill for traffic above the original growth cap. This expectation
assumes no further changes to the rules regarding intercarrier compensation for ISP bound traffic during 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The increase in other operating revenues of $410, or 14.7%, was primarily due to growth in DSL revenues of approximately $261 as combined DSL lines (both
wholesale and retail) sold increased from 10,445 as of March 31, 2004 to 12,544 as of March 31, 2005. In addition, revenues earned from other Internet related products and services, such as web development services, increased over the prior year
comparable period.



The decrease in long distance and access
services revenues3of $740, or 4.4%, was primarily attributable to the following factors:



| |  |  | Access revenues decreased $875, primarily due to four factors. First, as previously described in the text above that discusses local network service revenues, there was an
approximate $360 reduction in North Pittsburghs intrastate access revenues in conjunction with the revenue neutral rate re-balancing that increased North Pittsburghs local residential and business rates and decreased its intrastate
access rates.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Second, changes in NECA average
schedule formulas used to determine North Pittsburghs interstate revenue requirement as well as some regulatory modifications and other events that have diminished North Pittsburghs ability to earn above the historical allowable rate of
return have caused these interstate revenues to decrease approximately $325. Although we anticipate such revenues to decrease for full year 2005 as compared to full year 2004, we expect the majority of the year over year



---

|3 | The Company records and analyzes into three main components the elements that comprise the long distance and access services revenue category. The first category,
access revenues, reflects mainly per minute of use (MOU) sensitive access charges, universal service revenues received by the Company and end-user interstate access line charges assessed on customer bills. The second category, special access,
reflects the revenues received from high capacity circuits (primarily DS-1s, DS-3s and OC-3s) that are: 1) provided directly to end-user customers, both in the Companys ILEC and CLEC territories; 2) provisioned to other telecommunication
carriers for connection to their end-user customers; and 3) provisioned for inter-office trunking and transport and are billed under the special access tariff. The third category, toll, represents amounts billed to end-users for metro-area,
intraLATA, interLATA and international toll.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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decrease to occur in the first two quarters of the year. Average schedule formulas, which are effective
on a fiscal July 1 through June 30 basis (assuming no interim rate filings), decreased approximately 4% with the fiscal July 1, 2004 through June 30, 2005 filing (as average schedule formulas are a composite of multiple rate elements, the 4%
described above is a North Pittsburgh specific percentage based upon its respective weighted average impact of the multiple rate elements). As such, allowable earnings for the first quarter of 2005 decreased over the first quarter of 2004. Based
upon a review of the proposed NECA tariff for the fiscal July 1, 2005 through June 30, 2006 period, average schedule formulas appear to be remaining relatively constant with the prior fiscal year filing. As such, the average schedule formulas used
to calculate North Pittsburghs allowable earnings for the second half of 2005 should be comparable to those which were in effect for the second half of 2004.



Third, in conjunction with the FCCs Access Charge Reform Order, Penn Telecoms interstate access rates have been
phased down over a three-year period that began in 2001. The final phase down decrease, which adjusted Penn Telecoms rates to mirror the incumbents rates, was effective June 20, 2004 and resulted in an approximate $40 per month decrease
in access revenues.



Fourth, reductions in wireless
intercarrier compensation rates contributed to a $160 decrease in access revenues received from wireless carriers, despite an increase in billable MOUs. We expect to see a decrease in access revenues from wireless carriers for full year 2005, due to
the fact that the majority of the decreases in rates were effective in the beginning of the third quarter of 2004. As such, 2005 will reflect a full year of the reduced rates in comparison to only six months in 2004.



| |  |  | Overall toll revenues decreased $50. We have continued to be successful in bundling toll in our edge-out markets (in which the number of access lines grew by 5,536), with nearly an
80% subscription rate. Our ability to increase our customer base has been offset by continuing pricing pressures from the introduction of aggressively priced flat rate toll packages from other competitors and VoIP providers and intense pricing
competition in the wireless market. Excluding the impact of the prior year quarter benefiting from an extra day due to leap year, toll revenues were basically flat on a quarter over quarter basis.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Partially offset by:



| |  |  | Special access revenues increased $185, mostly as a result of increases in the number of DS-1 and DS-3 circuits sold in our ILEC territory. In addition, an increase in trunking from
wireless carriers and a network reconfiguration from an IXC also added to the revenue increase in this category.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The decrease in directory advertising, billing and other services revenues of $2 was not material.



The decrease in telecommunication equipment sales of $290 was due to a $205
decrease in new equipment sales and a $75 decrease in post-sale support revenues. As noted above, these revenue sources for the most part are non-recurring in nature and are therefore subject to greater fluctuation on a quarterly basis. The first
quarter of 2004 benefited from several large PBX sales, with revenues from that quarter totaled 31% of full year 2004 revenues.



Operating Expenses and Net Operating Income



Total operating expenses increased $524, or 2.6%, in the three-month period ended March 31, 2005 over the comparable period in 2004. The change was
the result of increases in network and other operating expenses of $479 (3.4%) and depreciation and amortization expenses of $253 (5.5%), offset partially by decreases in state and local taxes of $32 (2.9%) and telecommunications equipment expenses
of $176 (41.8%).



The increase in network and other
operating expenses of $524, or 2.6%, was primarily due to:



| |  |  | Increases in direct costs associated with the growth in access lines and access line equivalents. Such direct costs include the fees paid for leasing unbundled network elements in
the portions of our edge-out markets that we do not provision over our own facilities and fees paid to terminate the increased local, toll and Internet traffic generated by our growing customer base.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increases in auditing and legal expenses of approximately $80 as a result of the continued increases in rules and regulations promulgated by various market governing bodies, most
notably the requirements imposed by the Sarbanes-Oxley Act of 2002.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Increases in vehicle and building maintenance of approximately $90 due to the scheduling of when such repair and servicing projects are undertaken.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



Combined labor and benefit expenses for the three-month period ended March
31, 2005 increased a modest 0.3% over the comparable period in 2004. For full year 2004, such expenses increased 2.0% (excluding the impact of the workforce reduction charges incurred in 2003 as previously noted). Payroll expense was up slightly as
a result of the effects of the normal year over year wage increases and slight increases in the personnel serving our edge-out markets. Current benefit expenses (mostly composed of medical insurance premiums) declined slightly, primarily due to
decreases in medical insurance premiums at the Companys North Pittsburgh subsidiary as a result of an increase in employee co-payments as well as more favorable experience ratings received for our 2005 premiums (2003 and 2004 premium increases
were abnormally large due to an unusually high number of severe medical cases which negatively impacted the experience rated portion of our insurance premiums). Aggregate postretirement benefit expenses, as outlined in more detail in Note 3 to the
Condensed Consolidated Financial Statements included in this Form 10-Q, remained relatively constant, first quarter 2005 over first quarter 2004.



The increase in consolidated depreciation and amortization expenses of $253, or 5.5%, was the result of the depreciable asset base (gross property, plant
and equipment) increasing by 4.3% over the course of the past year. Furthermore, a higher ratio of new additions reflected data-centric equipment, which have shorter useful lives than the Companys average depreciable base.



The decrease in state and local taxes of $32 was not material.



The decrease in telecommunication equipment expenses of $176, or 41.8%, was
attributable to decreases in the direct costs of goods for equipment sales, as the associated revenues declined $290 from the prior year.



Overall, the increase in total operating revenues of $215, coupled with the increase in total operating expenses of $524, resulted in a $309, or 4.3%,
decrease in net operating income for the three-month period ended March 31, 2005 over the comparable prior year period.



Other Items



Interest expense decreased for the three-month period ended March 31, 2005 by $75 due to the continued scheduled pay-down of our Federal Financing Bank
(FFB) notes and capital lease obligation.



Interest income
increased by $190 during the three-month period ended March 31, 2005 due to higher average invested cash balances as well as a tripling of the average interest rate received on our temporary investments from the historically low rates earned in the
first quarter of 2004.



Equity income of affiliated companies
increased $516 in the three-month period ended March 31, 2005 over the comparable prior year period due mainly to a $525 increase in the amount of income generated from the Companys limited partner interests in three wireless partnerships.
These partnerships, all of which are majority owned and operated by Verizon Wireless, have continued to show strong growth in the number of customers and operating results. We are also benefiting from a reduction in the partnerships switching
costs that became effective with the partnerships results of operations recorded in our second quarter of 2004, which we estimate has contributed approximately $225 to the overall increase in first quarter 2005 equity income over the prior
year comparable quarter. While we expect that the earnings of the wireless partnerships will continue to improve during 2005, we do not anticipate the same magnitude of improvement as seen in 2004 ($2,537 increase for full year 2004). Although we
will continue to benefit from the aforementioned reduction in switching costs, the incremental impact it had on 2004 earnings will most likely be non-repetitive in nature (that is, for 2005 comparison purposes, the last three quarters of 2004 would
also have contained the lower switching rates).



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



Liquidity and Capital Resources



|                                              |  |               |        |                  |   |       
|--------------------------------------------- |  | ------------- | ------ | ---------------- | - | ------
|                                              |  | March 31,2005 |        | December 31,2004
|Cash and temporary investments                |  | $             | 44,006 |                  | $ | 42,569
|Working capital                               |  | $             | 40,863 |                  | $ | 39,157
|Long-term debt (including current maturities) |  | $             | 23,911 |                  | $ | 24,682



Cash and temporary
investments were $44,006 at March 31, 2005 as compared to $42,569 at December 31, 2004. The increase was a result of operating cash flows exceeding investment



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and financing requirements. Cash flows from operations were $6,797 for the three-month period ended March 31, 2005, a
$1,302 decrease from the comparable prior year period. Cash flows from operations were negatively impacted by an $846 increase in discretionary contributions into the Companys Pension Plan. We estimate that discretionary contributions to the
Pension Plan will be similar for full year 2005 as compared to full year 2004. However, we accelerated the amount of our January contribution into the Pension Plan in comparison to last year. In addition, the first quarter of 2004 was positively
impacted by improvements in accounts receivable collection, with an approximate $421 previously disputed receivable paid by a carrier in January of 2004. We do not expect the magnitude of the first quarter 2005 decrease (16.1%) in cash flows from
operations to continue throughout the rest of the year as we anticipate the Pension Plan discretionary contributions for 2005 to be similar in amount to those in 2004 on a full year basis. In addition, the above mentioned accounts receivable
collection was unique to the first quarter of 2004.



Cash flows
used for investing activities were $1,588 for the three-month period ended March 31, 2005, an $888 decrease from the comparable prior year period. The decrease was primarily the result of a $750 decrease in expenditures for capital additions. We
expect that a larger portion of our 2005 capital expenditure program will be spent in the second half of the year, although, in total, we estimate that the full year 2005 capital expenditure program may be approximately $1,000 less than the prior
year program as 2004 included several large building renovations and expenditures for the majority of the core networking equipment for our planned VoIP product. Cash flows from investing activities were also positively impacted by a $113 increase
in distributions received from our wireless partnerships.



We
expended $3,772 during the three-month period ended March 31, 2005 for financing activities, which included cash dividends and the scheduled repayments of debt and capital lease obligations. The amount was $189 higher than the prior year period,
mostly as a result of a $150 increase in dividends paid pursuant to a $.01 per share increase in the dividend paid during the first quarter of 2005 over that paid in the first quarter of 2004.



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



Working capital levels at
March 31, 2005 increased $1,706 from December 31, 2004, mostly due to the continued generation of cash flows from operations, which contributed to a $1,437 increase in cash and temporary investments (as discussed above).



The decrease in long-term debt was a result of scheduled principal repayments
of $771 during the three-month period ended March 31, 2005. We funded 100% of our first quarter 2005 expenditures for property and equipment from operations cash flows and cash reserves. Therefore, no additional advances were requested from our
available debt facilities. In 1996, North Pittsburgh was granted approval for a loan from the FFB guaranteed by the Rural Utilities Service (RUS) in the maximum principal amount of $75,000. The total amount outstanding at March 31, 2005 to the FFB
under this loan was $23,911, with all advances having a maturity date of December 31, 2012. The unadvanced amount of this facility as of December 31, 2004 was $34,764. North Pittsburgh can draw against this facility through June 30, 2012 for
qualified capital expenditure projects, as defined in the loan agreement, to furnish and improve telephone service in rural areas. As of March 31, 2005, North Pittsburgh had approximately $3,979 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 $100,454, are subject to a lien or a security interest.
Such agreement contains restrictions regarding dividends and other distributions by North Pittsburgh. Under these restrictions, unless certain working capital levels, net worth levels and interest expense ratios are maintained, North Pittsburgh is
not permitted to pay dividends on its capital stock (other than in shares of capital stock), or make any other distributions to its shareholder, or purchase, redeem or retire any of its capital stock or make any investment in affiliated companies.
As a result of these restrictions, approximately $9,476 of North Pittsburghs retained earnings was available for dividends and other distributions to the Registrant as of March 31, 2005. Taking into consideration these North Pittsburgh
restrictions, approximately $52,961 of our consolidated retained earnings were available for dividends and other distributions to our shareholders as of March 31, 2005.



North Pittsburgh also has available through June of 2009 a $10,000 line of credit with the Rural Telephone Finance
Cooperative at a rate of prime plus 11/2%. No borrowings have been taken against the line of credit and there
are no commitment fees associated with it.



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



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dividends and to finance all capital projects. We currently expect a capital expenditure program for 2005 in the range of
$12,000 to $13,000. We expect to continue to have the necessary cash flows from operations and cash reserves to internally finance 100% of our projected capital expenditures. However, due to the low cost financing available through the RUS for
qualified North Pittsburgh capital expenditures, we may request advancements from the RUS facility in the future.



We refer you to our Managements Discussion and Analysis of Financial Condition and Results of Operations section of our 2004 Form 10-K for a
disclosure and discussion of our aggregate contractual obligations and purchase commitments as of December 31, 2004. There were no material changes in the specified contractual obligations and purchase commitments during the three-month period ended
March 31, 2005. Scheduled payments of $771, $427 and approximately $86 were made to reduce the outstanding long-term debt, capital lease and operating lease obligations, respectively, during the first quarter of 2005.



Critical Accounting Policies



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



Revenue Recognition



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



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



Valuation of Accounts Receivable



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



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 included in our 2004 Form 10-K. The most significant of these assumptions are the discount rate used
to value the future obligation, expected return on plan assets and health care cost trend rates. We select discount rates commensurate with current market interest rates on high-quality, fixed-rate debt securities. The expected return on assets is
based on our current view of the long-term returns on assets held by the plan, which is influenced by the historical performance of plan assets, asset allocation and other third-party studies. The medical cost trend rate is based on our actual
medical claims and future projections of medical cost trends.



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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.



Regulatory Environment



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



Federal Regulatory Matters



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



FCC Interconnection Rules



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



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



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



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



Triennial Review Order



On February 20, 2003, the FCC issued its TRO regarding the 1996 Act. In that Order, the FCC eliminated unbundling requirements for ILECs in regard to broadband services provided over fiber facilities but continued to require unbundled
access to mass-market narrowband loops. In



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addition, ILECs were not required to unbundle packet switching services. The FCC further found that the high frequency
portion of the loop, also referred to as line sharing, was no longer required to be provided as a UNE and would therefore be phased out over three years. Additionally, the FCC found that ILECs would no longer have to offer the local switching UNE to
CLECs for business customers served by high-capacity loops. The states had 90 days to rebut this finding. For mass market customers served by narrowband loops, the FCC set out specific criteria that states shall apply to determine if switching
should no longer be available as an UNE. Upon a state ruling eliminating switching as an UNE for mass market customers, the FCC set forth a three-year period for carriers to transition off UNE-P, which is a service that bundles UNE switching with
other UNEs such as UNE loop to provide the entire local service platform.



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



On February 4, 2005, the FCC released its Order on Remand, setting forth the final rules regarding the unbundling obligations of the ILECs in response to the Appeals Court Decision. The FCCs revised UNE rules
now state that CLECs are not impaired without unbundled access to the UNE-P combination comprised of Local Switching and UNE Loop, or Shared Transport Call Related Databases, or Signaling Networks used in connection with Local Switching.



In addition, the FCC found that CLECs are not impaired at certain Wire
Center locations in regard to high bandwidth (DS-1 and DS-3) loops, dark fiber loops and interoffice transport facilities based on such criteria as the number of Business Lines and Fiber-Based collocators within the wire center.



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



On February 10, 2005, Verizon Pennsylvania, Inc. notified Penn Telecom regarding Verizons implementation plan of the FCC Order on Remand. At the
same time, Verizon also petitioned the PA PUC to institute an arbitration proceeding regarding amendments to interconnection agreements that it has with CLECs and cellular mobile radio service (CMRS) providers. While the FCC Remand Order was clear
in regard to which unbundled elements are no longer required to be provided by ILECs, the definitions relating to the criteria for when a particular UNE is no longer required to be offered are still at issue and should be addressed in the
arbitration proceeding.



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



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



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



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



Intercarrier Compensation and Universal Service



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



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



Prior to the FCCs issuance of the NPRM regarding VoIP, several companies had petitioned the FCC for declaratory rulings that their specific service offerings, which utilize some component of Internet Protocol
(IP), were exempt from access charges. One of these filings was made by AT&T and one was made by pulver.com.



The AT&T Petition asked the FCC for a declaratory ruling that AT&Ts Phone-to-Phone IP telephony service, which utilizes IP in the transport
portion of the service, is exempt from access charges. On April 21, 2004, the FCC released an Order denying the AT&T Petition and affirming that access charges do apply to toll calls that originate or terminate on the Public Switched Telephone
Network (PSTN) even if some portion of the call is transported utilizing IP.



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



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



On December 20, 2003, Level 3 Communications, LLC, filed with the FCC a petition requesting that the FCC forbear from
applying switched access charges to IP calls that utilize the PSTN. On March 21, 2005, Level 3 Communications, LLC withdrew its petition, therefore, no action will be taken in regard to this matter at this time.



In February of 2002, the FCC also issued a FNPRM regarding the possible
reformation of the system for assessing and recovering Universal Service Fund (USF) monies. In that proceeding, the FCC has asked for comment on whether it should assess carrier contributions based on the number and capacity of connections that
contributing carriers provide to customers, rather than on



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the current method, which is based on the interstate revenues they earn. Because the outcome of this proposal is unknown
at this time, we are unable to determine the effect such action may have on our operations and revenues.



Other Federal Regulatory Matters



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



State Regulatory Matters



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



Price Regulation



Effective January 22, 2001, under a statutory framework referred to as
Chapter 30, North Pittsburgh moved from rate-of-return regulation in the intrastate jurisdiction to an alternative form of regulation, which is a price cap plan. Under North Pittsburghs price cap plan, rates for non-competitive intrastate
services are allowed to increase based on an index that measures economy-wide price increases less a productivity offset. There is no limitation on earnings under this plan. The terms of the plan also allow North Pittsburgh to rebalance rates once
each year to allow North Pittsburgh to gradually realign its intrastate rate structure on a more rational cost and market basis in order to meet future competition. In addition, as competition develops in the future, North Pittsburgh may file with
the PA PUC to declare certain services competitive and thereby be freed from all rate regulation for those services. In return for approval of the alternative form of regulation, North Pittsburgh has committed to continue to upgrade its network in
the future to ensure that all its customers will have access to broadband services. That Chapter 30 legislation expired due to legislative sunset provisions on December 31, 2003.



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



On February 25, 2005 North Pittsburgh filed an Amended Alternative Form of Regulation and Network Modernization Plan with the PA PUC pursuant to Act 183.
In that filing, in addition to modifying its prior Chapter 30 Plan to comport with the new statute, North Pittsburgh committed to accelerate its deployment of a ubiquitous broadband network throughout its entire service area from the previous
commitment date of December 31, 2015 to December 31, 2008. In return for making this commitment, North Pittsburgh will no longer be subject to a productivity offset when calculating the Price Stability Index component of its annual price stability
mechanism filing. North Pittsburgh will also not have to contribute to certain new public policy funding obligations that were instituted as part of Act 183. The PA PUC is expected to act on North Pittsburghs amended plan by the end of the
second quarter of 2005. If the PA PUC fails to act within 100 days of the filing date, the amended plan is deemed approved.



Other State Regulatory Matters



In addition to the PA PUCs revision of Verizons unbundled rates previously discussed under the Triennial Review Order heading, there is
another recent PA PUC proceeding that could impact North Pittsburgh and Penn Telecom. On December 16, 2004, the PA PUC adopted an Order instituting an investigation regarding the intrastate access charges and intraLATA toll rates of rural carriers
in Pennsylvania, and the effect on those charges and rates if the PA PUC were to reduce disbursements from the Pennsylvania USF to the rural carriers or if it were to broaden the base of contributors to include carriers that do not currently pay
into the fund. The proceeding will also address the ramifications of recent changes to the Pennsylvania Public Utility Code set forth in Act 183 that affect access rate setting for both rural LECs and CLECs. Under the Act 183 changes to the Public
Utility Code, the PA PUC may not require a LEC to reduce intrastate access rates except on a revenue neutral basis. The new statute also sets limits on a CLECs ability to charge



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intrastate access rates higher than the ILECs in the area in which they are offering service. The procedures regarding
the PA PUCs implementation of these rate setting limitations will be determined in this access charge and USF proceeding. This proceeding may affect both North Pittsburghs and Penn Telecoms ability to set access charge rates. The
proceeding also may affect the amount of funding that North Pittsburgh receives from the Pennsylvania USF and the amounts that North Pittsburgh and Penn Telecom contribute to that fund. The outcome of this proceeding is unknown at this time, so we
are unable to determine the impact the proceeding may have on the revenues of North Pittsburgh and Penn Telecom.



Recent Accounting Pronouncements



The FASB issued FIN 46, Consolidation of Variable Interest Entities, in January 2003 and amended the Interpretation in December 2003. A
variable interest entity (VIE) is an entity in which its voting equity investors lack the characteristics of having a controlling financial interest or where the existing capital at risk is insufficient to permit the entity to finance its activities
without receiving additional financial support from other parties. FIN 46 requires the consolidation of entities which are determined to be VIEs when the reporting company determines itself to be the primary beneficiary (the entity that will absorb
a majority of the VIEs expected losses, receive a majority of the VIEs residual returns, or both). The amended Interpretation was effective for the first interim or annual reporting period ending after March 15, 2004, with the exception
of special purpose entities for which the statement was effective for periods ending after December 15, 2003. We have completed a review of our partnership investments and have determined that those entities do not qualify as VIEs.



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



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PART I



Item 3. Quantitative And Qualitative Disclosures About Market Risk



There have been no material changes in reported market risks faced by the Company since the end of the Companys preceding fiscal year on December
31, 2004.



Item 4. 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 evaluated the effectiveness of the design and
operation of its disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, and, based on their evaluation, the Chief Executive Officer and Chief Financial and Accounting Officer concluded that
these disclosure controls and procedures are effective.



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



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PART II



OTHER INFORMATION



Item 6. Exhibits



(a) Exhibits Index for Quarterly
Reports on Form 10-Q.



|            |  |                                                                                                       |  |                                                                                                                                                     
|----------- |  | ----------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|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 September 30, 2003 and Incorporated Herein by Reference                             
|            |  |                                                                                                      
|(3)(ii)     |  | Amended and Restated By-Laws                                                                          |  | Provided in Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 and Incorporated Herein by Reference                                 
|            |  |                                                                                                      
|(4)         |  | Instruments defining the rights of security holders including indentures                              |  |                                                                                                                                                     
|            |  |                                                                                                      
|            |  | (a)    Agreement of Reorganization and Plan of Merger                                                 |  | Provided in Registration of Securities of Certain Successor Issuers on Form 8-B filed on June 25, 1985 and Incorporated Herein by Reference         
|            |  |                                                                                                      
|            |  | (b)    Rights Agreement dated as of September 25, 2003                                                |  | Provided as Exhibit 1 to the Registration of Certain Classes of Securities on Form 8-A filed on October 3, 2003 and Incorporated Herein by Reference
|            |  |                                                                                                      
|(10)        |  | Material contracts                                                                                    |  |                                                                                                                                                     
|            |  |                                                                                                      
|            |  | (a)    Amended and Restated Executive Employment Agreement                                            |  | Provided in Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 and Incorporated Herein by Reference.                                
|            |  |                                                                                                      
|            |  | (b)    Executive Retention Payment Program Agreement                                                  |  | Provided in Annual Report on Form 10-K for the year ended December 31, 2003 and Incorporated Herein by Reference.                                   
|            |  |                                                                                                      
|            |  | (c)    Extension of Amended and Restated Executive Employment Agreement and Retention Payment Program |  | Provided in Annual Report on Form 10-K for the year ended December 31, 2003 and Incorporated Herein by Reference.                                   
|            |  |                                                                                                      
|(11)        |  | Statement re computation of per share earnings                                                        |  | Attached Hereto                                                                                                                                     
|            |  |                                                                                                      
|(15)        |  | Letter re unaudited financial information                                                             |  | Not Applicable                                                                                                                                      
|            |  |                                                                                                      
|(18)        |  | Letter re change in accounting principles                                                             |  | Not Applicable                                                                                                                                      
|            |  |                                                                                                      
|(19)        |  | Report furnished to securities holders                                                                |  | Not Applicable                                                                                                                                      
|            |  |                                                                                                      
|(22)        |  | Published report regarding matters submitted to vote of security holders                              |  | Not Applicable                                                                                                                                      
|            |  |                                                                                                      
|(23)        |  | Consents of experts and counsel                                                                       |  | Not Applicable                                                                                                                                      
|            |  |                                                                                                      
|(24)        |  | Power of attorney                                                                                     |  | Not Applicable                                                                                                                                      



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|            |  |                                                                                                                                                                                                |  |                
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------
|Exhibit No. |  | Subject                                                                                                                                                                                        |  | Applicability  
|(31.1)      |  | Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                               |  | Attached Hereto
|            |  |                                                                                                                                                                                               
|(31.2)      |  | Certification of Vice President, Treasurer and Chief Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                |  | Attached Hereto
|            |  |                                                                                                                                                                                               
|(32.1)      |  | Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                |  | Attached Hereto
|            |  |                                                                                                                                                                                               
|(32.2)      |  | Certification of Vice President, Treasurer and Chief Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 |  | Attached Hereto



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SIGNATURES



Pursuant to the
requirements 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: May 10, 2005 |  |  |  | /s/    H. R. Brown                                
|                   |  |  |  | H. R. Brown, President and Chief Executive Officer
|                   |  | 
|Date: May 10, 2005 |  |  |  | /s/    A. P. Kimble                               
|                   |  |  |  | A. P. Kimble, Vice President, Treasurer and       
|                   |  |  |  | Chief Financial and Accounting Officer            



29