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FORM 10-Q



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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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(Mark One)

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



For the quarterly period ended June 30, 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 August 5, 2005 was 15,005,000.



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##### Table of Contents

TABLE OF CONTENTS



|           |  |                                                                                                      |  |   
|---------- |  | ---------------------------------------------------------------------------------------------------- |  | --
|PART I     |  | Financial Information                                                                                |  | 3 
|           |  |                                                                                                     
|           |  | Report of Independent Registered Public Accounting Firm                                              |  | 3 
|           |  |                                                                                                     
|Item 1.    |  | Financial Statements (Unaudited)                                                                     |  | 4 
|           |  |                                                                                                     
|           |  | Condensed Consolidated Statements of IncomeFor the three and six months ended June 30, 2005 and 2004 |  | 4 
|           |  |                                                                                                     
|           |  | Condensed Consolidated Balance SheetsJune 30, 2005 and December 31, 2004                             |  | 5 
|           |  |                                                                                                     
|           |  | Condensed Consolidated Statements of Cash FlowsFor the six months ended June 30, 2005 and 2004       |  | 7 
|           |  |                                                                                                     
|           |  | Notes to Condensed Consolidated Financial Statements                                                 |  | 8 
|           |  |                                                                                                     
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                |  | 11
|           |  |                                                                                                     
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                                           |  | 27
|           |  |                                                                                                     
|Item 4.    |  | Controls and Procedures                                                                              |  | 27
|           |  |                                                                                                     
|PART II    |  | Other Information                                                                                    |  | 28
|           |  |                                                                                                     
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                  |  | 28
|           |  |                                                                                                     
|Item 6.    |  | Exhibits                                                                                             |  | 28
|           | 
|SIGNATURES |  | 30                                                                                                  



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 June 30, 2005, the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 2005 and 2004, and the related condensed consolidated statements of cash flows for the six-month periods ended June
30, 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 reviews, 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

August 5, 2005



3



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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 June 30 |        |   | For the Six MonthsEnded June 30 |  
|                                                                                                         |  | 2005                               |        |   | 2004                            |   |        | 2005 |  |   | 2004   |  
|Operating revenues:                                                                                      |  |                                    |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Local network services                                                                                   |  | $                                  | 7,862  |   |                                 | $ | 7,101  |      |  | $ | 15,731 |   |  | $ | 14,132 |  
|Long distance and access services                                                                        |  |                                    | 17,460 |   |                                 |   | 16,569 |      |  |   | 33,371 |   |  |   | 33,220 |  
|Directory advertising, billing & other services                                                          |  |                                    | 359    |   |                                 |   | 353    |      |  |   | 714    |   |  |   | 711    |  
|Telecommunication equipment sales                                                                        |  |                                    | 522    |   |                                 |   | 501    |      |  |   | 847    |   |  |   | 1,116  |  
|Other operating revenues                                                                                 |  |                                    | 3,179  |   |                                 |   | 2,846  |      |  |   | 6,380  |   |  |   | 5,637  |  
|                                                                                                         |  |                                    |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Total operating revenues                                                                                 |  |                                    | 29,382 |   |                                 |   | 27,370 |      |  |   | 57,043 |   |  |   | 54,816 |  
|                                                                                                         |  |                                    |        |  
|Operating expenses:                                                                                      |  |                                    |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Network and other operating expenses (exclusive of depreciation and amortization shown separately below) |  |                                    | 13,936 |   |                                 |   | 14,430 |      |  |   | 28,572 |   |  |   | 28,586 |  
|Depreciation and amortization                                                                            |  |                                    | 4,893  |   |                                 |   | 4,705  |      |  |   | 9,774  |   |  |   | 9,335  |  
|State and local taxes                                                                                    |  |                                    | 818    |   |                                 |   | 851    |      |  |   | 1,904  |   |  |   | 1,969  |  
|Telecommunication equipment expenses                                                                     |  |                                    | 369    |   |                                 |   | 367    |      |  |   | 614    |   |  |   | 787    |  
|                                                                                                         |  |                                    |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses                                                                                 |  |                                    | 20,016 |   |                                 |   | 20,353 |      |  |   | 40,864 |   |  |   | 40,677 |  
|                                                                                                         |  |                                    |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Net operating income                                                                                     |  |                                    | 9,366  |   |                                 |   | 7,017  |      |  |   | 16,179 |   |  |   | 14,139 |  
|                                                                                                         |  |                                    |        |  
|Other income (expense), net:                                                                             |  |                                    |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Interest expense                                                                                         |  |                                    | (416   | ) |                                 |   | (477   | )    |  |   | (833   | ) |  |   | (970   | )
|Interest income                                                                                          |  |                                    | 323    |   |                                 |   | 64     |      |  |   | 575    |   |  |   | 126    |  
|Equity income of affiliated companies                                                                    |  |                                    | 1,725  |   |                                 |   | 1,366  |      |  |   | 3,045  |   |  |   | 2,170  |  
|Sundry expense, net                                                                                      |  |                                    | (23    | ) |                                 |   | (58    | )    |  |   | (30    | ) |  |   | (73    | )
|                                                                                                         |  |                                    |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Total other income (expense), net                                                                        |  |                                    | 1,609  |   |                                 |   | 895    |      |  |   | 2,757  |   |  |   | 1,253  |  
|                                                                                                         |  |                                    |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Income before income taxes                                                                               |  |                                    | 10,975 |   |                                 |   | 7,912  |      |  |   | 18,936 |   |  |   | 15,392 |  
|                                                                                                         |  |                                    |        |  
|Provision for income taxes                                                                               |  |                                    | 4,516  |   |                                 |   | 3,264  |      |  |   | 7,788  |   |  |   | 6,347  |  
|                                                                                                         |  |                                    |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Net income                                                                                               |  | $                                  | 6,459  |   |                                 | $ | 4,648  |      |  | $ | 11,148 |   |  | $ | 9,045  |  
|                                                                                                         |  |                                    |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Weighted average common shares outstanding                                                               |  |                                    | 15,005 |   |                                 |   | 15,005 |      |  |   | 15,005 |   |  |   | 15,005 |  
|                                                                                                         |  |                                    |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Basic and diluted earnings per share                                                                     |  | $                                  | .43    |   |                                 | $ | .31    |      |  | $ | .74    |   |  | $ | .60    |  
|                                                                                                         |  |                                    |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Dividends per share                                                                                      |  | $                                  | .19    |   |                                 | $ | .18    |      |  | $ | .37    |   |  | $ | .36    |  
|                                                                                                         |  |                                    |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  



See accompanying notes
to unaudited condensed consolidated financial statements.



4



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##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES



Condensed Consolidated Balance Sheets

(Amounts in Thousands)



|                                                                                 |  |                        |         |              |   |        
|-------------------------------------------------------------------------------- |  | ---------------------- | ------- | ------------ | - | -------
|                                                                                 |  | (Unaudited)June 302005 |         | Dec. 31 2004
|ASSETS                                                                           |  |                        |         |              |   |        
|Current Assets:                                                                  |  |                        |         |              |   |        
|Cash and temporary investments                                                   |  | $                      | 46,276  |              | $ | 42,569 
|Marketable securities available for sale                                         |  |                        | 475     |              |   | 487    
|Accounts receivable:                                                             |  |                        |         |              |   |        
|Customers, net of allowance for doubtful accounts of $545 and $565, respectively |  |                        | 6,001   |              |   | 5,320  
|Access services, settlements and other                                           |  |                        | 5,250   |              |   | 7,027  
|Unbilled revenues                                                                |  |                        | 601     |              |   | 591    
|Prepaid expenses                                                                 |  |                        | 728     |              |   | 748    
|Inventories                                                                      |  |                        | 1,625   |              |   | 1,539  
|Prepaid taxes other than income taxes                                            |  |                        | 740     |              |   |       
|Deferred income taxes                                                            |  |                        | 1,073   |              |   | 1,199  
|                                                                                 |  |                        |         |              |   |        
|Total current assets                                                             |  |                        | 62,769  |              |   | 59,480 
|                                                                                 |  |                        |         |              |   |        
|Property, plant and equipment:                                                   |  |                        |         |              |   |        
|Land                                                                             |  |                        | 475     |              |   | 475    
|Buildings                                                                        |  |                        | 14,520  |              |   | 14,107 
|Equipment                                                                        |  |                        | 202,924 |              |   | 200,484
|Assets held under capital lease                                                  |  |                        | 10,498  |              |   | 10,498 
|                                                                                 |  |                        |         |              |   |        
|                                                                                 |  |                        | 228,417 |              |   | 225,564
|                                                                                 |  |                       
|Less accumulated depreciation and amortization                                   |  |                        | 156,970 |              |   | 148,730
|                                                                                 |  |                        |         |              |   |        
|                                                                                 |  |                        | 71,447  |              |   | 76,834 
|                                                                                 |  |                       
|Construction in progress                                                         |  |                        | 4,035   |              |   | 3,212  
|                                                                                 |  |                        |         |              |   |        
|Total property, plant and equipment, net                                         |  |                        | 75,482  |              |   | 80,046 
|                                                                                 |  |                       
|Investments                                                                      |  |                        | 14,947  |              |   | 13,902 
|Intangible asset                                                                 |  |                        | 824     |              |   | 824    
|Other assets                                                                     |  |                        | 1,255   |              |   | 1,248  
|                                                                                 |  |                        |         |              |   |        
|Total assets                                                                     |  | $                      | 155,277 |              | $ | 155,500
|                                                                                 |  |                        |         |              |   |        



(Continued)



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##### Table of Contents

NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES



Condensed Consolidated Balance Sheets

(Amounts in Thousands)



|                                                                                    |  |                        |         |   |              |   |         |  
|----------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ------------ | - | ------- | -
|                                                                                    |  | (Unaudited)June 302005 |         |   | Dec. 31 2004 |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                |  |                        |         |   |              |   |         |  
|Current liabilities:                                                                |  |                        |         |   |              |   |         |  
|Current portion of long-term debt                                                   |  | $                      | 3,085   |   |              | $ | 3,085   |  
|Obligation under capital lease                                                      |  |                        | 936     |   |              |   | 1,086   |  
|Accounts payable                                                                    |  |                        | 4,531   |   |              |   | 6,322   |  
|Advance billings                                                                    |  |                        | 1,808   |   |              |   | 1,714   |  
|Dividend payable                                                                    |  |                        | 2,851   |   |              |   | 2,701   |  
|Other accrued liabilities                                                           |  |                        | 2,973   |   |              |   | 3,702   |  
|Federal and state income taxes                                                      |  |                        | 1,400   |   |              |   | 1,713   |  
|                                                                                    |  |                        |         |   |              |   |         |  
|Total current liabilities                                                           |  |                        | 17,584  |   |              |   | 20,323  |  
|                                                                                    |  |                        |         |   |              |   |         |  
|Long-term debt                                                                      |  |                        | 20,055  |   |              |   | 21,597  |  
|Obligation under capital lease                                                      |  |                        | 4,173   |   |              |   | 4,588   |  
|Deferred income taxes                                                               |  |                        | 8,117   |   |              |   | 8,490   |  
|Accrued pension and postretirement benefits                                         |  |                        | 11,781  |   |              |   | 13,038  |  
|Other liabilities                                                                   |  |                        | 1,117   |   |              |   | 603     |  
|                                                                                    |  |                        |         |   |              |   |         |  
|Total liabilities                                                                   |  |                        | 62,827  |   |              |   | 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                                                                   |  |                        | 90,423  |   |              |   | 84,827  |  
|Less cost of treasury stock (35 shares)                                             |  |                        | (508    | ) |              |   | (508    | )
|Accumulated other comprehensive loss                                                |  |                        | (2,030  | ) |              |   | (2,023  | )
|                                                                                    |  |                        |         |   |              |   |         |  
|Total shareholders equity                                                          |  |                        | 92,450  |   |              |   | 86,861  |  
|                                                                                    |  |                        |         |   |              |   |         |  
|Total liabilities and shareholders equity                                          |  | $                      | 155,277 |   |              | $ | 155,500 |  
|                                                                                    |  |                        |         |   |              |   |         |  



See accompanying notes
to unaudited condensed consolidated financial statements.



6



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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 Six MonthsEnded June 30 |       
|                                                                           |  | 2005                            |        |   | 2004 |  
|Cash from operating activities:                                            |  |                                 |        |   |      |   |        |  
|Net income                                                                 |  | $                               | 11,148 |   |      | $ | 9,045  |  
|Adjustments to reconcile net income to net cash from operating activities: |  |                                 |        |   |      |   |        |  
|Depreciation and amortization                                              |  |                                 | 9,774  |   |      |   | 9,335  |  
|Equity income of affiliated companies                                      |  |                                 | (3,045 | ) |      |   | (2,170 | )
|Changes in assets and liabilities:                                         |  |                                 |        |   |      |   |        |  
|Accounts receivable and unbilled revenues                                  |  |                                 | 1,086  |   |      |   | 606    |  
|Inventories                                                                |  |                                 | (86    | ) |      |   | 10     |  
|Prepaid expenses and other assets                                          |  |                                 | 13     |   |      |   | 279    |  
|Prepaid taxes other than income taxes                                      |  |                                 | (740   | ) |      |   | (688   | )
|Accounts payable and advanced billings                                     |  |                                 | (1,697 | ) |      |   | (509   | )
|Other accrued liabilities                                                  |  |                                 | (215   | ) |      |   | (275   | )
|Accrued pension and postretirement benefits                                |  |                                 | (1,257 | ) |      |   | (1,242 | )
|Federal and state income taxes                                             |  |                                 | (313   | ) |      |   | (1,326 | )
|Deferred income taxes                                                      |  |                                 | (242   | ) |      |   | (240   | )
|Other, net                                                                 |  |                                 | (82    | ) |      |   | 201    |  
|                                                                           |  |                                 |        |   |      |   |        |  
|Total adjustments                                                          |  |                                 | 3,196  |   |      |   | 3,981  |  
|                                                                           |  |                                 |        |   |      |   |        |  
|Net cash from operating activities                                         |  |                                 | 14,344 |   |      |   | 13,026 |  
|                                                                           |  |                                 |        |   |      |   |        |  
|Cash used for investing activities:                                        |  |                                 |        |   |      |   |        |  
|Expenditures for property and equipment                                    |  |                                 | (5,128 | ) |      |   | (5,978 | )
|Purchase of marketable securities available for sale                       |  |                                 |       |   |      |   | (25    | )
|Distributions from affiliated companies                                    |  |                                 | 2,000  |   |      |   | 1,783  |  
|                                                                           |  |                                 |        |   |      |   |        |  
|Net cash used for investing activities                                     |  |                                 | (3,128 | ) |      |   | (4,220 | )
|                                                                           |  |                                 |        |   |      |   |        |  
|Cash used for financing activities:                                        |  |                                 |        |   |      |   |        |  
|Cash dividends                                                             |  |                                 | (5,402 | ) |      |   | (5,252 | )
|Payments of capital lease obligation                                       |  |                                 | (565   | ) |      |   | (527   | )
|Retirement of debt                                                         |  |                                 | (1,542 | ) |      |   | (1,542 | )
|                                                                           |  |                                 |        |   |      |   |        |  
|Net cash used for financing activities                                     |  |                                 | (7,509 | ) |      |   | (7,321 | )
|                                                                           |  |                                 |        |   |      |   |        |  
|Net increase in cash and temporary investments                             |  |                                 | 3,707  |   |      |   | 1,485  |  
|                                                                           |  |                                
|Cash and temporary investments at beginning of period                      |  |                                 | 42,569 |   |      |   | 32,026 |  
|                                                                           |  |                                 |        |   |      |   |        |  
|Cash and temporary investments at end of period                            |  | $                               | 46,276 |   |      | $ | 33,511 |  
|                                                                           |  |                                 |        |   |      |   |        |  
|Supplemental disclosure of cash flow information:                          |  |                                 |        |   |      |   |        |  
|Interest paid                                                              |  | $                               | 861    |   |      | $ | 979    |  
|Income taxes paid                                                          |  | $                               | 8,418  |   |      | $ | 7,916  |  



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 Annual Report on Form 10-K for the year ended December 31, 2004 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 the 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 MonthsEnded June 30 |       |   | For the Six MonthsEnded June 30 |  
|                                                                                            |  | 2005                              |       |   | 2004                            |   |       | 2005 |  |   | 2004   |  
|Net income                                                                                  |  | $                                 | 6,459 |   |                                 | $ | 4,648 |      |  | $ | 11,148 |   |  | $ | 9,045 |  
|Unrealized loss on marketable securities including reclassification adjustments, net of tax |  |                                   | (2    | ) |                                 |   | (7    | )    |  |   | (7     | ) |  |   | (4    | )
|                                                                                            |  |                                   |       |   |                                 |   |       |      |  |   |        |   |  |   |       |  
|Comprehensive income                                                                        |  | $                                 | 6,457 |   |                                 | $ | 4,641 |      |  | $ | 11,141 |   |  | $ | 9,041 |  
|                                                                                            |  |                                   |       |   |                                 |   |       |      |  |   |        |   |  |   |       |  



(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 contributions
based on the gross wages of the employees as well as on a specified percentage of each participating employees contributions.



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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 table that follows.



Components of Net Periodic Benefit Cost:



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



|                                   |  |                               |      |   |                         |   |      |      |  |   |        |   |  |   |        |  
|---------------------------------- |  | ----------------------------- | ---- | - | ----------------------- | - | ---- | ---- |  | - | ------ | - |  | - | ------ | -
|                                   |  | Pension Benefits              |     
|                                   |  | Three Months Ended June 30    |      |   | Six Months EndedJune 30 |  
|                                   |  | 2005                          |      |   | 2004                    |   |      | 2005 |  |   | 2004   |  
|Service cost                       |  | $                             | 371  |   |                         | $ | 331  |      |  | $ | 742    |   |  | $ | 663    |  
|Interest cost                      |  |                               | 724  |   |                         |   | 690  |      |  |   | 1,448  |   |  |   | 1,380  |  
|Expected return on plan assets     |  |                               | (795 | ) |                         |   | (716 | )    |  |   | (1,590 | ) |  |   | (1,433 | )
|Amortization of prior service cost |  |                               | 35   |   |                         |   | 31   |      |  |   | 71     |   |  |   | 63     |  
|Amortization of transition asset   |  |                               | (38  | ) |                         |   | (38  | )    |  |   | (77    | ) |  |   | (77    | )
|Recognized actuarial loss          |  |                               | 133  |   |                         |   | 116  |      |  |   | 266    |   |  |   | 232    |  
|                                   |  |                               |      |   |                         |   |      |      |  |   |        |   |  |   |        |  
|Net periodic benefit cost          |  | $                             | 430  |   |                         | $ | 414  |      |  | $ | 860    |   |  | $ | 828    |  
|                                   |  |                               |      |   |                         |   |      |      |  |   |        |   |  |   |        |  
|                                   | 
|                                   |  | Other Postretirement Benefits |     
|                                   |  | Three Months EndedJune 30     |      |   | Six Months EndedJune 30 |  
|                                   |  | 2005                          |      |   | 2004                    |   |      | 2005 |  |   | 2004   |  
|Service cost                       |  | $                             | 87   |   |                         | $ | 88   |      |  | $ | 175    |   |  | $ | 177    |  
|Interest cost                      |  |                               | 168  |   |                         |   | 171  |      |  |   | 336    |   |  |   | 341    |  
|Amortization of prior service cost |  |                               | (1   | ) |                         |   | (1   | )    |  |   | (3     | ) |  |   | (3     | )
|Recognized actuarial loss          |  |                               | 55   |   |                         |   | 59   |      |  |   | 110    |   |  |   | 119    |  
|                                   |  |                               |      |   |                         |   |      |      |  |   |        |   |  |   |        |  
|Net periodic benefit cost          |  | $                             | 309  |   |                         | $ | 317  |      |  | $ | 618    |   |  | $ | 634    |  
|                                   |  |                               |      |   |                         |   |      |      |  |   |        |   |  |   |        |  



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 June 30, 2005 and 2004 was $63 and $55, respectively, and for the six-month periods ended June 30, 2005 and 2004 was $126 and $110, respectively.



Employer Contributions:



The Company 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 the Company 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 to the Pension Plan is required in 2005. However, the Company made tax-deductible discretionary contributions of $2,000 and $500 in January and June of 2005, respectively.



Contributions for the other postretirement benefit plans are made on a
pay-as-you-go basis, with total contributions of $360 having been made during the six-month period ended June 30, 2005. The $360 of contributions for the first half 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 former director who served on the
Companys Board of Directors through May of 2005. Payments to the Processor under this agreement were $1,556 and $1,421 for the six-month periods ended June 30, 2005 and 2004, respectively. Also, we paid $144 and $119 in each of those same
periods to the law firms of two members of the Board of Directors for various legal services. As of June 30, 2005, we had amounts outstanding of $310 and $73 to the Processor and law firms, respectively.



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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 $13 for both six-month
periods, and total expenses incurred from receiving services from Boulevard were approximately $87 and $99 for the six-month periods ended June 30, 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 $81 and $79, for those same periods, respectively. The amounts outstanding from and/or due to Boulevard and the companies in the
Armstrong Group were negligible as of June 30, 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 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 was effective for the first interim reporting 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.



In March 2005, the FASB issued Interpretation No. 47 (FIN 47),
Accounting for Conditional Asset Retirement Obligations  an interpretation of FASB Statement No. 143. FIN 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for
Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. An
entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Any uncertainty about the amount and/or timing of future settlement should be
factored into the measurement of the liability when sufficient information exists. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. We are currently evaluating the potential impact of this accounting
interpretation on our results of operations and financial position.



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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, Pennsylvania. 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 marketplace. 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
approximately 285 square mile territory in Western Pennsylvania, which includes portions of Allegheny, Armstrong, Butler and Westmoreland Counties. We provide service to approximately 71,500 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 activity and new housing starts have 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 CLECs. As of June 30, 2005, Penn Telecom served 39,260 dial tone access lines and 22,004 access line equivalents1, for a grand total of 61,264 equivalent access lines2.



---

|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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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, cable and satellite 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



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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



Net income for the six-month period ended June 30, 2005 was $11,148, or $.74 per share, as compared to $9,045, or $.60 per share, for the comparable prior year period. The $2,103 increase in net income was predominately a result of an
increase in earnings recorded from the Companys investment in three wireless partnerships, an increase in income recorded from the Companys temporary investments and the favorable impact of a settlement agreement reached with a carrier
in the second quarter of 2005. The $2,404 settlement, which covered the exchange of traffic between North Pittsburgh and the carrier over a multi-year period of time, resulted in a $1,604 increase in revenues and a $800 decrease in operating
expenses. On an after tax basis, the settlement contributed $1,406 to the increase in net income.



Revenues for the six-month period ended June 30, 2005 increased $2,227, or 4.1%, over the prior year comparable period. The impact from the aforementioned
settlement contributed $1,604 to this increase. Revenues from all other sources increased $623, or 1.1%, in the six-month period ended June 30, 2005 over the prior year comparable period. 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 was our experience also for the full year 2004, in which our full year 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 partially 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 $269 decrease in telecommunication equipment sales, which is our only notable revenue source that is non-recurring in nature and therefore subject to greater fluctuation, also negatively impacted our revenue growth rate for
the first six months of 2005 as compared to the prior year comparable period.



Although the 1.1% revenue growth rate discussed above for the first six months 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. The impact of those access rate decreases on our revenue growth rate therefore should not be as great in the second half of 2005, as the majority of the comparable 2004 period
was also 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 six-month period ended
June 30, 2005 increased $187, or 0.5%, over the prior year comparable period. The current year period benefited, though, from the $800 cumulative reduction to operating expenses associated with the aforementioned settlement. All other operating
expenses increased $987, or 2.4%, in the six-month period ended



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June 30, 2005 over the prior year comparable period. This 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 implement a new billing and OSS platform at our CLEC in the near future. 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 the second half of 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 in the future. 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 have experienced in 2005 an overall slight decrease in the average
costs (on a per line basis) to provision our CLEC access lines. 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, the continuing use of attrition to manage our workforce levels 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 serving Pittsburgh and other portions of Western Pennsylvania. Total equity income recorded from our investments in the
wireless partnerships increased $898 in the first six months of 2005 over the prior year comparable period.



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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
($46,276) than our total debt outstanding ($23,140). 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.



Results of Operations for
the Six Months Ended June 30, 2005 and 2004



Net
income for the six-month period ended June 30, 2005 was $11,148, or $.74 per share, compared to net income of $9,045, or $.60 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 $2,227, or 4.1%, in the six-month period
ended June 30, 2005 over the comparable period in 2004. This increase was the result of increases in local network services revenues of $1,599 (11.3%), long distance and access services revenues of $151 (0.5%), directory advertising, billing and
other services revenues of $3 (0.4%) and other operating revenues of $743 (13.2%), offset partially by a decrease in telecommunication equipment sales of $269 (24.1%).



Increases in local network services revenues of $1,599, or 11.3%, were primarily attributable to the following factors:



| |  |  | Local dial tone revenues increased $904, partially as a result of total access lines (including CLEC) growing by 5,619 lines, or 5.3%, from 105,099 access lines as of June 30, 2004
to 110,718 access lines as of June 30, 2005. More specifically, the total growth was a result of a 7,583 access line increase in our edge-out markets offset partially by a 1,964 access line decrease in our ILEC market. Also contributing to the
increase was an approximate $720 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 $217, 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 $278 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The increase in long distance and access services revenues3of $151, or 0.5%, was primarily attributable to the following factors:



| |  |  | Special access revenues increased $295, 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Overall toll revenues increased $15. We have continued to be successful in bundling toll in our edge-out markets (in which the number of access lines grew by 7,583), with nearly an
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

|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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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.



These special access and toll revenue increases were partially offset by access revenue decreases of $159, primarily due to
the following factors:



| |  |  | First, as described in the text above that discusses local network service revenues, there was an approximate $720 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, as also discussed above, 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 $550.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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. Although interstate access revenues
for Penn Telecom will decline for full year 2005 over 2004, the majority of that comparative revenue decrease will have been concentrated in the first half of 2005 over the first half of 2004, because the revenue prior to June 20, 2004 was at the
higher pre-final phase down rate.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Fourth, reductions in wireless intercarrier compensation rates contributed to a $334 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 while the full year 2004 experienced the reduced rates for only the last six months in 2004. However, similar to the discussion in the preceding paragraph, the majority of that comparative revenue decrease will have
been concentrated in the first half of 2005 over the first half of 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | These offsetting factors were partially mitigated in the second quarter of 2005 by the positive impact of the settlement between North Pittsburgh and a carrier, resulting in a
$1,604 increase in terminating access revenues realized over that amount which had been estimated and accrued over a multi-year period. Concurrent with the execution of the settlement agreement, North Pittsburgh also executed an interconnection
agreement with the carrier. Based solely an a static analysis (assuming constant MOUs, jurisdictional splits of traffic and access rates), we anticipate that North Pittsburghs revenues will benefit by approximately $200 on an annualized basis
as a result of the difference between the final rates and terms of the interconnection agreement in comparison to those used historically in our estimates.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The increase in directory advertising, billing and other services revenues of $3 was not material.



The increase in other operating revenues of $743, or 13.2%, was partially due
to the $377 growth in DSL and multi-megabit Ethernet revenues. Combined DSL lines (both wholesale and retail) sold increased from 11,028 as of June 30, 2004 to 13,335 as of June 30, 2005. Also, over the last twelve months, we have introduced a
multi-megabit Ethernet product that can deliver speeds from 3 to 20 megabits, surpassing the existing top speed of our DSL product. Currently geared mostly for business applications, the multi-megabit Ethernet product experienced a growth of 112
circuits over the twelve-month period ended June 30, 2005. Revenues earned from other Internet related products and services, such as web development services, also increased over the prior year comparable period. In addition, aggregate revenue
write-offs improved as the prior year six-month period included write-offs for some ISPs while the current year six-month period benefited from the recovery of a previously written-off carrier receivable.



The decrease in telecommunication equipment sales of $269, or 24.1%, was
primarily due to a $117 decrease in new equipment sales and a $129 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
comparable period basis. However, over the past several years, the long-term trend for these revenues has shown a decline, mostly as a result of continuous price competition.



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Operating Expenses and Net Operating Income



Total operating expenses increased $187, or 0.5%, in the six-month period
ended June 30, 2005 over the comparable period in 2004. The change was the result of an increase in depreciation and amortization expenses of $439 (4.7%), offset partially by decreases in network and other operating expenses of $14 (0.1%), state and
local taxes of $65 (3.3%) and telecommunications equipment expenses of $173 (22.0%).



The increase in consolidated depreciation and amortization expenses of $439, or 4.7%, was the result of the depreciable asset base (gross property, plant and equipment) increasing by 4.0% over the course of the past
year. Furthermore, a higher ratio of new additions reflected data-centric equipment, which has shorter useful lives than the Companys average depreciable base.



The decrease in network and other operating expenses of $14, or 0.1%, was primarily due to the fact that the second
quarter of 2005 contained the positive impact of the aforementioned settlement between North Pittsburgh and a carrier, resulting in a cumulative $800 reduction in traffic termination costs from the amount that was estimated and accrued over a
multi-year period. As previously discussed, North Pittsburgh also concurrently executed an interconnection agreement with the carrier. However, the amount of traffic that North Pittsburgh terminates to the carrier has decreased approximately 70%
over the past several years, and we therefore do not expect the final rates and terms of the interconnection agreement to have a material impact on our operating expenses on a going forward basis.



All other network and other operating expenses increased $786, or 2.7%, in
the six-month period ended June 30, 2005 over the prior year comparable period. This increase was mostly the result of:



| |  |  | 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 $125 as a result of the continued increases in requirements imposed by rules and regulations promulgated by various market
governing bodies, most notably the requirements imposed by the Sarbanes-Oxley Act of 2002.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increases in combined labor and benefit expenses of approximately $300, or 2.1%, for the six-month period ended June 30, 2005 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. 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 six months of 2005 over first six months of
2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The decrease in state and local taxes of
$65 was not material.



The decrease in telecommunication
equipment expenses of $173, or 22.0%, was attributable to decreases in the direct costs of goods for equipment sales, as the associated revenues declined $269 from the prior year comparable period.



Overall, the increase in total operating revenues of $2,227, coupled with the
increase in total operating expenses of $187, resulted in a $2,040, or 14.4%, increase in net operating income for the six-month period ended June 30, 2005 over the comparable prior year period. As discussed above, the primary contributing factor to
the increase in net operating income was the $2,404 North Pittsburgh settlement. Operating income from all other sources for the six-month period ended June 30, 2005 declined $364, or 2.6%, over the comparable prior year period.



Other Items



Interest expense decreased for the six-month period ended June 30, 2005 by
$137 due to the continued scheduled pay-down of our Federal Financing Bank (FFB) notes and capital lease obligation.



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Interest income increased by $449 during the six-month period ended June 30, 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 half of 2004.



Equity income of affiliated companies increased $875 in the six-month period ended June 30, 2005 over the comparable prior
year period, due mainly to a $898 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 equity income (the positive comparative impact was experienced primarily in the first quarter 2005 over first quarter 2004 results). 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 in our equity income of affiliated companies 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 costs).



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



Results of Operations
for the Three Months Ended June 30, 2005 and 2004



Fluctuations in revenue, operating expenses and other income (expenses) for the three-month period ended June 30, 2005, as compared to the same quarterly period in 2004, were generally attributable to the same reasons discussed in the
six-month comparison with the exceptions of the following:



Long distance and access services revenues increased $891, or 5.4%, for the three-month period ended June 30, 2005 as compared to the same quarterly period in 2004, in contrast to a six-month year-to-date increase of $151, or 0.5%. The
larger percentage increase for the second quarterly period of 2005 as compared to the six-month period was due to the fact that the second quarter of 2005 contained the positive impact of the aforementioned settlement between North Pittsburgh and a
carrier, resulting in a $1,604 increase in terminating access revenues realized over that amount which had been estimated and accrued over a multi-year period. Long distance and access services revenues from all other sources decreased $713, or
4.3%, for the second quarter of 2005, and $1,453, or 4.4%, for the six-month year-to-date period, over the comparable prior year periods.



Telecommunication equipment sales increased $21, or 4.2%, for the three-month period ended June 30, 2005 as compared to the same quarterly period in 2004,
in contrast to a six-month year-to-date decrease of $269, or 24.1%. As the majority of our revenue from this category is non-recurring in nature, quarter over quarter comparisons can be impacted by the timing of when some of our larger installations
occur. Correspondingly, telecommunication equipment expenses increased $2 in the second quarter of 2005 over the prior year second quarter, in contrast to a six-month year-to-date decrease of $173.



Network and other operating expenses decreased $494, or 3.4%, for the
three-month period ended June 30, 2005 as compared to the same quarterly period in 2004, in contrast to a six-month year-to-date decrease of $14, or 0.1%. The larger percentage decrease for the second quarterly period of 2005 as compared to the
year-to-date period was due to the fact that the second quarter of 2005 contained the positive impact of the aforementioned settlement between North Pittsburgh and a carrier, resulting in a cumulative $800 reduction in traffic termination costs from
the amount that was estimated and accrued over a multi-year period. All other network and other operating expenses increased $306, or 2.1%, for the second quarter of 2005, and $786, or 2.7%, for the six-month year-to-date period, over the comparable
prior year periods.



Liquidity and Capital Resources



|                                              |  |              |        |                  |   |       
|--------------------------------------------- |  | ------------ | ------ | ---------------- | - | ------
|                                              |  | June 30,2005 |        | December 31,2004
|Cash and temporary investments                |  | $            | 46,276 |                  | $ | 42,569
|Working capital                               |  | $            | 45,185 |                  | $ | 39,157
|Long-term debt (including current maturities) |  | $            | 23,140 |                  | $ | 24,682



Cash and temporary
investments were $46,276 at June 30, 2005 as compared to $42,569 at December 31, 2004. The increase was a result of operating cash flows exceeding investment and financing requirements. Cash flows from operations were $14,344 for the six-month
period ended June 30, 2005, a $1,318 increase from the comparable prior year period. Cash flows from operations were positively impacted by the receipt of the $2,404 in cash from the aforementioned



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North Pittsburgh settlement, although for period over period comparison purposes, the 2004 six-month period was
positively impacted by the collection of an approximate $421 previously disputed receivable paid by a carrier in January of 2004. We do not expect the magnitude of the increase (10.1%) in cash flows from operations for the six-month period ended
June 30, 2005 to continue throughout the rest of the year as the North Pittsburgh settlement was unique to the second quarter of 2005. In addition, the federal income taxes due on the North Pittsburgh settlement will be included in the third quarter
2005 estimated tax payment.



Cash flows used for investing
activities were $3,128 for the six-month period ended June 30, 2005, a $1,092 decrease from the comparable prior year period. The decrease was primarily the result of an $850 decrease in expenditures for capital additions. We estimate that the full
year 2005 capital expenditure program may be approximately $1,000 to $2,000 less than the prior year program, because 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 $217 increase in distributions received from our partnership investments.



We expended $7,509 during the six-month period ended June 30, 2005 for financing activities, which included cash dividends and the scheduled repayments
of debt and capital lease obligations. The amount was $188 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 June 30, 2005 increased $6,028 from December 31, 2004, mostly due to the continued generation of cash flows from operations, which contributed to the increase in cash and temporary
investments (as discussed above).



The decrease in long-term
debt was a result of scheduled principal repayments of $1,542 during the six-month period ended June 30, 2005. We funded 100% of our year-to-date 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 June 30, 2005 to the FFB under this loan was $23,140, with all advances having a maturity date of December 31, 2012. The unadvanced amount of this facility as of June 30, 2005 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 June 30, 2005, North Pittsburgh had approximately $3,608 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 $87,070, 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 $3,701 of North Pittsburghs retained earnings was available for dividends and other distributions to the Registrant as of June 30, 2005. The Registrant has no
restrictions on the amount of its retained earnings that are available for dividends and other distributions to its shareholders as of June 30, 2005. However, because of the aforementioned North Pittsburgh restrictions on dividends and
distributions, the portion of our total cash and temporary investments available for dividends and other distributions to our shareholders as of June 30, 2005 was $35,060.



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 dividends and to finance all capital projects. We currently expect a capital
expenditure program for 2005 in the range of $11,000 to $12,000. 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.



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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 six-month period ended June 30, 2005. Scheduled payments of approximately $2,189, $805, $171 and $1,021 were made to reduce the outstanding long-term debt (principal and interest), capital lease, operating lease and
operational support system obligations, respectively, during the first six months 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 projections of future medical cost trends.



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



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Regulatory Environment



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



Federal Regulatory Matters



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



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. 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.



North Pittsburgh has received several requests from facilities-based CLECs to
negotiate interconnection agreements and is now in the process of either negotiating or implementing those agreements.



Triennial Review Order and Related Matters



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 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.



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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. We have recently signed a three-year commercial agreement with Verizon that has set the terms of the pricing and
provisioning of these lines. Although the costs for UNE-P will increase over time in connection with the terms of the agreement, 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 as a result of the FCCs Order on Remand. We caution, however, that although the FCCs Order on Remand defines impairment of such circuits based on a review of the number
of business lines and fiber-based collocators in a serving wiring center, the practical definitions of what constitutes a business line or fiber-based collocator have yet to be decided.



In a separate matter, the PA PUC, which has the authority to set rates and terms for interconnection between carriers within
the guidelines ordered by the FCC, has recently revised many of Verizons unbundled rates for loops as well as high capacity circuits. Although the revised rates reflect a mixture of both increases and decreases, based on the specific types of
circuits and markets in which we operate, we have experienced 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 have mitigated the negative impacts of the FCCs Order on Remand, with slight decreases in the overall per line cost to provision access lines in our edge-out markets experienced in 2005. We caution, however, that Verizon
has challenged the PA PUCs revisions to Verizons rates in Federal court. In addition, there are aspects concerning the terms and implementation of the FCCs TRO and subsequent Order on Remand that presently remain uncertain or
challenged by court proceedings.



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##### Table of Contents

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, that 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 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





Since February 2002, the FCC has been considering the possible classification of wireline broadband Internet access as an information service rather than
a telecommunications service. On June 27, 2005, the U.S. Supreme Court supported the 2002 FCC decision that said cable broadband Internet service was an information service and therefore free from most telephone rules, including the requirements to
lease network access to competitors. In response to the Supreme Court ruling, on August 5, 2005, the FCC issued a press release stating that they had adopted an Order, which determined that wireline broadband Internet access services are information
services. The Commission also eliminated the requirement that wireline carriers offer the broadband transmission component of Internet access on a stand-alone basis to competitors. As stated in the press release, the Order does allow a wireline
provider the flexibility to offer the transmission component on a common carrier basis, a non-common carrier basis, or some combination of both. The Order also requires a one-year transition period during which unaffiliated ISPs will be able to
receive the separate transmission component on a grandfathered basis. In addition, the Order requires that facilities-based providers of broadband DSL transmission services continue to contribute to the federal USF based on current levels of
reported revenues for those services for a 270-day period, or until the Commission adopts new USF contribution rules, whichever occurs earlier. Because the FCC has yet to release the final Order, we are unable to determine the effect the Order will
have on the provision of our broadband Internet access services.



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##### Table of Contents

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 was a price cap plan. Under North Pittsburghs price cap plan, rates for non-competitive
intrastate services were allowed to increase based on an index that measures economy-wide price increases less a productivity offset. There were no limitations on earnings under this plan. The terms of the plan also allowed 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 and pursuant to competition developing, North
Pittsburgh could 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 committed to continue to
upgrade its network in the future to ensure that all its customers would have access to broadband services. The original 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 (as described above) but also added some 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. On June
2, 2005, the PA PUC approved North Pittsburghs amended plan with no significant changes. We believe that, based on the substantial investment we have already made in our broadband network, the capital expenditures necessary to meet the
accelerated commitment date should necessitate any material increases to our capital expenditure program from recent levels.



Other State Regulatory Matters



In addition to the PA PUCs revision of Verizons unbundled rates previously discussed under the Triennial Review Order and Related Matters
heading above, 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 Local Exchange Carriers (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 intrastate access
rates higher than the ILECs



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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. While a number of parties to the proceeding have filed a petition asking that the PA PUC delay any action in
regard to the Pennsylvania USF and intrastate access charges until such time as the FCC takes action in regard to intercarrier compensation issues, the PA PUC has not yet ruled on that petition. 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 was effective for the first interim reporting 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.



In March 2005, the FASB issued FIN 47,
Accounting for Conditional Asset Retirement Obligations  an interpretation of FASB Statement No. 143. FIN 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for
Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. An
entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Any uncertainty about the amount and/or timing of future settlement should be
factored into the measurement of the liability when sufficient information exists. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. We are currently evaluating the potential impact of this accounting
interpretation on our results of operations and financial position.





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##### Table of Contents

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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##### Table of Contents

PART II



OTHER INFORMATION



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



The 2005 Annual Meeting of Shareholders of the Company was held on May 20, 2005. The only matter voted upon at the Annual Meeting was the election of Directors. The vote tabulation in respect to each nominee to serve
as Director until the 2006 Annual Meeting of Shareholders is shown in the following table:



|                       |  |                               |  |                          
|---------------------- |  | ----------------------------- |  | -------------------------
|Name                   |  | Number ofSharesVoted in Favor |  | Number of Shares Withheld
|Nominees Elected:      |  |                               |  |                          
|                       |  |                              
|Harry R. Brown         |  | 9,899,602                     |  | 2,956,699                
|Dr. Charles E. Cole    |  | 12,108,471                    |  | 747,830                  
|Frederick J. Crowley   |  | 12,085,081                    |  | 771,240                  
|Allen P. Kimble        |  | 9,960,774                     |  | 2,895,527                
|Stephen G. Kraskin     |  | 11,150,192                    |  | 1,706,109                
|David E. Nelsen        |  | 12,127,838                    |  | 728,463                  
|Charles E. Thomas, Jr. |  | 9,873,210                     |  | 2,983,091                



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.                                   



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|            |  |                                                                                                                                                                                            |  |                
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------
|Exhibit No. |  | Subject                                                                                                                                                                                    |  | Applicability  
|(11)        |  | Statement re computation of per share earnings                                                                                                                                             |  | Attached Hereto
|            |  |                                                                                                                                                                                           
|(15)        |  | Letter re unaudited interim 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 
|            |  |                                                                                                                                                                                           
|(31(i).1)   |  | Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                           |  | Attached Hereto
|            |  |                                                                                                                                                                                           
|(31(i).2)   |  | Certification of Senior Vice President 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 Senior Vice President 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: August 9, 2005 |  | /s/ H. R. Brown                                   
|                     |  | H. R. Brown, President and Chief Executive Officer
|                     | 
|Date: August 9, 2005 |  | /s/ A. P. Kimble                                  
|                     |  | A. P. Kimble, Senior Vice President and           
|                     |  | Chief Financial and Accounting Officer            



30