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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-K



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(Mark One)



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



| | For the fiscal year ended December 31, 2006
| | -------------------------------------------

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 000-20709

D&E Communications, Inc.

(Exact name of registrant as specified in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Pennsylvania                                                  |  | 23-2837108                         
|(State or other jurisdiction ofIncorporation or Organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              | 
|124 East Main Street P.O. Box 458 Ephrata, PA                 |  | 17522-0458                         
|(Address of principal executive offices)                      |  | (Zip Code)                         

Registrants telephone number, including area code:

(717) 733-4101

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

Common Stock, par value $0.16 per share

(Title of Class)

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

None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes ̈No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    Yes ̈No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):



|                         |  |                      |  |                       
|------------------------ |  | -------------------- |  | ----------------------
|Large Accelerated Filer ̈ |  | Accelerated Filer  þ |  | Non-accelerated Filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).    Yes ̈No  þ

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2006 was approximately $152,362,086. Such
aggregate market value was computed by reference to the closing price of the registrants Common Stock as reported on the Nasdaq Global Market on June 30, 2006. For purposes of making this calculation only, the registrant has defined
affiliates to include all directors, executive officers and beneficial owners of more than ten percent of the Common Stock of the registrant.

The number of shares of the registrants Common Stock outstanding as of March 2, 2007 was 14,398,214.

DOCUMENTS
INCORPORATED BY REFERENCE

Portions of the registrants definitive proxy statement for its 2007 annual meeting of stockholders are
incorporated by reference into Part III of this Form 10-K.



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TABLE OF CONTENTS



|         |  |                                                                                                              |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                                              |  | Page
|PART I   |  |                                                                                                             
|Item 1.  |  | Business                                                                                                     |  | 3   
|Item 1A. |  | Risk Factors                                                                                                 |  | 23  
|Item 1B. |  | Unresolved Staff Comments                                                                                    |  | 26  
|Item 2.  |  | Properties                                                                                                   |  | 26  
|Item 3.  |  | Legal Proceedings                                                                                            |  | 27  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 27  
|         | 
|PART II  |  |                                                                                                             
|Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 28  
|Item 6.  |  | Selected Financial Data                                                                                      |  | 30  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 31  
|Item 7A. |  | Quantitative and Qualitative Disclosure About Market Risks                                                   |  | 55  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 55  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 55  
|Item 9A. |  | Controls and Procedures                                                                                      |  | 55  
|Item 9B. |  | Other Information                                                                                            |  | 56  
|         | 
|PART III |  |                                                                                                             
|Item 10. |  | Directors, Executive Officers and Corporate Governance                                                       |  | 57  
|Item 11. |  | Executive Compensation                                                                                       |  | 57  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 57  
|Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 57  
|Item 14. |  | Principal Accounting Fees and Services                                                                       |  | 57  
|         | 
|PART IV  |  |                                                                                                             
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  | 58  



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PART I

Forward Looking Information is Subject to Risk and Uncertainty

Our disclosure and analysis in this report includes
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements provide our current expectations or forecasts of future events.
You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements may relate to our financial condition, results of operations, plans, objectives, future performance and business. Often
these statements include words such as believes, expects, anticipates, estimates, intends, strategy, plan, or similar words or expressions. In particular,
statements, express or implied, concerning future operating results or the ability to generate income or cash flows are forward-looking statements. Forward-looking statements involve certain risks and uncertainties. Our actual performance or
achievements may differ materially from those contemplated by forward-looking statements.

You should understand that various factors,
including those discussed in the section titled Item 1A. Risk Factors and elsewhere in this document could affect our future results and could cause results to differ materially from those expressed in these forward-looking statements.
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. All subsequent written and oral forward-looking statements attributable to us are expressly qualified in their
entirety by the cautionary statements contained or referred to in this report. We do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this
document or to reflect the occurrence of unanticipated events.



|Item 1. | Business
|------- | --------

Overview

We are a provider of integrated communications services to residential and business customers in markets throughout the eastern half of Pennsylvania. We
have operated as a rural local exchange carrier (RLEC) in parts of Lancaster, Berks, Lebanon, Chester, Montgomery, Lehigh, Union and Northumberland counties in Pennsylvania since the early 1900s and were among the first to deploy a 100%
digitally switched network. In 1998, we began operating as a competitive local exchange carrier (CLEC) and currently operate in the Lancaster, Reading, State College, Pottstown, Williamsport, Altoona and Harrisburg, Pennsylvania areas,
which we refer to as our edge-out markets. Today, we offer our customers a comprehensive package of communications services, including local and long distance telephone services, broadband services, Internet access and, in certain of our
markets, video services. We also provide business customers with systems integration services, including professional data and information technology services, security, design and network monitoring.

Our segments are RLEC, CLEC, Internet Services, and Systems Integration. The measure of profitability that management uses to evaluate performance of our
business segments is operating income (loss) because individual segments are not charged an allocation for such items as interest and income taxes that are reported below operating income on the statement of operations. Effective January 1,
2007, we reorganized our business segments in order to better align them with our management structure and organized our segments based on the similar nature of products and services, production processes and distribution methods. Based on that
reorganization, the RLEC, CLEC and Internet Services business units and the cable television and video operations currently reported in the corporate and other segment will be combined into one reportable segment, Wireline. The Systems
Integration and Corporate and Other units will continue as distinct, reportable business segments.

As of December 31, 2006, we served
129,848 RLEC access lines, 43,720 CLEC access lines, 31,724 digital subscriber line (DSL)/high-speed Internet subscribers, 5,337 dial-up internet access subscribers, 7,437 video subscribers and 951 web-hosting customers. For the year
ended December 31, 2006, we generated revenue of $162.1 million, operating income of $22.5 million and a net income of $6.7 million.

Historically, we have derived a majority of our revenues from the regulated RLEC segment. The RLEC segment accounted for approximately 59% of total 2006 revenues and substantially all of our operating income. Our RLEC revenue is derived
primarily from local telephone service, network access charges, enhanced telephone services, directory advertising, private line service and regional toll service. Our CLEC focuses primarily on businesses, and revenue is derived primarily from local
telephone service, network access charges, enhanced telephone services, private line service and long distance service revenue. Our Internet Services



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revenue is derived from broadband and dial-up Internet access services, web-hosting services and Voice over Internet Protocol (VoIP) service. Our
Systems Integration revenue is derived from the sale of professional data and information technology services and equipment that support the design, implementation and maintenance of client-focused technology solutions including local and wide area
networks. The following graphs represent fiscal year segment revenues and operating income.

LOGO

LOGO



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Our company currently owns a one-third interest in EuroTel, LLC (EuroTel), a domestic
corporate joint venture, which previously owned 100% of Pennecom BV (PenneCom), a Netherlands telecommunications holding company. Effective January 26, 2007, PenneCom has been dissolved and its existence terminated. We expect that
EuroTel will be dissolved and liquidated prior to the end of the second quarter of 2007.

Our common stock is listed for quotation on the
Global Market System of the National Association of Securities Dealers Automated Quotation System under the symbol DECC. Our internet address is www.decommunications.com. Electronic copies of the 2006 Annual Report on Form 10-K are
available free of charge by visiting the Investor Relations section of www.decommunications.com. Electronic copies of quarterly reports on Form 10-Q and current reports on Form 8-K are also available at this internet address. These
reports are posted as soon as reasonably practicable after they are electronically filed with the United States Securities and Exchange Commission (SEC).

Our principal offices are located at 124 E. Main Street, Ephrata, Pennsylvania 17522, and we can be reached by telephone by calling (717) 733-4101 or through our website at www.decommunications.com. The contents
of this website are not part of this filing. We are a Pennsylvania corporation.

Recent Developments

Debt Refinancing

On
September 19, 2006, we completed an amendment to our syndicated senior debt financing, consisting of a $25 million revolving line of credit, Term Loan A in the amount of $36.1 million, Term Loan B in the amount of $144.7 million, and $28.9
million of term indebtedness. The amendment reduced the interest rates on the indebtedness, provided greater flexibility in the financial covenants, extended the scheduled amortization of principal, eliminated the $10 million permanent reduction on
the revolving line of credit previously scheduled for December 31, 2006 and eliminated the requirement to maintain interest rate protection with a weighted average life of at least two years on 50% of total variable rate indebtedness. We
anticipate that the reduction in interest rates will result in an average annual cash savings of approximately $0.6 million assuming the margin added to the U.S. prime or LIBOR rates in effect prior to the amendment would have been in effect
throughout the term of the credit facilities using the amended loan amortization schedules.

Discontinued Operations

On September 29, 2006, we completed the sale of assets of the commercial voice equipment and service operations of the Systems
Integration segment (Voice Systems Business) to eCommunication Systems Corporation (eComm) under an Asset Purchase Agreement dated September 13, 2006. The Voice Systems Business generally consisted of our voice telephone
equipment business, but does not include the professional data and information technology services, security, design and network monitoring operations of the Systems Integration segment. The Voice Systems Business represented a component of our
Systems Integration segment and accordingly, the results of operations have been classified as a discontinued operation for all periods presented in the consolidated statements of operations.

The Telecommunications Industry

The
telecommunications industry is comprised of companies involved in the transmission of voice, data and video communications over various media and through various technologies from the point of origination to the point of termination. In recent years
the industry has undergone significant change due to competition, the construction of additional infrastructure and the introduction of new technologies, which has resulted in increased demand for telecommunications services. The Telecommunications
Act of 1996 (TA-96) and its subsequent interpretation and implementation by the Federal Communications Commission (FCC) has had a far reaching impact on telecommunications companies, regulators and customers.

There are two predominant types of local wireline telephone service providers in the telecommunications industry: Incumbent Local Exchange Carriers
(ILEC) and Competitive Local Exchange Carriers (CLEC).



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Within the ILEC sector, generally there are Rural Local Exchange Carriers (RLEC), which operate primarily in rural areas, RLEC aggregators, which
operate multiple RLEC properties throughout the United States, and Regional Bell Operating Companies (RBOC).

The passage of
TA-96, with its stated goal of encouraging the rapid deployment of new telecommunications technologies and promoting competition to ensure lower prices and higher quality services for U.S. telecommunications customers, substantially changed the
telecommunications industry. TA-96 permitted CLECs to compete with ILECs on more favorable terms and conditions. As a result, ILEC and CLEC operators increasingly seek to differentiate themselves by bundling their communications service offerings
and providing high quality customer service. Both ILEC and CLEC operators face other competitive methods of delivering communications services including wireless telephones, cable service, satellite transmission and VoIP service.

Despite competition introduced into the telecommunications industry as a result of the passage of TA-96, many large RLECs continue to grow portions of
their business by capitalizing on their extensive networks, favorable demographic trends and the increasing demand for communications services, including new service offerings such as broadband and enhanced telephone services. There are also a
number of RLECs that operate in rural areas where competition from CLECs generally has been minimal due to regulatory factors, including exemptions from rules applicable to the RBOCs that require competitive access as mandated by TA-96, and the
unfavorable economics of constructing and operating competitive systems in rural areas. Additionally, there has been consolidation among RLECs, which has created economies of scale and the ability to cross-sell new services across a larger customer
base. Nationally, there are a large number of RLECs similar to ours that operate in sparsely populated rural areas where competition from CLECs generally has been minimal due to these same economic and competitive conditions. Most of these RLECs
have fewer than 50,000 access lines.

Business Strategy

Our primary business objective is to be a leading, regional integrated communications service provider (ICP). To achieve this objective, we will continue to pursue the following goals:



| |  |  | We will pursue the goal of capturing as many broadband connections to customers homes and businesses as possible. While we intend to continue to serve our
dial-up Internet access customer base, our focus will be to migrate these customers in the RLEC and CLEC areas to broadband connections. New broadband customers will also be aggressively pursued. Targeting customers with a broadband connection to
their home and/or business is vital for the future delivery of Internet Protocol (IP) services.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will implement an IP core network, along with a softswitch platform to more efficiently support and expand our voice and data delivery. In conjunction with this
network implementation, we will continue to build-out our fiber-to-the-node infrastructure to support the future deployment of advanced broadband IP communication services. With the establishment of an IP core network as part of our circuit switch
to IP switch network migration, we expect to meet the demands of our residential and business customers for increased bandwidth and new IP applications.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will continue to operate under a disciplined strategy to increase our market share in our edge-out markets, primarily to business customers, by offering
competitive communication service packages. We will continue to leverage our modern network infrastructure, established reputation, extensive local knowledge and significant operating experience to attempt to gain new customers and increase our
market share in our edge-out markets. Our focus will be on acquiring customers that can be served on our own network facilities and moving existing customers from leased facilities to our own network.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will pursue the goal of Delivering Excellence for our customers by providing reliable, responsive, state-of-the-art broadband communications services, including
voice, high-speed data and, in certain of our RLEC and CLEC markets, video. We will assess and tailor the bundling of services to best serve our customers and endeavor to achieve a competitive advantage in our local markets. We have direct
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | experience with video deployments on two technology platformshybrid fiber coaxial in the State College CLEC market and ADSL2+ over the RLEC copper
system in Union County, Pennsylvania. The deployment of video in our other RLECs remains under review and evaluation.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will endeavor to be a single-source provider of voice and data communications services to our business customers. We believe that the convergence and complexity
of voice communications and data network technologies has increased the need for businesses to seek a single provider for all of their communications and information technology needs. We are creating a more direct link between our RLEC, CLEC and
Internet customer base and the Systems Integration business through joint sales proposals, sales incentive plans, and needs-based proposals that combine Systems Integration and RLEC, CLEC or Internet services for a custom and differentiated offering
including professional information technology services, network security services and network monitoring and response.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will continue to make our commitment to customer service a top priority. Our Network Operations Center (NOC) provides monitoring, repair and
emergency services 24 hours a day, 7 days a week and 365 days a year, which strengthens our relationships with our customers and enhances our competitive position. In an effort to enhance the customers experience when they call in service
issues, we integrated a case management system into the NOC. The system has given us the ability to better manage and prioritize service calls resulting in greater ability to manage the customers request. To further enable this capability,
several automated tests were developed and implemented that allow us to analyze every issue that is called in, determine the location of the issue and identify the appropriate technical group to resolve the issue. We offer customers our Managed
Services products, which are internal monitoring (within the customers enterprise), external monitoring (devices outside the customers enterprise) and comprehensive security assessments and management. Our complement of Managed Services
fills the needs of our customers by allowing them to improve reliability, provide higher levels of service and save money through efficient device management and planning.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will offer a broad array of advanced communication services that will enable new modes of communication to become a part of the daily home or business
experience. Using softswitch technology currently being implemented, a unified communications portfolio of integrated application services (e.g., email, voicemail, instant messaging and video conferencing) will provide customers with more flexible
communication alternatives.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Operations

RLEC Operations

Our RLEC segment has provided telecommunications services to the RLEC
territories since the early 1900s and was one of the first to deploy a 100% digitally switched network. Today, we market our RLEC services, including local telephone, network access, long distance, data and enhanced telephone services, as D&E
Communications, in three distinct service territories. Our RLEC strategy is to sell additional communications services, including broadband and enhanced telephone services, and to manage expenses through improved operating efficiencies.

We operate in rural and suburban territories totaling 802 square miles, averaging 162 access lines per square mile as of December 31, 2006.
Access lines represent revenue producing voice grade equivalent lines connected to the public switch providing dial tone to the customer. As of December 31, 2006, the RLEC served 129,848 access lines. Approximately 71% of these access lines
served residential customers.

We offer our customers a broad array of enhanced telephone services, including call waiting, call
transferring and forwarding, automatic callback, call trace, call-blocking, conference calling, voice mail, teleconferencing, DID (direct inward dial), caller name and number identification, distinctive ringing and simultaneous ringing (in limited
areas).

We also offer network access services that provide other telecommunications carriers, such as local exchange carriers, long
distance carriers and wireless companies access, to our local network facilities for the



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completion of their calls. Payment for providing these services comes either directly from our customers or from other telecommunications carriers that
utilize our networks. Additional interstate access revenues are received from settlement pools administered by the National Exchange Carrier Association, Inc. (NECA). In addition, we offer private-line service and long-distance telephone
service to our RLEC customers and directory advertising to give customers business service information in addition to telephone number data.

Historically, we have derived a majority of our revenues from the regulated RLEC segment. The RLEC segment accounted for approximately 59% of total 2006 operating revenues and substantially all of our operating income. Our RLEC revenue is
derived primarily from network access charges, local telephone service, enhanced telephone services, directory advertising, private line service and regional toll service. Network access revenue consists of charges paid by wireless companies for
access to our network and by long distance companies for access to our network in connection with the completion of long distance telephone calls. Local telephone service revenue consists of charges for local telephone services, including monthly
charges for basic local service. Enhanced telephone services revenue is derived from providing special calling features. Regional long distance revenue is derived from providing regional long distance services to our RLEC customers.

Our total RLEC lines decreased by 2.2% in 2004, 3.5% in 2005 and 3.6% in 2006, as a result of various factors that reflect industry trends, including the
use of wireless service in place of second lines and, in some cases, primary lines, the move to VoIP service and the use of alternative telecommunication services. The following table reflects RLEC access line trends over the past three years:



|                   |  |                                        |    |  |         |    |  |         |   
|------------------ |  | -------------------------------------- | -- |  | ------- | -- |  | ------- | --
|                   |  | At Or For The Years Ended December 31, |   
|                   |  | 2006                                   |    |  | 2005    |    |  | 2004    |   
|ACCESS LINES:      |  |                                        |    |  |         |    |  |         |   
|Residential        |  | 92,400                                 |    |  | 97,100  |    |  | 101,366 |   
|Business           |  | 37,448                                 |    |  | 37,598  |    |  | 38,241  |   
|                   |  |                                        |    |  |         |    |  |         |   
|Total RLEC         |  | 129,848                                |    |  | 134,698 |    |  | 139,607 |   
|                   |  |                                        |   
|PERCENT OF TOTAL:  |  |                                        |    |  |         |    |  |         |   
|Residential        |  | 71.2                                   | %  |  | 72.1    | %  |  | 72.6    | % 
|Business           |  | 28.8                                   | %  |  | 27.9    | %  |  | 27.4    | % 
|                   |  |                                        |   
|PERCENTAGE CHANGE: |  |                                        |    |  |         |    |  |         |   
|Residential        |  | (4.8                                   | )% |  | (4.2    | )% |  | (3.5    | )%
|Business           |  | (0.4                                   | )% |  | (1.7    | )% |  | 1.4     | % 
|Total RLEC         |  | (3.6                                   | )% |  | (3.5    | )% |  | (2.2    | )%

CLEC Operations

Our CLEC began operations in 1998 and offers services similar to the RLEC, but primarily targets small and medium-sized business customers within the
edge-out markets. We also provide services to residential customers in certain markets, where economically prudent, as part of bundled services with video, high-speed data or long distance. By concentrating the CLEC strategy on markets surrounding
the RLEC territories, we are able to leverage our existing human resources including technical and engineering professionals, significant back office infrastructure and network assets. As a result, three of the CLEC markets are within 10 miles,
three are within 50 miles, and one is within 100 miles of one or more of the RLEC territories.

We provide our CLEC customers with
broadband services, local calling, customized extended local calling, long distance and enhanced telephone services. In addition, we have developed a broadband fiber and coaxial cable network in our State College market to offer bundled services,
including cable television, to business and multi-dwelling unit residential customers. We plan to continue to focus primarily on business customers, leverage our existing facilities and construct new facilities when and where it is economically
prudent.



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Our CLEC revenue is derived primarily from local telephone service, long distance service, network access
charges, enhanced telephone services and dedicated data circuits. Local telephone service revenue consists of charges for local telephone services, including monthly charges for basic local service. Long distance revenue consists of charges for both
national and regional long distance services, a portion of which is provided on a resale basis. Network access revenue consists of charges paid by long distance companies and other telecommunications carrier customers for access to our network in
connection with the completion of long distance telephone calls. Dedicated circuit revenue consists of charges for T-1, DS-3 and other high capacity broadband circuits. Enhanced telephone services revenue is derived from providing special calling
features, such as caller ID, call waiting and a telemarketer call-blocking service.

The number of access lines served by our CLECs has
increased from 38,461 access lines as of December 31, 2004, to 40,796 access lines as of December 31, 2005 and 43,720 as of December 31, 2006. We believe that market demand for an alternative communications provider, combined with our
sales efforts and quality reputation, will contribute to continued growth. As of December 31, 2006, approximately 30% of access lines were On-Net, defined as served entirely on our own facilities. Approximately 62% were
On-Switch, or served through a combination of our facilities and leased facilities, and 8% were served completely on lines of another provider, known as Resale. At December 31, 2005, approximately 26% of access lines
were On-Net, approximately 64% were On-Switch and 10% were Resale lines. We provide residential service in our markets but we concentrate our expansion of service to business customers. To help improve
profitability, we focus our sales efforts in areas where we can provide service On-Net and capital spending is targeted for places where Resale and On-Switch customers can be converted to On-Net. The
following table reflects our CLEC access line growth over the past three years:



|                            |  |                                        |    |  |        |    |  |        |   
|--------------------------- |  | -------------------------------------- | -- |  | ------ | -- |  | ------ | --
|                            |  | At Or For The Years Ended December 31, |   
|                            |  | 2006                                   |    |  | 2005   |    |  | 2004   |   
|ACCESS LINES:               |  |                                        |    |  |        |    |  |        |   
|Residential                 |  | 3,536                                  |    |  | 3,727  |    |  | 4,298  |   
|Business                    |  | 40,184                                 |    |  | 37,069 |    |  | 34,163 |   
|                            |  |                                        |    |  |        |    |  |        |   
|Total CLEC                  |  | 43,720                                 |    |  | 40,796 |    |  | 38,461 |   
|                            |  |                                        |   
|PERCENT OF TOTAL:           |  |                                        |    |  |        |    |  |        |   
|Residential                 |  | 8.1                                    | %  |  | 9.1    | %  |  | 11.2   | % 
|Business                    |  | 91.9                                   | %  |  | 90.9   | %  |  | 88.8   | % 
|                            |  |                                        |   
|PERCENTAGE GROWTH:          |  |                                        |    |  |        |    |  |        |   
|Residential                 |  | (5.1                                   | )% |  | (13.3  | )% |  | (13.0  | )%
|Business                    |  | 8.4                                    | %  |  | 8.5    | %  |  | 13.1   | % 
|Total CLEC                  |  | 7.2                                    | %  |  | 6.1    | %  |  | 9.5    | % 
|                            |  |                                        |   
|Percent On-Net or On-Switch |  | 92.0                                   | %  |  | 90.0   | %  |  | 89.0   | % 

Internet Service Operations

As part of the strategy to provide a range of data services to customers, we began offering DSL service in the second half of 1999 and began bundling DSL
and Internet access services to RLEC and CLEC customers when we launched our Internet service provider, D&E Jazzd, in the fourth quarter of 2000. We began offering VoIP services in May 2005 in our CLEC territory. Our Internet services revenue is
derived from dial-up and broadband services and web-hosting services. Internet services are offered to residential and business customers in a geographic region that includes and surrounds the RLEC and CLEC operations. This service is offered
entirely on our own facilities in our RLEC territories and primarily on our own facilities in our CLEC markets. Our objective has been to migrate our dial-up Internet customers to our broadband service with DSL. In 2006, 11% of our new DSL
subscribers upgraded to our broadband service from our previous dial-up service. The fact that we have succeeded in adding Internet service customers at a substantial rate over the past three years



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demonstrates that our customers value broadband Internet services. We believe the opportunity to provide such services is an important component of our
business plan. The following table reflects subscriber growth over the past three years:



|                          |  |                                        |    |  |        |    |  |        |   
|------------------------- |  | -------------------------------------- | -- |  | ------ | -- |  | ------ | --
|                          |  | At Or For The Years Ended December 31, |   
|                          |  | 2006                                   |    |  | 2005   |    |  | 2004   |   
|DSL/High-Speed Internet * |  | 31,724                                 |    |  | 22,504 |    |  | 13,595 |   
|Dial-up                   |  | 5,337                                  |    |  | 7,959  |    |  | 11,535 |   
|                          |  |                                        |    |  |        |    |  |        |   
|Total Subscribers         |  | 37,061                                 |    |  | 30,463 |    |  | 25,130 |   
|Web-Hosting Customers     |  | 951                                    |    |  | 952    |    |  | 909    |   
|                          |  |                                        |   
|PERCENT OF TOTAL:         |  |                                        |    |  |        |    |  |        |   
|DSL/High-Speed Internet   |  | 85.6                                   | %  |  | 73.9   | %  |  | 54.1   | % 
|Dial-up                   |  | 14.4                                   | %  |  | 26.1   | %  |  | 45.9   | % 
|                          |  |                                        |   
|PERCENTAGE GROWTH:        |  |                                        |    |  |        |    |  |        |   
|DSL/High-Speed Internet   |  | 41.0                                   | %  |  | 65.5   | %  |  | 45.3   | % 
|Dial-up                   |  | (32.9                                  | )% |  | (31.0  | )% |  | (10.3  | )%
|Total Subscribers         |  | 21.7                                   | %  |  | 21.2   | %  |  | 13.1   | % 
|Web-Hosting Customers     |  | (0.1                                   | )% |  | 4.7    | %  |  | 11.7   | % 

---

|* | DSL/High-Speed Internet subscriber amounts for 2005 and 2004 have been adjusted to include our cable modem subscribers.
|- | -----------------------------------------------------------------------------------------------------------------------

We believe our local presence, focus on customer service and technologically advanced services provide us with a competitive advantage in our markets.
While we plan to continue to serve our dial-up Internet access customer base, we plan to focus our sales efforts on selling our broadband services as part of an integrated communications package.

Systems Integration Operations

To augment our core voice and data communications services and enhance our position as a provider of integrated communications services, we offer a full range of data solutions for businesses, government agencies and educational
institutions. We believe that the complexity of voice communications and data networks has increased the need for these organizations to seek a single provider for all of their communications and networking needs. We believe that the convergence of
voice communications and data networks technology further drives this outsourcing trend and increases the need for service providers that have expertise in both voice and data networks. In addition, systems integration services can serve as an entry
point to business customers to better position us to capture more of their total communications services spending.

Our Systems Integration
revenue is derived from sales of services and equipment that support the design, implementation and maintenance of local and wide area data networks. Our offerings include wireless networking solutions, managed services and managed security services
and consultative information technology (IT) services. We market these products and services primarily in our RLEC and CLEC service areas, as well as in the eastern Pennsylvania and greater Philadelphia market areas. Our sales team
targets businesses, government agencies and educational institutions with comprehensive solutions for their voice and data communication networking needs.

On September 29, 2006, we completed the sale of assets of the Voice Systems Business to eComm. The Voice Systems Business is no longer a strategic part of our core business or related to our focus on broadband
and on-net CLEC growth. In our Systems Integration segment, we have put more focus on data, professional and managed services which provide recurring and more profitable revenues. As part of the sale, eComm has



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become an authorized representative of our Company for the sale of voice telephone equipment and services to our business customers. Conversely, eComm will
refer its clients to us for their telecommunications service needs including local, long distance, Internet access, data circuits and professional and managed services.

In order to improve the financial performance of this segment, we have begun to streamline our operation by reducing expense and enhancing revenue. Operational expense reductions include rent and wages. Revenue
enhancements include meeting market rates for services and adding computer security services and managed services to RLEC and CLEC sales proposals. Systems Integration services, when combined with RLEC, CLEC and Internet Services, offer our
customers a differentiated product offering.

Video Operations

We provide video services in certain of our RLEC and CLEC markets on two technology platformshybrid fiber coaxial in the State College CLEC market
and ADSL2+ over the RLEC copper system in Union County, Pennsylvania. The deployment of video in our other RLECs remains under review and evaluation. Providing video services is part of our strategy to bundle our services to best serve our customers
and endeavor to achieve a competitive advantage in our local markets.

Investments

We acquired a 10% equity interest valued at $0.35 million in eComm in connection with the sale of the Voice Systems Business on September 29, 2006.
We account for this investment on the cost method.

Our company currently owns a one-third interest in EuroTel, LLC (EuroTel),
a domestic corporate joint venture, which previously owned 100% of Pennecom BV (PenneCom), a Netherlands telecommunications holding company. Effective January 26, 2007, PenneCom has been dissolved and its existence terminated. We
expect that EuroTel will be dissolved and liquidated prior to the end of the second quarter of 2007.

We owned a direct and indirect
interest in Pilicka Telefonia Sp. z o.o. (Pilicka) until we sold it on December 19, 2005. We recorded pre-tax income of approximately $6.4 million as a result of the sale. Pilicka provides telecommunication services in Poland.

We also owned an interest in PenTeleData Limited Partnership I until we sold the interest on February 28, 2005 for $2.9 million.
PenTeleData provides telecommunications and Internet access services in Pennsylvania.

Competitive Strengths

Customer Service

We believe
there is a high correlation between service quality and the likelihood that our customers will remain with us when presented with a competitive alternative. Our commitment to personalized customer service includes locating call centers in the
communities that we serve and providing a single point of contact for service calls by cross-training all customer service personnel in RLEC, CLEC, long distance and Internet service offerings. Call centers provide convenient access for customers to
place their orders and make billing inquiries.

Multiple customer retention measures are employed for larger RLEC business customers and
for our CLEC customers who are more likely to be targeted by competitors. These customer retention measures include performance and satisfaction measures, such as monthly customer surveys to ensure customer satisfaction and loyalty.For
quality assurance purposes, we do live monitoring by supervisors, and engage a third-party firm to evaluate and provide feedback on various aspects of the customers interaction as well as an overall rating of the customers experience. In
2006, an employee team reviewed RLEC line-loss activity, which resulted in specific marketing tactics to attempt to slow RLEC access line loss.



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We set high standards for answering customer calls promptly and efficiently. In 2006, our overall
performance for answering customer calls within 20 seconds exceeded the Pennsylvania Public Utility Commission (PA PUC) guidelines. Additionally, in areas such as call completion, customer-out-of-service reports and service-order
completion, our performance consistently exceeds guidelines established by the PA PUC.

In addition, personnel at our NOC center coordinate
provisioning and maintenance for our customers. Our network is monitored, and repair service is available, 24 hours a day, 365 days a year. Inbound maintenance requests, field personnel dispatches and service order monitoring are all coordinated
through this center. Our NOC also provides us with remote network management, maintenance and repair capabilities, which we believe increases our engineers productivity and reduces potential service interruptions for our customers.

In an effort to enhance the customers experience when they call in service issues, we integrated a new case management system into the NOC. The
system has given us the ability to better manage and prioritize service calls resulting in a greater ability to manage the customers request. To further enable this capability, several automated tests were developed and implemented that allow
us to analyze every issue that is called in, determine the location of the issue and identify and dispatch the appropriate technical group to resolve the issue.

Sales and Marketing

We continue to leverage our Delivering Excellence branding
both externally and internally. During the past year we solicited feedback from our business customers to further define our Delivering Excellence branding by creating a value proposition. Our value proposition defines what we uniquely
bring to our customers and what our customers told us they value from our Company. In addition, to support our continued focus on Delivering Excellence, we have implemented quarterly and annual awards to recognize individual employee
efforts that exemplify the key behaviors that focus on the overall customer experience.

Convergence of communication technologies is a key
element in the future growth of our company. With RLEC line counts declining and increasingly threatened, we must capture additional sources of revenue from each customer. The more customer needs we can address and solve with our communication
services, the more effectively we can build a long-term relationship with our customers. The broadband connection into our customers homes and businesses is the key to delivering voice, data and video services today and advanced IP
communication services in the future.

An example of delivering on convergence today for consumers occurs in Union County, Pennsylvania
where we have deployed video over RLEC copper facilities. Offering video programming over the existing copper wireline increases the revenue we receive from the customer and provides the means for potential revenue growth within our Company. The
bundling of services (e.g. video and DSL with voice) is a key part of our strategy to add revenue and strengthen our customer relationships by providing increased value with our new bundled services. In addition, offering a full range of services
will strengthen our competitive position to compete with cable companies and other competitors who begin to encroach on our traditional telephone service areas.

As we deploy new products and services into our seven edge-out markets as part of our CLEC strategy, we believe that we will continue to drive CLEC revenue growth. By solving our customers
communication needs, we attempt to demonstrate value and strengthen our relationship with them. Customer testimonials and referrals result from these successes and help drive additional customer opportunities.

We employ a relationship-based sales and marketing approach. This approach, and a commitment to customer service, builds brand loyalty and increases the
effectiveness of sales efforts. We also grow our general brand awareness through corporate and product awareness campaigns that utilize local television, billboard and print ads as well as sponsorship of community events. Corporate spokesmen, Dick
Vermeil (former head coach



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of the Kansas City Chiefs, St. Louis Rams and Philadelphia Eagles) and Joe Paterno (head football coach of Penn State University) also help promote our
Companys products and services. With respect to non-RLEC businesses, we support an aggressive integrated marketing communications strategy with targeted direct sales efforts. Customer service representatives are located throughout the service
territories and are supported by local sales efforts.

We manage our sales organization to serve both residential and business customers.
Our CLEC sales team is focused on businesses that can be served by our On-Net facilities. We serve business customers in many markets including healthcare, financial services and education. Customer service representatives proactively
market a complete service portfolio to residential customers through regular calling programs and consultative analyses of customers services on incoming calls. We employ up-sell and cross-sell programs in our customer service call centers
with sales representatives who are cross-trained in all segments of our business to market the service offerings more effectively. Aggressive monthly sales targets are established for the customer service representatives and their efforts are
coordinated with the marketing incentives designed to promote a given service at the same time. Marketing programs and sales initiatives are coordinated with the calling efforts to maximize their effectiveness. In 2005 and 2006, a focused sales
effort centered on broadband Internet services.

The direct sales force targets healthcare, financial services, government and educational
institutions, as well as small and medium-sized businesses, and is divided between communication services and systems integration services. Both sales groups make direct calls to existing and prospective customers, make product recommendations and
offer a cost comparison of the service package. The sales personnel work closely with the network and systems integration engineers to design solutions to meet customers needs.

Network Architecture and Operations Support Systems

We have implemented a next generation packet
network strategy, which utilizes softswitch technology for voice services and packet transport technology for efficient transmission of voice, data and video services. In 2006, we completed a softswitch implementation in our Ephrata switching
end-office. Our NOC monitors network performance 24 hours a day, 365 days a year and allows us to maintain high-network performance standards.

The RLEC has host switches in Ephrata, Lititz, Birdsboro and Lewisburg, Pennsylvania and delivers dial tone to an extensive network of remote switches and broadband loop carriers that are connected with fiber optic cable. Connection to
customers, or the last mile, is provided over the RLECs copper or fiber outside plant. The host/remote architecture concentrates network intelligence in the four host offices, enabling the RLEC operations to leverage this network
and provide short customer loop lengths in our copper cable plant using a fiber to the node strategy. The resulting shorter loops and use of DSL technology allows us the capability of providing broadband services to approximately 99% of our RLEC
customers.

The CLECs network strategy is to leverage the existing core switching architecture and to own the key elements of the
local exchange network. These elements include remote access nodes and the facilities connecting the host switches to the remote access nodes, including both the fiber optic cable and the optical transport electronics. In addition, where
economically viable, the CLEC builds copper/fiber distribution facilities between the remote access nodes and customers premises. The network strategy allows the CLEC to provide high quality and reliable service and helps to minimize customer
turnover. In addition, we have one host switch and three remote access nodes supporting the broadband fiber network in State College, Pennsylvania. As of December 31, 2006, the CLEC had 92% of its access lines connected to our switches and 30%
of its access lines completely on our network.

The network is supported by computer systems, called operations support systems, that
provide the ability to install service for customers on a short interval basis and to analyze network problems in many instances before the customers are affected. These systems include databases of all RLEC and CLEC customers and the associated
facilities such as the fiber and copper cable and the associated central office switching connections that serve



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them. We also use geographic information systems to map our outside plant cable and associated structure of poles and underground conduit. These same systems
allow us to verify quickly the capability of the network for broadband service. We have a system that stores the inventory of central office and transmission equipment that is accessed for the automatic provisioning of customized services for
customers. These systems also have monitoring and troubleshooting capabilities to insure the reliability of the network. We are able to interface with the operations support systems of Verizon and Embarq to assure fast and accurate provisioning of
services for the CLEC customers.

Competitive Environment

TA-96 introduced competition among providers of local telephone services enabling customers to switch to services offered by competitive local exchange carriers and cable companies. Several other factors are further
increasing competition in local telephone service, including growing customer demand for communications products and services, development of fiber optics and digital electronic technology and legislation and regulations designed to promote
competition.

We believe that our RLECs have certain competitive advantages, including the lack of concentration of any large business
customers, a strong customer service record and high level of customer satisfaction and the service territories high cost of facilities-based entry due to low population density and other regulatory factors. Our RLECs experience competition
from wireless operators in our service territories, which provide an alternative service to wireline local and long distance services. Wireless competitors include Verizon Wireless, AT&T, Sprint Nextel, Immix and T-Mobile Wireless. The entry of
VoIP competitors, such as Vonage and cable companies offering VoIP services, have also become a competitive threat.

Our CLEC competes
principally with the services offered by the incumbent local exchange carriers, Verizon Communications and Embarq, and other competitive providers, including other CLECs, inter-exchange carriers, cable television companies, VoIP competitors such as
Vonage, wireless service providers and private networks built by large business customers. The edge-out markets served by our CLEC are served by one or more other CLECs. In addition, in providing long distance service, our RLECs and CLECs are in
competition with major carriers, such as AT&T and Verizon Communications, as well as the wireless companies listed above.

Our Systems
Integration business competes with large, regional and national companies that provide a wide variety of services to their customers. These competitors include Technisource and Weidenhammer Systems Corp. We also compete with numerous smaller service
providers. As a result of this competition, we may lose customers or have difficulty acquiring new customers. Barriers to entry to the markets for these services are generally low. As a result, new competitors may enter this market. The existing and
new sources of competition place pressure on the pricing of these services.

The market for Internet services is highly competitive. We
compete for dial-up and broadband customers with national, regional and local Internet service providers as well as cable companies and direct broadcast satellite companies. These competitors include AOL, EarthLink, MSN, Comcast, Service Electric
and Pencor Services. We also compete for business customers with long distance and local communications providers in selling broadband services. The existing and new sources of competition in this market place pressure on the pricing of these
services.

Regulatory Environment

Overview

Our communications services are subject to federal, state and local regulation. We hold various regulatory
authorizations for our service offerings. At the federal level, the FCC exercises jurisdiction over all facilities of telecommunications common carriers, such as us, to the extent those facilities are used to provide, originate, or terminate
interstate or international communications. State regulatory commissions exercise jurisdiction over such facilities and services to the extent those facilities are used to provide, originate or terminate intrastate communications.



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Pursuant to TA-96, state and federal regulators share responsibility for implementing and enforcing the
domestic pro-competitive policies introduced by that legislation. In particular, state regulatory agencies have substantial oversight in the provision by ILECs for interconnection and non-discriminatory network access to competitive communications
providers. Local governments often regulate the public rights-of-way necessary to install and operate networks, and may require communications services providers to obtain licenses or franchises regulating their use of public rights-of-way.

Federal Regulation

We must comply with the Communications Act of 1934, as amended, which requires, among other things, that communications carriers offer services at just and reasonable rates and on non-discriminatory terms and conditions. Our RLECs also must
comply with TA-96. TA-96 encourages competition in local telephone service by requiring ILECs to open their networks and markets to competition. Because unique market characteristics are typically present in the areas served by RLECs, TA-96 granted
an exemption to RLECs from providing certain interconnection requirements including collocation, unbundled network elements and resale of tariffed services at discounted rates. This exemption remains in place until an RLEC receives a request for
interconnection and the state public service commission determines that the request will not have a negative impact on universal service, will not be unduly economically burdensome, and is technically feasible. RLECs with less than 50,000 access
lines, such as our Buffalo Valley RLEC, have an additional exemption available to them under state law. Pursuant to Pennsylvania Act 183, RLECs with less than 50,000 access lines who commit to advancing their universal broadband commitment to
December 31, 2008 shall be granted a suspension from providing certain interconnection requirements, including collocation, unbundled network elements and resale of tariffed services at discounted rates. This suspension of obligations will
expire December 31, 2008, unless extended by the PA PUC. Our RLECs with more than 50,000 access lines continue to be protected from the more onerous requirements involving the provision of RLEC network facilities at discounted wholesale costs
to competitors, until the PA PUC grants a competitors request to terminate our RLECs rural exemption. Our RLECs are subject to rate of return regulation at the FCC level. Each RLEC participates in the National Exchange Carrier
Association access tariffs and are nationwide average schedule companies for access revenue settlement purposes. If the FCC would disallow RLECs to receive compensation for interstate services based on the NECA average schedule formulas, our RLECs
could experience a change in revenues. Changes in the average schedule formula amounts developed by NECA and implemented annually in July will impact the RLECs future revenues. The FCC has approved NECAs changes in average schedule
settlement formulas effective July 1, 2006, which included a two-year transition period for implementing the new calculations. We estimate that the impact of the new formulas and the transition plan on consolidated network access revenues using
actual access lines and minutes of use for the year 2006 will be a reduction of approximately $1.7 million during fiscal year 2007, a reduction of $2.6 million during fiscal year 2008 and an annual reduction of $2.7 million thereafter.

Additionally, NECA has filed a proposal with the FCC for a change in average schedule settlement formulas to be effective July 1, 2007, which
includes a two-year transition period for implementing the new calculations. If the proposed filing is approved by the FCC, we estimate that the impact of the new proposed formulas and the transition plan on consolidated network access revenues,
based on 2006 actual access lines and minutes of use, will be a reduction of approximately $0.5 million during the last six months of 2007, a reduction of approximately $1.5 million during fiscal year 2008, a reduction of approximately $2.0 million
during fiscal year 2009 and an annual reduction of approximately $2.1 million thereafter, based on information provided by NECA. We estimate that the total combined effect of both the approved and proposed changes in NECA average schedule settlement
formulas on consolidated network access revenue will be a reduction of $2.2 million in 2007, $4.1 million in 2008, $4.7 million in 2009 and $4.8 million thereafter.

Pennsylvania Regulation

Our RLECs are subject to regulation by the Pennsylvania Public
Utility Commission. In 2001, we entered into an alternative regulatory framework, commonly known as Chapter 30, with the PA PUC for our intrastate operations under which we agreed to meet certain broadband service delivery parameters in exchange for
a price



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cap formula, rather than a rate-of-return regulation. As a result of the alternative regulatory framework, profits are not directly limited by the PA PUC as
they were under the former rate of return system of regulation. Instead, our RLECs received the flexibility to increase intrastate rates annually based on inflation less two percentage points. In exchange for the indexed price cap on rates, the
RLECs receive the benefit of any increase in margin resulting from their ability to reduce operating costs. Our RLECs can also seek to rebalance rates periodically within or between various intrastate service categories, such as local, toll and
access. Additionally, our RLECs have the ability to request relief on a dollar-for-dollar basis for certain events deemed outside of their control that result in reduced revenue or increased expenses. On November 30, 2004, the Governor of
Pennsylvania signed into law a revised Chapter 30, known as Act 183, that impacts our RLECs. The law provides additional options to promote broadband deployment in the state and encourage faster rollout of broadband capability to all consumers. Our
RLECs have the opportunity to make capital expenditures to have broadband services available to all consumers by December 31, 2008. In light of the increased capital expenditure requirements associated therewith, the new law removes the two
percentage points inflation offset used to calculate intrastate rates annually. The new law adds other provisions to further the advancement of broadband services to schools in Pennsylvania and provides for a suspension of certain interconnection
requirements until December 31, 2008, for companies with less than 50,000 access lines. Our RLECs filed amended Chapter 30 plans to meet the 100% threshold by December 31, 2008. The amended Chapter 30 Plans were approved by the PA PUC. We
currently are capable of providing broadband services as defined by the new law to 99% of our customers. We feel we are well positioned to meet the required 100% threshold by December 31, 2008. Our RLECs also pay into and receive intrastate
Universal Service Fund (USF) support from the Pennsylvania USF. See Promotion of Universal Service.

Our CLEC is
also subject to regulation by the PA PUC in relation to intrastate services, including local telephone, regional long distance and network access services. Under the PA PUCs current practices, our CLEC rates and services are generally subject
to much less regulatory scrutiny than those of the RLECs in their markets.

The PA PUC must also approve any issuance of stock, incurrence
of long-term debt, or acquisition or sale of material utility assets by our RLECs and CLECs. In addition, the PA PUC must approve any change in controlling interest of either our RLECs and CLECs or their holding companies. The PA PUC defines a
controlling interest as an interest held by a person or group acting in concert, which enables the beneficial holders to control at least 20% of the voting interest in the utility or its parent, regardless of the remoteness of the
transaction.

Under TA-96, the PA PUC also has authority to arbitrate any disputes over the terms and conditions of interconnection between
our RLECs and CLEC and other telecommunication carriers in our RLEC and CLEC markets, including the prices of various unbundled network elements that our CLEC purchases. The PA PUC has taken a number of actions over the past several years affecting
the prices for network elements, as well as the terms and conditions under which these elements are provided. Further decisions by the PA PUC may have a material effect on our CLECs costs and profitability.

Promotion of Local Service Competition  The Telecommunications Act of 1996

One of the key goals of TA-96 is to encourage competition in local telephone service. To do this, TA-96 provides three means by which communications
service providers can enter the local telephone service marketplace:

Resale.ILECs are required to permit new
communications service providers to purchase their services for resale to the public at a retail rate or a wholesale rate that is less than the rate charged by the ILEC to their retail customers.

Access to Network Elements. ILECs are required to lease to new communications service providers the various elements in their
network that are used to provide local telephone service. The leased parts of the ILECs networks are known as unbundled network elements. The ILEC must make unbundled network elements available at rates that are based on their
forward-looking economic costs.



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Construction of New Facilities.New communications service providers may also
enter the local telephone service market by building their own facilities.

To facilitate new communications service providers entry
into local telephone markets using one or more of the above three methods, TA-96 imposes on non-rural ILECs the obligation to open their networks and markets to competition. When requested by competitors, non-rural ILECs are required to negotiate
agreements, in good faith, that set forth terms governing interconnection to their network, access to unbundled network elements and discounted resale. Non-rural ILECs also must allow competing carriers to co-locate, or place their own
equipment, in the non-rural ILECs central offices.

As a result of the passage of TA-96, local exchange carriers, including our
RLECs, are facing competition in the provision of local telephone and regional long distance services. TA-96 also provides for the codification of the principles of universal service and establishes safeguards to foster the provision of
communications services in the areas served by ILECs by adopting a federal universal service support fund, or USF. See  Promotion of Universal Service.

TA-96 makes competitive entry into the telecommunications industry more attractive to non-ILECs by, among other things, removing most state and local barriers to competition. In particular, after notice and an
opportunity for comment, the FCC may preempt any state requirement that prohibits or has the effect of prohibiting a carrier from providing intrastate or interstate communications services. In addition, TA-96 establishes procedures under which an
RBOC can enter the market for long distance services within the area where it provides local telephone service. To date, RBOCs have been granted authority by the FCC to provide such regional long distance services in nearly every state, including
Pennsylvania. The provision of regional long distance services by RBOCs permits them to offer one-stop shopping of local and long distance services, enhancing their competitive position generally in our edge-out markets, should they seek
to enter these markets.

Pursuant to TA-96, local telephone companies, including both ILECs and CLECs, are required to: (i) allow
others to resell their services at retail rates; (ii) ensure that customers can keep their telephone numbers when changing carriers; (iii) ensure that competitors customers can use the same number of digits when dialing and receive
nondiscriminatory access to telephone numbers, operator service, directory assistance and directory listing; (iv) ensure access to telephone poles, ducts, conduits and rights of way; and (v) compensate competitors for the competitors
costs of completing calls to competitors customers. Competitors are required to compensate the ILEC for the cost of providing these interconnection services.

TA-96, with certain exceptions described below, requires ILECs to: (i) interconnect their facilities and equipment with any requesting telecommunications carrier at any technically feasible point within their
networks; (ii) unbundle and provide nondiscriminatory access to network elements, such as local loops and transport facilities, at nondiscriminatory rates and on nondiscriminatory terms and conditions; (iii) offer their retail services for
resale at wholesale rates that would have to be negotiated; (iv) provide reasonable notice of changes in the information necessary for transmission and routing of services over the ILECs facilities or in the information necessary for
interoperability; and (v) provide, at rates, terms and conditions that are just, reasonable and nondiscriminatory, for the physical co-location of equipment necessary for interconnection or access to unbundled network elements at the premises
of the ILEC. Competitors are required to compensate the ILEC for the cost of providing these interconnection services.

The FCC has ruled
that local exchange carriers must port their telephone numbers to requesting wireless carriers, so-called wireline-to-wireless Local Number Portability (LNP). Local exchange carriers operating in the countrys largest urban areas
were required to make LNP capability available to wireless carriers beginning November 24, 2003. Rural carriers, including our RLECs, outside the 100 largest Metropolitan Statistical Areas had to port their numbers to wireless carriers
beginning May 24, 2004, or within six months of receiving a bona fide request, whichever was later. As of the date of this filing, we have received requests to port numbers from seven wireless companies. The FCC still has under consideration a
number of technical and cost recovery issues associated with deployment of LNP.



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At its February 20, 2003 public meeting, the FCC voted on rules concerning ILECs obligations
to make elements of their networks available on an unbundled basis to new entrants. The Third Report and Order (the TRO) was published on August 21, 2003. According to the TRO, ILECs would not be obligated to give competitors
unbundled access to broadband and fiber lines that the ILECs deploy in the future to provide broadband service. The FCC established an impairment standard to determine whether ILECs must open elements of their systems to competitive providers.
The standard is whether economic and operational impairment exists in a particular market necessitating the unbundling of elements of the ILECs systems for competitive providers. The state public utility commissions were tasked with conducting
proceedings to apply the stated impairment standards to their specific markets. The PA PUC undertook its proceedings and was in the final decision stage when, on March 2, 2004, the United States Court of Appeals for the District of Columbia
(D.C.) Circuit invalidated significant portions of the TRO. Most relevantly, the Appeals Court ruled that the FCC had delegated too much authority to the states and had not established sufficient bases for its order to unbundle mass
market switches and transport facilities. Further, the Appeals Court affirmed the FCCs decision not to require unbundling of hybrid loops, fiber-to-home loops and line sharing, but partially remanded the FCCs rules on enhanced extended
loops (EELs) used for provision of long distance service. The Court temporarily stayed its vacating of the rules until the later of 60 days or the denial of any petition for rehearing. In June 2004, the Department of Justice and the FCC
decided not to seek review of the D.C. Circuits decision. In response, on August 20, 2004, the FCC released interim rules for unbundling and initiated a proceeding to review and revise its unbundling rules. On December 15, 2004, the
FCC adopted rules limiting ILEC unbundling obligations in order to provide incentives for both ILECs and CLECs to invest in the telecommunications market in a way that best allows for innovation and sustainable competition. The new rules eliminated
mass market switching as an unbundled network element and limited the availability of high-capacity loops and dedicated interoffice transport as unbundled network elements to CLECs. On February 4, 2005, the FCC published an order on remand
regarding the requirements of Section 251(c)(3) of TA-96. The Order imposes unbundling obligations in a more targeted manner where requesting carriers have undertaken their own facilities-based investments and will be using unbundled network
elements in conjunction with self-provisioned facilities. The FCC clarified their impairment standard with regards to Dedicated Interoffice Transport and High Capacity loops and reaffirmed that ILECs have no obligation to provide CLECs with
unbundled access to mass market local circuit switching. The FCC adopted a 12-month plan for competing carriers to transition away from use of unbundled mass market local circuit switching. ILECs and CLECs may now turn to tariffs and/or market-based
contract pricing to continue to purchase the vacated unbundled elements for the immediate future.

Congress specifically recognized that
the movement towards increased competition under TA-96 requires accommodation for the different market characteristics of areas served by RLECs. For these areas, TA-96 included provisions which anticipate that the public interest may be best served
by exempting RLECs from the more burdensome interconnection obligations. RLECs characteristics make these markets much more vulnerable to target market entry (i.e. cream skimming) by new entrants. TA-96 recognized that selective
customer targeting in areas served by RLECs could have an adverse impact on universal service and the overall public interest.

Congress
also recognized that interconnection requirements must be carefully constructed, modified or suspended in order to ensure that new entrants targeting primarily lower cost, higher volume customers do not leave the RLECs with only high cost, low
volume customers from whom to recover relatively unchanged network costs. Accordingly, TA-96 provides RLECs, including our RLECs, with an automatic blanket exemption (rural exemption) from certain interconnection requirements. Therefore,
an RLEC is exempt from the more onerous interconnection requirements until that RLEC receives a bona fide request for interconnection and the state public service commission determines that the request is not unduly economically burdensome, is
technically feasible, and is consistent with universal service principles.

RLECs with less than 50,000 access lines, such as our Buffalo
Valley RLEC, have an additional exemption available to them under state law. Pursuant to Act 183, RLECs with less than 50,000 access lines that commit to advancing their universal broadband commitment to December 31, 2008 are to be granted a
suspension from



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providing certain interconnection requirements including collocation, unbundled network elements and resale of tariffed services at discounted rates. This
state suspension of obligations will expire December 31, 2008, unless extended by the PA PUC. Our RLECs continue to be protected from the more onerous requirements involving the provision of RLEC network facilities at discounted wholesale costs
to competitors until the PA PUC grants a competitors request to terminate our RLECs rural exemption. In addition, according to the recent Appeals Court decision on the FCCs TRO, if our RLECs were to lose their rural exemption, they
would not have to unbundle all elements of their system to competitors, including their broadband and DSL deployment and some of their switches. However, our RLECs are in a position of having to challenge any request for removal of their rural
exemption which may require them to provide interconnection to other providers without adequate compensation, cause us to incur administrative and regulatory costs as a result of administrative proceedings to determine whether the provider
requesting interconnection has met its burden under the rural exemption of TA-96, cause our operating costs to increase as a result of having to make such interconnections, and at the same time cause us to suffer a loss of customers to such
competitive providers.

To the extent our CLEC seeks to enter the local telephone service business in other RLEC territories, we could
encounter difficulties in obtaining interconnection with those RLECs, particularly if those RLECs are entitled to the same protections we enjoy in our RLEC territories. In particular, in those circumstances, we might be unable to obtain access to
the RLECs networks, which could significantly detract from our ability to implement a CLEC strategy in those areas.

Even if an ILEC
in a territory that we wished to enter were not entitled to such protections, we may nonetheless be unable to obtain interconnection on favorable terms. The FCC has issued rules implementing the interconnection and resale provisions of TA-96, but
those rules have been, and continue to be, subject to administrative and judicial appeals. Thus, there is continuing uncertainty about individual rules governing pricing of interconnection and unbundled network elements, and the terms and conditions
of interconnection agreements. This uncertainty may make negotiating these agreements more difficult and time-consuming. It also could require renegotiations of relevant provisions of existing interconnection agreements or subject them to additional
court or regulatory proceedings.

Promotion of Universal Service

The Federal Universal Service Support Fund (USF) and the Pennsylvania State Universal Service Fund (PA USF) pay our RLECs from
their funds to support the cost of our operations in rural markets. In 2006, two of our three RLECs received net distributions from the PA USF totaling $2,197,000, while the third RLEC made net payments of $22,000 to this fund. In addition, the
three RLECs received approximately $6,191,000 from the Federal USF. The RLECs also contributed to the fund, but this expense is recovered in full through the NECA revenue settlement process.

Newly codified universal service principles have been implemented by the FCC. One of the implemented principles provides that USF funds will be
distributed only to carriers that are designated as Eligible Telecommunications Carriers (ETCs) by the PA PUC. Our RLECs have been designated as ETCs pursuant to TA-96. However, under TA-96, competitors could obtain the same support
payments as we do if the PA PUC determined that granting such support payments to competitors would be in the public interest. If such universal service support payments were to become available to potential competitors, our RLECs might not be able
to compete as effectively or otherwise continue to operate as profitably as they have historically. RLECs will receive USF payments pursuant to existing mechanisms for determining the amounts of such payments with some limitations, such as on the
amount of corporate operating expense that can be recovered from the USF. On October 6, 2005, our CLEC filed for ETC status. This filing was approved by the PA PUC on April 20, 2006.

In 2004, the Federal-State Joint Board on Universal Service (Joint Board) provided recommendations to the FCC addressing the growth of the
USF, eligibility criteria for receipt of funds, and the cost basis for fund payment to Competitive Eligible Telecommunications Carriers. On June 8, 2004, the FCC issued a Notice of



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Proposed Rulemaking seeking comment on a recommended decision of the Joint Board. The Joint Board recommended that the FCC adopt permissive federal
guidelines for states to consider in proceedings to designate competitive carriers as eligible to receive universal service support, and it further recommended that the FCC limit the scope of high-cost support to a single connection that provides a
subscriber access to the public telephone network. On August 16, 2004 and August 17, 2005, the Joint Board issued notices seeking comments on several matters relating to the high-cost portion of federal universal service for rural carriers
and the appropriate rural mechanism to succeed the five-year plan that the FCC created in 2001. Issues under consideration include the appropriate cost basis for determining support levels for rural carriers, whether to modify the definition of
rural carrier and the amount of universal support available for acquired exchanges. We are unable to predict whether and to what extent we would be eligible to receive any federal support if the FCC makes some or all of the modifications under
consideration in these proceedings. In addition, Congress may address universal service issues in legislation, but we cannot predict the occurrence, timing or effects of such legislation. However, the federal high-cost support we receive today is
only one component of the total federal USF support that we receive and constitutes less than one percent of our total revenues.

Access Charge Reform

For the year ended December 31, 2006, approximately 49% of our RLECs revenues came
from network access charges, which are paid to us via universal service funding and by end users, wireless carriers and intrastate and interstate long distance carriers. The amount of network access revenues that we receive is calculated based on
guidelines set by federal and state regulatory bodies, and such guidelines could change at any time. Both the PA PUC and the FCC are considering various reforms for charges assessed on end users and long distance carriers. These reforms are designed
to move these network access charges, over time, to rate levels closer to cost. These changes could shift recovery of some portion of current access revenues from end-user customers rather than from long distance carriers.

In July 2000, the PA PUC created a state universal service fund accompanied by intrastate regulatory access reform, resulting in revenue shifts for our
RLECs among local telephone, long distance and network access service categories. On November 9, 2001, the FCC released an order changing its interstate access charge rules and universal service support system for rate-of-return RLECs. The new
rules change the sources of funding under the average schedule formulas, but not the amounts paid to participants. These modifications include a reduction in access charges to long distance companies, an increase in subscriber line charges to local
service customers, and the creation of a universal funding mechanism funded by all telecommunications carriers. Two of our three RLECs are net recipients from this fund.

On October 5, 2004, the Intercarrier Compensation Forum (ICF), a diverse group of telecommunications industry participants representing ILECs, CLECs, long distance companies, rural telephone companies
and wireless providers, submitted to the FCC a comprehensive plan for reforming the current system of rates that telecommunications companies charge each other for network access and fees to ensure universal service in the United States. Shortly
afterwards, several other entities filed their versions of proposed intercarrier compensation reform plans with the FCC. On February 10, 2005, at CC Docket No. 01-92, the FCC released a notice seeking comment on seven comprehensive reform
proposals submitted by the industry and others in the rulemaking. Among the questions the Commission will examine is the effect any change will have on consumers and the universal service fund, which helps provide affordable service for rural and
low income Americans. The Commission said it would be particularly receptive to any plan that offers expanded choices and lower rates to rural consumers. The FCC is now considering and soliciting comments from the public on the Missoula
Plan, a proposal that was developed by industry representatives. The Missoula Plan, if adopted, would have a significant impact on the intercarrier compensation revenues and the federal Universal Service Fund (USF) funding that our RLECs
receive, as well as the intercarrier compensation expense that they incur. Potential rule changes that may result from this proceeding could have a material effect on our revenues, expenses and earnings. The FCC has not yet acted on this notice, and
there is no guarantee that a final order addressing potential modifications to the current access charge system will be issued in 2007. Until the FCC adopts a specific proposal, it is impossible to predict how much the proposed changes will affect
our company and whether they will be favorable or unfavorable.



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The PUC has a proceeding open to consider changes in intrastate switched access rates and PA USF, along
with the potential impact on local service rates, for rural local exchange carriers in Pennsylvania. On August 30, 2006, a filing was made by numerous parties, including a rural coalition group that included our RLECs, to stay this
investigation. On November 9, 2006, the PA PUC granted in its entirety a stay of this investigation pending the outcome of the FCCs Unified Intercarrier Compensation proceeding at CC Docket No. 01-92 or for one year, whichever is
earlier. At this time, we cannot predict what the outcome will be of the FCCs investigation or what the PA PUC may do if the FCC approves changes or fails to act within the one-year delay.

Communications Assistance for Law Enforcement Act

Under the Communications Assistance for Law Enforcement Act (CALEA) and related federal statutes, we are required to provide law enforcement officials with call content and call identifying information
under a valid electronic surveillance warrant or court order and to provide specific technical capabilities for use by law enforcement officials in executing court-authorized electronic surveillance. We are in compliance with current laws and
regulations that apply to traditional circuit-based telephony. On September 23, 2005, the FCC issued a First Report and Order that concluded that CALEA requirements should also apply to facilities-based broadband Internet access providers and
providers of VoIP service that is interconnected with the public switched network. On May 12, 2006, the FCC released its Second Report and Order addressing the capabilities required of such service providers. Providers of these services must be
compliant with these new CALEA requirements by May 17, 2007. The FCC is still considering whether to exempt small rural providers and certain other entities from these requirements. As we provide these services, we are, accordingly, in the
process of making our network compliant with these additional CALEA requirements by the required deadline and anticipate that the capital expenditures to meet these requirements will be less than $0.3 million.

Voice Over Internet Protocol

The further development of VoIP is changing voice communication to a packet data transmission process. This new process will enable Internet service providers (ISPs) and new start-up companies the ability to utilize existing
loop cable facilities without incurring the cost of the cable loop. Cable companies, ISPs and new start-up companies will be able to compete with telephone companies for voice transmission services and phone features like voicemail and unified
messaging. Furthermore, there is not consistent regulation of VoIP offerings at this time, placing VoIP at a possible regulatory advantage over telephone services. The FCC has ruled that certain VoIP services should be subject to minimal regulation.
In a related matter, however, the FCC has denied AT&Ts petition claiming that its long-distance service involving conversion of a call into IP format in the middle of transport is an information service not subject to access charges.
Additionally, the FCC has issued a decision that IP-enabled services, such as VoIP, are not subject to traditional state public utility regulation. The decision makes clear that the FCC has the responsibility and obligation to decide whether certain
regulations apply to IP-enabled services. The FCC has yet to decide what compensation these services must pay to originate calls to or terminate calls from the traditional public switched telephone network. In addition, on May 19, 2005, the FCC
adopted an Order requiring the provision of 911 services by VoIP providers that connect their customers to the public switched network. All interconnected VoIP providers must notify customers regarding the provisions of 911 service and certify to
the FCC that existing customers have been informed and that they acknowledged receipt of such information. Our ISP is in full compliance with the FCC requirements and we are working to make 911 service available everywhere we wish to offer the
service. In addition, as was noted above, providers of VoIP must be compliant with CALEA requirements by May 17, 2007. The FCC is still considering whether to exempt small rural providers and certain other entities from these requirements.

Cable Modem and DSL Broadband Services

In 2005, the Supreme Court upheld an FCC ruling that broadband cable modem service provided by cable operators is properly classified as an information service, rather than as a telecommunications service. As such,
our cable TV operation will not have to provide open access to its cable modems. In response to the Courts action, on September 23, 2005, the FCC released a Report and Order in which it determined that the provision by telephone companies
of wireline broadband services such as DSL, constitutes an information service, rather than



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a telecommunications service. Previous to this ruling, FCC policies and rules required facilities-based telephone company providers of DSL to offer the
wireline transmission component of DSL separately to competitors, on a common carrier basis. The FCCs recent ruling eliminated this requirement to share such transmission capacity with purchasers unaffiliated with the telephone company. The
FCC ruled that while facilities-based telephone companies are not required to offer broadband wireline transmission capacity to their competitors, they are permitted to do so if they choose, and may make such offerings on either a common carrier or
a non-common carrier basis. The FCCs ruling appears at this time to be deregulatory and to be intended to put facilities-based telephone company providers of DSL in a regulatory position similar to that of cable TV providers of cable modem
service. The ruling also provides that it does not alter the rights of competitors under Section 251 of the Communications Act to purchase unbundled network elements including the purchase of unbundled loops to provide their own DSL
service. However, our RLECs are not required to provide these unbundled network elements as long as their rural exemption continues in existence. In a separate and pending proceeding, the FCC is considering the question as to whether cable modem
providers will be required to contribute to the federal USF, like our RLECs are required to do, or whether telephone company DSL providers like our RLECs will no longer have to contribute to the federal USF on the basis of their DSL revenue. Since
our RLECs must charge their DSL customers for federal USF while cable modem providers do not, our RLECs are placed in a competitive disadvantage with the cable modem operator.

Customer Proprietary Network Information

In addition to existing customer proprietary network information (CPNI) rules, the FCC is now considering implementing additional security measures that could prevent the unauthorized disclosure of
sensitive customer information held by telecommunications companies. The FCC is concerned about recent events whereby data brokers have taken advantage of inadequate security standards of some carriers to gain access to the information under false
pretenses. Accordingly, the FCC has initiated a proceeding to examine what security measures carriers have in place, what inadequacies exist in those measures, and what kind of security measures may be warranted to better protect consumers
privacy. Among the measures specifically being considered by the FCC are passwords, audit trails, encryption, limits on data retention, and customer notification when the security of their CPNI may have been breached. It is not possible at this time
to predict what the outcome of this proceeding will be or the impact of that outcome on our company.

Potential Internet Regulatory
Obligations

In connection with our Internet access offerings, we could become subject to laws and regulations as they are adopted
or applied to the Internet. There is currently only a small body of laws and regulations applicable to access to or commerce on the Internet. As the significance of the Internet expands, federal, state and local governments may adopt rules and
regulations, or apply existing laws and regulations to the Internet. To date, the FCC has treated Internet service providers, or ISPs, as enhanced service providers, rather than common carriers, and therefore ISPs are exempt from most federal and
state regulation, including the requirement to pay access charges or contribute to the federal USF. We cannot predict the nature of such future regulations or their impact on our business.

There is limited regulation of Voice over Internet Protocol (VoIP) offerings at this time, placing VoIP at a possible regulatory advantage
over traditional telephone services. Although VoIP is not regulated as a voice public utility service, the FCC has recently made several rulings that imposed certain regulatory requirements on VoIP providers. VoIP providers are now required to
enable their customers to access 911 services, comply with the Communications Assistance for Law Enforcement Act and contribute to the support of universal service. We have introduced VoIP offerings into our marketplace in anticipation of the demand
for this voice communications product.

Employees

We had 569 full-time employees as of December 31, 2006, of which 71 employees are covered by a collective bargaining agreement. This agreement expires on July 12, 2009.



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|Item 1A. | Risk Factors
|-------- | ------------

The
convergence of voice and data communications technologies could eliminate our competitive advantages and may, in fact, put us at a competitive disadvantage. We may experience increased competitive pressures, which could have a negative effect on our
revenues and earnings.

One of the critical drivers in the communications industry today is the convergence of voice and data
communication technologies into various IP based platforms, all of which have the potential to provide VoIP, broadband services, and IP video over telephone companies copper and fiber networks, cable companies coaxial and fiber networks,
wireless telephone companies wireless networks, satellite companies satellite networks and electric companies electric lines. Although each of the networks has relative strengths and weaknesses, they are all effectively in
competition for the customers communications needs. These developments mean that we are competing for our existing customer base in our RLEC and CLEC territories with cable TV companies, wireless telephone companies, satellite communications
providers and VoIP providers. The recent decreases in the number of access lines in our RLEC territories reflect such increased competition, in addition to the elimination of lines by our customers as they shift to DSL for high-speed Internet
access. These developments have placed our core telephone business at risk, although also enabling us to compete in the provision of cable TV services.

It is basic policy of the FCC and the PA PUC to encourage competition in the communications industry. Our RLECs have an exemption from providing certain interconnection requirements including collocation, unbundled
network elements and resale of tariffed services at discounted rates. Further, our Buffalo Valley RLEC has a suspension of these requirements under state law through December 31, 2008. This exemption remains in place, and will remain in place
after December 31, 2008 for our Buffalo Valley RLEC, until our RLECs receive a request for interconnection and the state public service commission determines that the request will not have a negative impact on universal service, will not be
unduly economically burdensome, and is technically feasible. Our RLECs are in a position of having to challenge any request for removal of their rural exemption which may require them to provide interconnection to other providers without adequate
compensation, cause us to incur administrative and regulatory costs as a result of administrative proceedings to determine whether the provider requesting interconnection has met its burden under the rural exemption of TA-96, cause our operating
costs to increase as a result of having to make such interconnections, and at the same time cause us to suffer a loss of customers to such competitive providers. Local cable TV companies may use their own facilities and apply to be licensed as a
facilities-based CLEC within our franchise territory in order to attempt to qualify for number portability. This would enable our existing telephone customers to switch to VoIP services provided by the cable TV companies and still retain the same
telephone numbers, thus making the transfer of local telephone services to VoIP far more convenient to the customer. Service Electric Telephone Company, LLC, filed on September 2, 2005 with the PA PUC to be a facilities-based CLEC competitor in
our Conestoga RLEC territory. In addition, CORE Communications, Inc (CORE) filed an amended application on August 19, 2005 with the PA PUC to be a facilities-based CLEC providing service in our RLEC territories. On January 25,
2006, CORE served our three RLECs with their Petition for Arbitration. Included in their filing is a request seeking a termination of the rural exemption for the limited purpose of permitting the interconnection standards to apply to any direct
interconnection between our three RLECs and CORE. On January 8, 2007, CORE filed an Amended Petition for Arbitration of Interconnection Rates, Terms and Conditions with the PA PUC, seeking immediate PA PUC arbitration of issues on a collective
basis with our three RLECs and a number of other small ILECs in Pennsylvania. We are actively engaged in these filings. We have reached an oral agreement with Service Electric and are in the process of obtaining signatures and then filing the signed
agreement with the PA PUC. We will be working with CORE in an attempt to develop an interconnection agreement that can also be filed with the PA PUC. If negotiations fail, the matter will be arbitrated before the PA PUC, which arbitration is pending
at the current time.

In areas served by our CLEC, the incumbent carrier, Verizon, enjoys certain business advantages, including its size,
financial resources, brand recognition and network connection to virtually all of our customers and potential customers in those areas. Similarly, in areas where we do or may provide video services, the incumbent cable operators enjoy certain
business advantages, including their size, financial resources, brand recognition, and ownership of or superior access to programming.



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As an integrated communications provider, we face competition from:



| |  |  | competitive local exchange carriers, including TelCove, Commonwealth Telephone Enterprises, Choice One and XO Communications;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | wireless service providers, including AT&T, Verizon Wireless, Sprint Nextel, Immix and T-Mobile Wireless;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | internet service providers, including AOL, EarthLink and MSN;
| | - |  | -------------------------------------------------------------



| |  |  | cable television companies, including Comcast, Pencor Services, Atlantic Broadband LLC, Service Electric and CATV Service, Inc.;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | voice over Internet protocol (VoIP) providers, including Vonage, AT&T and Verizon;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | providers of communications services, such as long distance services, including AT&T and Verizon Communications;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | systems integration providers, including Technisource and Weidenhammer Systems Corp.; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | electric power companies as possible competitors in the future.
| | - |  | ---------------------------------------------------------------

Many of our competitors are, or are affiliated with, major communications companies. These competitors have substantially greater financial and marketing resources and greater name recognition and more established
relationships with a larger base of current and potential customers than we do. Accordingly, it may be more difficult to compete against these large communications providers. In addition, we cannot assure that we will be able to achieve or maintain
adequate technology to remain competitive. Our continued addition of fiber to enhance our broadband capacity may be more difficult as a result of our indebtedness than for our competitors. Accordingly, it may be difficult to compete in any of our
markets.

We are subject to a complex and uncertain regulatory environment that may require us to alter our business plans.

The United States communications industry is subject to federal, state and local regulations that are continually evolving. As new
communications laws and regulations are issued, we may be required to modify our business plans or operations, and we may not be able to do so in a cost-effective manner. Federal and state regulatory trends toward a more competitive market place
through reduced competitive entry standards are likely to have negative effects on our business and our ability to compete. In this regard, the regulatory environment governing ILEC operations has been and will likely continue to be very liberal in
its approach to promoting competition and network access, which may increase the likelihood of new competitors offering similar services in our service areas. The introduction of new competitors could have a negative effect on our RLEC operating
results, yet at the same time present operating benefits to our CLEC business. For more information, see Regulatory Environment discussion in Item 1 of this document.

Prices for RLECs interstate services, consisting primarily of subscriber line charges and access charges for interstate and international toll
calls, are regulated by the FCC based on the average schedule formulas developed by NECA. Changes in the average schedule formula amounts developed by NECA and implemented annually in July could have an impact on the RLECs future
revenues.

Our RLECs filed for changes in local and intrastate access rates to be effective July 1, 2006, in accordance with our
Chapter 30 Plan. When we made our filings to increase certain local and intrastate access rates, no customer filed any complaint or request for intervention. The PA PUC identified a minor change to our filing, but allowed the new rates to go into
effect on July 1, 2006 as modified for the change. Verizon, however, filed comments against our increase in intrastate access rates and requested that the PA PUC investigate our ability to increase access rates. On November 9, 2006, the PA
PUC elected to have its Office of Administrative Law Judge hold a hearing to determine whether the increases in access rates violated any previous PA PUC order or



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decision. This hearing was held on January 17, 2007. Our RLECs provided a witness in support of the access rate increases and the Office of Consumer
Advocate and the Office of Small Business Advocate also filed comments in support of our RLECs rate increases. Verizon provided a witness contending that local end-user rates should be increased, not intrastate access rates. On
February 20, 2007, the Administrative Law Judge issued a recommendation to the PA PUC that no rescission or amendment is warranted to our increase in certain local and intrastate access rates. The PA PUC is expected to provide its final order
as to whether the increases in access rates will remain or whether refunds must be provided to access customers and increases in other rates, such as residential and business local service, be made in the alternative.

The FCC has made and will continue to make regulatory changes that will affect both our RLEC and CLEC operations. Our CLEC depends, in certain
circumstances, upon the technology and capabilities of other telephone companies as well as the quality, availability and maintenance of the facilities of those telephone companies. We must also maintain efficient procedures for ordering,
provisioning, maintaining and repairing facilities from these other telephone companies. We may not be able to obtain facilities and services of satisfactory quality from other telephone companies, or on satisfactory terms and conditions, in which
case we may experience delays in the growth of our CLEC networks and the degradation of the quality of our service to customers.

The FCC
has yet to significantly regulate VoIP offerings, maintaining regulatory uncertainty while placing VoIP services at a regulatory advantage over our RLEC legacy telephone services. The FCC has ordered strict requirements for the provision of 911
services by VoIP providers. All interconnected VoIP providers must notify customers regarding the provisions of 911 service and certify to the FCC that existing customers have been informed and that they acknowledged receipt of such information. Our
ISP is in full compliance with the FCC requirements and we are working to make 911 service available everywhere we wish to offer the service. In addition to regulation of 911 service, the FCC has ordered that the requirements to make networks
available for electronic surveillance by law enforcement agencies under the federal Communications Assistance for Law Enforcement Act (CALEA) applies to facilities-based broadband Internet access providers and a broad category of VoIP
providers. The FCC is still considering whether to exempt small rural providers and certain other entities from these requirements. As we provide these services, we are, accordingly, in the process of making our network compliant with these
additional CALEA requirements and anticipate that the capital expenditures to meet these requirements will be less than $0.3 million.

The
FCC has also enacted changes to certain technical rules that would foster broadband deployment using the capabilities of the nations power grid.

All of these developments may result in an even more highly competitive environment in which electric utility companies are very likely to be in direct competition with telephone companies and cable TV operators in
many locations. This development could cause telephone companies to lose their competitive edge in their territories and, consequently, result in significant inroads into their core telephone/voice business.

Our indebtedness could restrict our operations.

As of December 31, 2006, we had approximately $207.0 million of total indebtedness, including current maturities and a capital lease obligation of $1.5 million. We refinanced our indebtedness in March 2004 and
further amended our credit facility in November 2004 and September 2006. The effect of the refinancing and amendments was to lower the interest rates on our indebtedness, provide greater flexibility in our financial covenants and spread out the
amortization of principal. This new structure, pursued to manage our balance sheet in order to better achieve our business plan, decreases the risks associated with our indebtedness.

However, our indebtedness could still restrict our operations because we will use a substantial portion of our cash flow from operations, if any, to pay
principal and interest on our indebtedness, which will reduce the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes. Additionally, our level of indebtedness may make us more vulnerable to
economic or industry downturns and competitive pressures. The agreements governing our indebtedness contain covenants imposing financial and



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operating restrictions on our business. These restrictions may limit our ability to take advantage of potential business opportunities as they arise and
adversely affect the conduct of our business. These covenants place restrictions on our ability and the ability of our subsidiaries to, among other things, incur more indebtedness, pay dividends over $10 million annual limit, redeem or repurchase
our stock or make other distributions, make acquisitions or investments, use assets as security in other transactions, enter into transactions with affiliates, merge or consolidate with others, dispose of assets or use asset sale proceeds, create
liens on our assets and extend credit.

The Systems Integration Segment could be affected by economic conditions of business customers.

The sale of services and computer equipment in the Systems Integration business is dependent upon the willingness of companies to
invest in improvements in their information technology and computer systems. This business may be affected by the economic conditions in our customers business sectors.

We have continuing involvement in the Conestoga Wireless segment after its sale, which may adversely affect the continuing operations of the business.

In connection with the acquisition of Conestoga, we committed to a plan to sell the assets of Conestogas wireless segment. The
sale was completed on January 14, 2003. We have continuing involvement after the sale as a result of our continued guarantees on cell site leases. This obligation could restrict our operations by reducing the funds available for working
capital, capital expenditures, acquisitions and other general corporate purposes.



|Item 1B. | Unresolved Staff Comments
|-------- | -------------------------

None



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

Our properties
consist primarily of administration buildings, central office switch facilities, telephone lines and related equipment and other land and buildings related to telephone operations. Our major owned facilities include: our corporate headquarters and
central office switching facility, totaling approximately 113,700 square feet in Ephrata, Pennsylvania; an office building including our network operations center totaling 80,100 square feet in Brownstown, Pennsylvania; and twenty other buildings
that serve a variety of functions including offices, warehouses, garages, vehicle service center and switching facilities, totaling approximately 175,300 square feet. We lease 13,100 square feet for use as office space. We own more than fifty other
smaller locations totaling over 68,500 square feet that are used for various purposes such as housing switching equipment. All our assets are maintained and upgraded on a continuing basis to assure quality service for our customers.

We have transmission facilities referred to as our outside plant, consisting of cables, wires, terminals and necessary supporting structures such as
poles, conduit and manholes. Our cables are installed on poles, underground conduit or directly buried in the earth. In addition to plant and equipment that we wholly own, we utilize poles, towers and cable and conduit systems wholly-owned by, or
jointly-owned with, other entities.

We were one of the first local exchange carriers in the nation to deploy a 100% digitally switched
network, which enables us to economically provide a broad portfolio of advanced voice and data communications services. Our network includes 1,515 route miles of fiber in a pattern of multiple rings, which provide a high level of redundancy in the
event of a service failure. We own 1,238 route miles and use 277 route miles through indefeasible right of use agreements. Our primary network operations center further leverages network design with remote network management, maintenance and repair
capabilities to pinpoint network problems, minimize technician deployment and improve operating efficiency. Our network is monitored 24 hours a day, 365 days a year and continual upgrades to network elements ensure the uninterrupted delivery of
quality services to customers.



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

We are
involved in various legal proceedings arising in the ordinary course of our business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on our consolidated financial condition, results of
operations or cash flows.



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

There were no matters submitted to a vote of the shareholders during the fourth quarter of 2006.



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PART II



|Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|------- | ------------------------------------------------------------------------------------------------------------

Our common stock trades on The NASDAQ Stock Market under the symbol DECC. The table below sets forth the high and low sales prices of our common stock
during each of the periods indicated, as reported daily by the NASDAQ Global Market.



|               |  |     |       |      |   |      
|-------------- |  | --- | ----- | ---- | - | -----
|2006           |  | Low |       | High
|First Quarter  |  | $   | 8.25  |      | $ | 11.24
|Second Quarter |  | $   | 10.00 |      | $ | 13.52
|Third Quarter  |  | $   | 10.01 |      | $ | 12.99
|Fourth Quarter |  | $   | 12.30 |      | $ | 13.90



|               |  |     |      |      |   |      
|-------------- |  | --- | ---- | ---- | - | -----
|2005           |  | Low |      | High
|First Quarter  |  | $   | 8.20 |      | $ | 12.42
|Second Quarter |  | $   | 7.01 |      | $ | 10.16
|Third Quarter  |  | $   | 9.02 |      | $ | 12.24
|Fourth Quarter |  | $   | 7.80 |      | $ | 9.50 

The closing price on December 31, 2006 and March 2, 2007, was $12.65 and $13.01,
respectively. The approximate number of record holders of our common stock, as of March 2, 2007, was 2,042.

During the two most
recent fiscal years, 2006 and 2005, cash dividends on our common stock have been declared quarterly in the annual amount of $0.50 per share. Dividends are paid as and when declared by our Board of Directors and in accordance with restrictions set
forth in covenants contained in our debt agreements, which limit our annual dividend payments to $10 million, provided no default or event of default exists on our debt agreements.

Equity Compensation Plan Information

At December 31, 2006



|                                                           |  |                                                                                      |  |                                                                              |       |                                                                                                                                          |          
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------- | ----- | ---------------------------------------------------------------------------------------------------------------------------------------- | ---------
|Plan Category                                              |  | (A) Number ofsecurities issued uponexercise
ofoutstandingoptions, warrantsand rights |  | (B) Weighted-average exercise price ofoutstandingoptions, warrantsand rights |       | (C)Number of securitiesremaining available forfuture issuance underequity compensationplans
(excludingsecurities reflected incolumn (a))
|Equity compensation plans approved by security holders     |  | 221,405                                                                              |  | $                                                                            | 10.06 |                                                                                                                                          | 1,121,576
|Equity compensation plans not approved by security holders |  |                                                                                     |  |                                                                              |       |                                                                                                                                          |         
|                                                           |  |                                                                                      |  |                                                                              |       |                                                                                                                                          |          
|Total                                                      |  | 221,405                                                                              |  | $                                                                            | 10.06 |                                                                                                                                          | 1,121,576
|                                                           |  |                                                                                      |  |                                                                              |       |                                                                                                                                          |          

Recent Sales of Unregistered Securities

None

Purchases of Equity Securities by the Issuer and
Affiliated Purchasers

None



28



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##### Table of Contents

STOCK PERFORMANCE GRAPH

The following graph is a comparison of five-year cumulative total return on shares of the Companys Common Stock. The comparison assumes $100
invested in each of the Nasdaq U.S. Index (Nasdaq US), the Nasdaq Telecommunications Index (Nasdaq Telecom) and the Companys Common Stock, on December 31, 2001 and that all dividends were reinvested. The stock price performance shown
below is not necessarily indicative of future price performance.

LOGO



|                         |  |      |        |      |   |       |  |      |        |      |   |        |  |   |        |  |   |       
|------------------------ |  | ---- | ------ | ---- | - | ----- |  | ---- | ------ | ---- | - | ------ |  | - | ------ |  | - | ------
|                         |  | 2001 |        | 2002 |   | 2003  |  | 2004 |        | 2005 |   | 2006  
|Nasdaq U.S.              |  | $    | 100.00 |      | $ | 69.13 |  | $    | 103.36 |      | $ | 112.49 |  | $ | 114.88 |  | $ | 126.22
|Nasdaq Telecom           |  | $    | 100.00 |      | $ | 46.03 |  | $    | 76.56  |      | $ | 81.63  |  | $ | 77.58  |  | $ | 102.00
|D&E Communications, Inc. |  | $    | 100.00 |      | $ | 48.69 |  | $    | 87.87  |      | $ | 75.89  |  | $ | 55.43  |  | $ | 87.80 



29



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##### Table of Contents

|Item 6. | Selected Financial Data
|------- | -----------------------

The
following table sets forth selected consolidated summary financial information as of December 31 and for each of the last five fiscal years ended December 31, 2006. This information should be read in conjunction with our consolidated
financial statements, including the notes thereto, and Managements Discussion and Analysis of Financial Condition and Results of Operations, both of which are included in this annual report. Certain amounts have been reclassified for
comparative purposes.



|                                                               |  |                                       |         |   |         |   |         |         |  |   |         |   |  |         |         |   |  |   |          |  
|-------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ------- | - | ------- | ------- |  | - | ------- | - |  | ------- | ------- | - |  | - | -------- | -
|                                                               |  | At or for the Year Ended December 31, |        
|                                                               |  | 2006(1)                               |         |   | 2005(1) |   |         | 2004(1) |  |   | 2003(1) |   |  | 2002(1) |        
|                                                               |  | (In thousands, except per share data) |        
|STATEMENT OF OPERATIONS DATA                                   |  |                                       |         |   |         |   |         |         |  |   |         |   |  |         |         |   |  |   |          |  
|Operating revenues                                             |  | $                                     | 162,068 |   |         | $ | 164,562 |         |  | $ | 164,423 |   |  | $       | 160,745 |   |  | $ | 127,645  |  
|Depreciation and amortization                                  |  |                                       | 38,241  |   |         |   | 38,123  |         |  |   | 38,432  |   |  |         | 38,009  |   |  |   | 28,118   |  
|Operating income                                               |  |                                       | 22,512  |   |         |   | 22,830  |         |  |   | 21,084  |   |  |         | 23,407  |   |  |   | 7,413    |  
|Income (loss) from continuing operations                       |  |                                       | 8,250   |   |         |   | 13,801  |         |  |   | (2,666  | ) |  |         | 3,635   |   |  |   | (7,014   | )
|Discontinued operations, net of tax(2)                         |  |                                       | (1,508  | ) |         |   | (90     | )       |  |   | (73     | ) |  |         | 189     |   |  |   | 55,408   |  
|Cumulative effect of accounting change, net of tax             |  |                                       |        |   |         |   |        |         |  |   |        |   |  |         | 260     |   |  |   |         |  
|Net income (loss)                                              |  |                                       | 6,742   |   |         |   | 13,711  |         |  |   | (2,739  | ) |  |         | 4,084   |   |  |   | 48,394   |  
|                                                               |  |                                       |         |   |        
|PER-SHARE DATA  BASIC AND DILUTED                             |  |                                       |         |   |         |   |         |         |  |   |         |   |  |         |         |   |  |   |          |  
|Income (loss) from continuing operations                       |  | $                                     | 0.57    |   |         | $ | 0.96    |         |  | $ | (0.18   | ) |  | $       | 0.23    |   |  | $ | (0.57    | )
|Discontinued operations                                        |  |                                       | (0.10   | ) |         |   |        |         |  |   |        |   |  |         | 0.01    |   |  |   | 4.52     |  
|Cumulative effect of accounting change                         |  |                                       |        |   |         |   |        |         |  |   |        |   |  |         | 0.02    |   |  |   |         |  
|Net income (loss) per common share                             |  |                                       | 0.47    |   |         |   | 0.96    |         |  |   | (0.18   | ) |  |         | 0.26    |   |  |   | 3.95     |  
|Cash dividends declared per common share                       |  |                                       | 0.50    |   |         |   | 0.50    |         |  |   | 0.50    |   |  |         | 0.50    |   |  |   | 0.50     |  
|                                                               |  |                                       |         |   |        
|BALANCE SHEET DATA                                             |  |                                       |         |   |         |   |         |         |  |   |         |   |  |         |         |   |  |   |          |  
|Total assets                                                   |  | $                                     | 510,574 |   |         | $ | 535,672 |         |  | $ | 546,785 |   |  | $       | 575,911 |   |  | $ | 601,818  |  
|Long-term debt                                                 |  |                                       | 199,950 |   |         |   | 205,500 |         |  |   | 218,500 |   |  |         | 222,765 |   |  |   | 244,966  |  
|Preferred stock of subsidiary                                  |  |                                       | 1,446   |   |         |   | 1,446   |         |  |   | 1,446   |   |  |         | 1,446   |   |  |   | 1,446    |  
|                                                               |  |                                       |         |   |        
|OTHER DATA                                                     |  |                                       |         |   |         |   |         |         |  |   |         |   |  |         |         |   |  |   |          |  
|Net cash provided by continuing operating activities           |  | $                                     | 37,754  |   |         | $ | 41,249  |         |  | $ | 49,013  |   |  | $       | 44,203  |   |  | $ | 24,680   |  
|Net cash used in continuing investing activities               |  |                                       | (28,440 | ) |         |   | (20,031 | )       |  |   | (25,147 | ) |  |         | (8,647  | ) |  |   | (177,267 | )
|Net cash provided by (used in) continuing financing activities |  |                                       | (16,008 | ) |         |   | (19,461 | )       |  |   | (27,788 | ) |  |         | (18,183 | ) |  |   | 88,997   |  

---

|(1) | Reflects data for Conestoga
Enterprises, Inc. operations since acquisition on May 24, 2002.
|--- | -------------------------------------------------------------------------------------------

|(2) | Reflects the results of our Voice Systems Business, our paging business and our interest in the PCS ONE
joint venture as discontinued operations.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------



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|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Monetary amounts presented in the following discussion are in thousands, except per-share amounts.

Overview

This Overview is intended to provide a
context for the following Managements Discussion and Analysis of Financial Condition and Results of Operations. Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our
consolidated financial statements, including the notes thereto, included in this annual report. We have attempted to identify the most important matters on which our management focuses in evaluating our financial condition and operating performance
and the short-term and long-term opportunities, challenges and risks (including material trends and uncertainties) which we face. We also discuss the actions we are taking to address these opportunities, challenges and risks. The Overview is not
intended as a summary of, or a substitute for review of, Managements Discussion and Analysis of Financial Condition and Results of Operations. For comparative purposes, certain amounts have been reclassified to conform to the current-year
presentation. The reclassifications had no impact on net income.

Business Segments

We operate as a rural local telephone company providing broadband integrated communications services to residential and business customers in markets
throughout the eastern half of Pennsylvania. We operate an incumbent rural local exchange carrier, or RLEC, in parts of Berks, Lancaster, Union and smaller portions of five other adjacent counties in Pennsylvania, and a competitive local exchange
carrier, or CLEC, in the Lancaster, Harrisburg, Reading, Altoona, Pottstown, State College and Williamsport, Pennsylvania metropolitan areas, which we refer to as our edge-out markets. We offer our customers a comprehensive package of
communications services, including local and long distance telephone services, broadband services, Internet access and, in certain of our markets, video services. We also provide business customers with systems integration services including
professional data and information technology services, security, design and network monitoring.

Our segments are RLEC, CLEC, Internet
Services, and Systems Integration. The measure of profitability that management uses to evaluate performance of our business segments is operating income (loss) because individual segments are not charged an allocation for such items as interest and
income taxes that are reported below operating income on the statement of operations.

Effective January 1, 2007, the Company
reorganized its business segments in order to better align them with our management structure and organized our segments based on the similar nature of products and services, production processes and distribution methods. Based on that
reorganization the RLEC, CLEC and Internet Services business units and the cable television and video operations currently reported in the corporate and other segment will be combined into one reportable segment, Wireline. The Systems
Integration and Corporate and Other units will continue as distinct, reportable business segments.

As of December 31, 2006, we served
129,848 RLEC access lines, 43,720 CLEC access lines, 31,724 digital subscriber lines (DSL)/high-speed Internet subscribers, 5,337 dial-up Internet access subscribers, 7,437 video subscribers and 951 web-hosting customers. For the year
ended December 31, 2006, we generated total revenues of $162,068, operating income of $22,512 and net income of $6,742.

Business Strategy

Our primary business objective is to be a leading, regional integrated communications service provider (ICP). To achieve
this objective, we will continue to pursue the following goals:



| |  |  | We will pursue the goal of capturing as many broadband connections to customers homes and businesses as possible. While we intend to continue to serve our
dial-up Internet access customer base,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | our focus will be to migrate these customers in the RLEC and CLEC areas to broadband connections. New broadband customers will also be aggressively pursued.
Targeting customers with a broadband connection to their home and/or business is vital for the future delivery of Internet Protocol (IP) services.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will implement an IP core network, along with a softswitch platform, to more efficiently support and expand our voice and data delivery. In conjunction with this
network implementation, we will continue to build-out our fiber-to-the-node infrastructure to support the future deployment of advanced broadband IP communication services. With the establishment of an IP core network as part of our circuit switch
to IP switch network migration, we expect to meet the demands of our residential and business customers for increased bandwidth and new IP applications.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will continue to operate under a disciplined strategy to increase our market share in our edge-out markets, primarily to business customers, by offering
competitive communication service packages. We will continue to leverage our modern network infrastructure, established reputation, extensive local knowledge and significant operating experience to attempt to gain new customers and increase our
market share in our edge-out markets. Our focus will be on acquiring customers that can be served on our own network facilities and moving existing customers from leased facilities to our own network.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will pursue the goal of Delivering Excellence for our customers by providing reliable, responsive, state-of-the-art broadband communications services, including
voice, high-speed data and, in certain of our RLEC and CLEC markets, video. We will assess and tailor the bundling of services to best serve our customers and endeavor to achieve a competitive advantage in our local markets. We have direct
experience with video deployments on two technology platformshybrid fiber coaxial in the State College CLEC market and ADSL2+ over the RLEC copper system in Union County, Pennsylvania. The deployment of video in our other RLECs remains under
review and evaluation.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will endeavor to be a single source provider of voice and data communications services to our business customers. We believe that the convergence and complexity
of voice communications and data network technologies has increased the need for businesses to seek a single provider for all of their communications and information technology needs. We are creating a more direct link between our RLEC, CLEC and
Internet customer base and the Systems Integration business through joint sales proposals, sales incentive plans, and needs-based proposals that combine Systems Integration and RLEC, CLEC or Internet services for a custom and differentiated
offering, including professional information technology services, network security services and network monitoring and response.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will continue to make our commitment to customer service a top priority. Our Network Operations Center (NOC) provides monitoring, repair and
emergency services 24 hours a day, 7 days a week and 365 days a year, which strengthens our relationships with our customers and enhances our competitive position. In an effort to enhance the customers experience when they call in service
issues, we integrated a case management system into the NOC. The system has given us the ability to better manage and prioritize service calls resulting in greater ability to manage the customers request. To further enable this capability,
several automated tests were developed and implemented that allow us to analyze every issue that is called in, determine the location of the issue and identify the appropriate technical group to resolve the issue. We offer customers our Managed
Services products, which are internal monitoring (within the customers enterprise), external monitoring (devices outside the customers enterprise) and comprehensive security assessments and management. Our complement of Managed Services
fills the needs of our customers by allowing them to improve reliability, provide higher levels of service and save money through efficient device management and planning.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will offer a broad array of advanced communication services that will enable new modes of communication to become a part of the daily home or business
experience. Using softswitch technology currently being implemented, a unified communications portfolio of integrated application services (e.g., email, voicemail, instant messaging and video conferencing) will provide customers with more flexible
communication alternatives.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Business Risks

Our primary business risks include the external threats of increased competition, the complex and uncertain regulatory environment in the telecommunications industry and the internal risk of our debt financing. See
Part I, Item 1A of this Form 10-K for a more extensive discussion of risk factors affecting our business.



| |  |  | Risk of increased competition
| | - |  | -----------------------------

We
have faced, and expect to continue to face, increased competition as a result of a convergence of technologies and a pro-competitive regulatory environment, which has eroded barriers to entry into some of our business segments.

Convergence of technologies

One of
the critical drivers in the communications industry today is the convergence of voice and data communication technologies into various IP based platforms, all of which have the potential to provide VoIP, broadband services, and IP video over
telephone companies copper and fiber networks, cable companies coaxial and fiber networks, wireless telephone companies wireless networks, satellite companies satellite networks and electric companies electric lines.
Although each of the networks has relative strengths and weaknesses, they are all effectively in competition for the customers communications needs. These developments mean that we are competing for our existing customer base in our RLEC and
CLEC territories with cable TV companies, wireless telephone companies, satellite communications providers and VoIP providers. The recent decreases in the number of access lines in our RLEC territories reflect such increased competition, in addition
to the elimination of lines by our customers as they shift to DSL for high-speed Internet access.

We have competitive strengths and
weaknesses in the competition for the customers communications dollar. On a national basis, cable TV companies have the major market share of paid video services and have a larger market share of broadband Internet access services than
telephone companies. Cable TV companies are now delivering VoIP services with systems fully capable of providing IP telephony services. We are now offering video over a portion of our fiber-copper network in the area of Lewisburg, Pennsylvania in
competition with the video services offered by incumbent cable companies.

The competitive threat posed by the convergence of technologies
makes our commitment to customer service even more critical to the protection of our competitive position. We are a local company with local connections that can give individual, personalized service. We are also small enough to be able to provide
an individual response to customer services needs. We feel that this responsiveness will be critical to our ability to successfully convince both our business and residential customers to see us as their preferred provider of integrated
communications services, particularly in light of the substantially greater resources of many of our competitors.

In order to remain
competitive and provide the broadband services required for high-speed data and video, we must continue to invest substantial amounts in our infrastructure. We have installed significant amounts of fiber in our system. We have installed
gigabit networks, and believe that we have the expertise to lead the way to providing ubiquitous broadband access in our markets. We have completed 99% of our requirements under Act 183 of the Pennsylvania Public Utility Code to provide
broadband availability in 100% of our RLEC system by December 31, 2008. In keeping with the foregoing, our 2007 capital budget is approximately $25,000. However, our ability to invest in infrastructure to remain competitive may be limited by
our indebtedness of $207,016 as of December 31, 2006.

Pro-competitive regulatory environment

It is basic policy of the FCC and the PA PUC to encourage competition in the communications industry. Federal and state regulatory trends toward a more
competitive marketplace through reduced competitive entry standards are likely to have negative effects on our business and our ability to compete. In this regard, the



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regulatory environment governing ILEC operations has been and will likely continue to be very liberal in its approach to promoting competition and network
access, which may increase the likelihood of new competitors offering similar services in our service areas. The introduction of new competitors could have a negative effect on our RLEC operating results yet at the same time present operating
benefits to our CLEC business.

Legislation enacted in Pennsylvania in the fourth quarter of 2004 provides a continued limited suspension
from certain interconnection requirements of the Telecommunications Act of 1996 to our Buffalo Valley RLEC through December 31, 2008. Competitors currently have the opportunity to seek the removal of our rural exemption applicable to our other
two RLECs to have access to our customers by entering our territory and using our facilities through interconnection agreements to provide local services.

In areas served by our CLEC, the incumbent carrier, Verizon, enjoys certain business advantages, including its size, financial resources, brand recognition and network connection to virtually all of our customers and
potential customers in those areas. Similarly, in areas where we do or may provide video services, the incumbent cable operators enjoy certain business advantages, including their size, financial resources, brand recognition, and ownership of or
superior access to programming.



| |  |  | Complex and uncertain regulatory environment
| | - |  | --------------------------------------------

The United States communications industry is subject to federal, state and local regulations that are continually evolving. As new communications laws and regulations are issued, we may be required to modify our business plans or
operations, and we may not be able to do so in a cost-effective manner.

Prices for RLECs interstate services, consisting primarily
of subscriber line charges and access charges for interstate and international toll calls, are regulated by the FCC based on the average schedule formulas proposed by National Exchange Carrier Association (NECA). If the FCC
would disallow RLECs to receive compensation for interstate services based on the NECA average schedule formulas, our RLECs could experience a change in revenues. Changes in the average schedule formula amounts developed by NECA and implemented
annually in July will impact the RLECs future revenues. The FCC has approved NECAs changes in average schedule settlement formulas effective July 1, 2006, which included a two-year transition period for implementing the new
calculations. We estimate that the impact of the approved NECA formulas and the transition plan on consolidated network access revenues, based on 2006 actual access lines and minutes of use, will be a reduction of approximately $1,700 during fiscal
year 2007, a reduction of $2,600 during fiscal year 2008 and an annual reduction of $2,700 thereafter.

Additionally NECA has filed a
proposal with the FCC for a change in average schedule settlement formulas to be effective July 1, 2007, which includes a two-year transition period for implementing the new calculations. If the proposed filing is approved by the FCC, we
estimate that the impact of the new proposed formulas and the transition plan on consolidated network access revenues, based on 2006 actual access lines and minutes of use, will be a reduction of approximately $500 during the last six months of
2007, a reduction of approximately $1,500 during fiscal year 2008, a reduction of approximately $2,000 during fiscal year 2009 and an annual reduction of approximately $2,100 thereafter, based on information provided by NECA. We estimate that the
total combined effect of both the approved and proposed changes in NECA average schedule settlement formulas on consolidated network access revenue will be a reduction of $2,200 in 2007, $4,100 in 2008, $4,700 in 2009 and $4,800 thereafter.

On February 10, 2005, the FCC initiated a proceeding at CC Docket No. 01-92 to develop a unified intercarrier compensation
methodology. As a part of this proceeding, the FCC is now considering and soliciting comments from the public on the Missoula Plan, a proposal that was developed by industry representatives. The Missoula Plan, if adopted, would have a significant
impact on the intercarrier compensation revenues and the federal Universal Service Fund (USF) funding that our RLECs receive, as well as the intercarrier compensation expense that they incur. The rule changes that result from this
proceeding could have a material effect on our



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revenues, expenses and earnings. The FCC has not yet acted on this notice, and there is no guarantee that a final order addressing potential modifications to
the current access charge system will be issued in 2007. Until the FCC adopts a specific proposal, it is impossible to predict how much the proposed changes will affect our company and whether they will be favorable or unfavorable.

The PA PUC has a proceeding open to consider changes in intrastate switched access rates and PA USF, along with potential impacts on local service rates,
for rural local exchange carriers in Pennsylvania. On August 30, 2006, a filing was made by numerous parties, including a rural coalition group that included our RLECs, to stay this investigation. On November 9, 2006, the PA PUC granted in
its entirety a stay of this investigation pending the outcome of the FCCs Unified Intercarrier Compensation proceeding at CC Docket No. 01-92 or for one year, whichever is earlier. At this time, we cannot predict what the outcome will be
of the FCCs investigation or what the PA PUC may do if the FCC approves changes or fails to act within the one-year delay.

Our RLECs
filed for changes in local and intrastate access rates to be effective July 1, 2006, in accordance with our Chapter 30 Plan. When we made our filings to increase certain local and intrastate access rates, no customer filed any complaint or
request for intervention. The PA PUC identified a minor change to our filing, but allowed the new rates to go into effect on July 1, 2006 as modified for the change. Verizon, however, filed comments against our increase in intrastate access
rates and requested that the PA PUC investigate our ability to increase access rates. On November 9, 2006, the PA PUC elected to have its Office of Administrative Law Judge hold a hearing to determine whether the increases in access rates
violated any previous PA PUC order or decision. This hearing was held on January 17, 2007. Our RLECs provided a witness in support of the access rate increases and the Office of Consumer Advocate and the Office of Small Business Advocate also
filed comments in support of our RLECs rate increases. Verizon provided a witness contending that local end-user rates should be increased, not intrastate access rates. On February 20, 2007, the Administrative Law Judge issued a
recommendation to the PA PUC that no rescission or amendment is warranted to our increase in certain local and intrastate access rates. The PA PUC is expected to provide its final order as to whether the increases in access rates will remain or
whether refunds must be provided to access customers and increases in other rates, such as residential and business local service, be made in the alternative.

There is limited regulation of Voice over Internet Protocol (VoIP) offerings at this time, placing VoIP at a possible advantage over traditional telephone services. Although VoIP is not regulated as a
voice public utility service, the FCC has recently made several rulings that imposed certain requirements on VoIP providers. VoIP providers are now required to enable their customers to access 911 services, comply with the Communications Assistance
for Law Enforcement Act and contribute to the support of universal service. We have introduced VoIP offerings into our marketplace in anticipation of the demand for this voice communications product.



| |  | Risk of debt financing
|- |  | ----------------------

We had
indebtedness of $207,016, including current maturities and a capital lease obligation of $1,516, at December 31, 2006. Our indebtedness could restrict our operations because:



| |  |  | We will use a substantial portion of our cash flow from operations to pay principal and interest on our indebtedness, which will reduce the funds available for
working capital, capital expenditures, acquisitions and other general corporate purposes;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Certain covenants in our loan agreement limit the amount of capital investment; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | The level of indebtedness will make us more vulnerable to economic or industry downturns, and our debt service obligations increase our vulnerability to competitive
pressures.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On September 19, 2006, we completed an amendment to our syndicated senior secured debt financing,
consisting of a $25,000 revolving line of credit, Term Loan A in the amount of $36,061, Term Loan B in the amount of $144,689, and $28,875 of term indebtedness. The amendment reduced the interest rates on the indebtedness, provided greater
flexibility in the financial covenants, extended the scheduled amortization of



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principal, eliminated the $10,000 permanent reduction on the revolving line of credit previously scheduled for December 31, 2006 and eliminated the
requirement to maintain interest rate protection with a weighted average life at least two years on 50% of total variable rate indebtedness. We also paid off the $7,000 balance on the revolving line of credit by drawing $7,000 from Term Loan A.

The effect of the amendment on interest rates was to reduce the revolving line of credit and Term Loan A U.S. prime and LIBOR margins by
0.75%, the Term Loan B U.S. prime and LIBOR margins by 0.25% and the average interest rate on the term indebtedness by 0.35%. We anticipate that the reduction in interest rates will result in an average annual cash savings of approximately $600
assuming the margin added to the U.S. prime or LIBOR rates in effect prior to the amendment would have been in effect throughout the term of the credit facilities using the amended loan amortization schedules. We incurred a loss on early
extinguishment of debt of $1,103, consisting of a non-cash write-off of $1,047 of unamortized debt issuance costs of the previous credit facility and the expensing of $56 of debt issuance costs related to the amended credit facility. We capitalized
approximately $344 of debt issuance costs related to the amended credit facility, which will be amortized into interest expense over the life of the amended credit facility.

The foregoing opportunities and risks require management to attempt to balance several aspects of our business. Our RLEC business segment is the primary
provider of cash flow both to pursue our business plan to be a leading, regional broadband ICP and to provide a current return on investment to our shareholders in the form of a dividend. However, because our resources are limited, and the manner in
which the communications industry will develop is uncertain, both in terms of technology and competition, we may not be able to pursue every possible avenue of development, and critical decisions will need to be made among various alternatives.
These decisions can be made more difficult by our desire to balance our short-term goals of maintaining our RLEC business segment and dividend return and our long-term goal of providing voice, data and video services on the next generation, IP-based
network. Maintaining our dividend payout may be challenging due to the capital requirements of our business strategy, payments of principal and interest on our long-term debt and restrictions under our financing facilities, the latter including an
annual limitation of $10,000 in dividends and the requirement to remain in compliance with financial covenants.



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Results of Operations

The measure of segment results used by management is operating income (loss). Certain amounts from prior years have been reclassified to conform to the current presentation. The following table is a summary of our
operating results by segment:



|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|----------------------------- |  | ---- | ------- | ---- | - | ------ | ----------------- |  | - | ------------------- | - |  | ---------------- | ------ | - | ------------ | - | ------ | ------------- |  | - | ------- | - |  | - | -------
|                              |  | RLEC |         | CLEC |   |        | Internet Services |  |   | Systems Integration |   |  | Corporate& Other |        |   | Eliminations |   |        | Total Company
|2006                          |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Revenues  External           |  | $    | 96,396  |      | $ | 39,997 |                   |  | $ | 15,503              |   |  | $                | 6,641  |   |              | $ | 3,531  |               |  | $ |        |   |  | $ | 162,068
|Revenues  Intercompany       |  |      | 10,230  |      |   | 2,806  |                   |  |   | 85                  |   |  |                  | 24     |   |              |   |       |               |  |   | (13,145 | ) |  |   |       
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Total Revenues                |  |      | 106,626 |      |   | 42,803 |                   |  |   | 15,588              |   |  |                  | 6,665  |   |              |   | 3,531  |               |  |   | (13,145 | ) |  |   | 162,068
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Depreciation and Amortization |  |      | 28,793  |      |   | 5,956  |                   |  |   | 1,507               |   |  |                  | 714    |   |              |   | 1,271  |               |  |   |        |   |  |   | 38,241 
|Intangible Asset Impairment   |  |      |        |      |   |       |                   |  |   |                    |   |  |                  | 1,892  |   |              |   |       |               |  |   |        |   |  |   | 1,892  
|Other Operating Expenses      |  |      | 47,433  |      |   | 36,670 |                   |  |   | 13,943              |   |  |                  | 10,519 |   |              |   | 4,003  |               |  |   | (13,145 | ) |  |   | 99,423 
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Total Operating Expenses      |  |      | 76,226  |      |   | 42,626 |                   |  |   | 15,450              |   |  |                  | 13,125 |   |              |   | 5,274  |               |  |   | (13,145 | ) |  |   | 139,556
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|                              |  |      |         |      |   |        |                  
|Operating Income (Loss)       |  | $    | 30,400  |      | $ | 177    |                   |  | $ | 138                 |   |  | $                | (6,460 | ) |              | $ | (1,743 | )             |  | $ |        |   |  | $ | 22,512 
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|                              |  |      |         |      |   |        |                  
|2005                          |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Revenues  External           |  | $    | 100,934 |      | $ | 38,291 |                   |  | $ | 12,999              |   |  | $                | 8,556  |   |              | $ | 3,782  |               |  | $ |        |   |  | $ | 164,562
|Revenues  Intercompany       |  |      | 9,517   |      |   | 2,505  |                   |  |   | 40                  |   |  |                  | 28     |   |              |   |       |               |  |   | (12,090 | ) |  |   |       
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Total Revenues                |  |      | 110,451 |      |   | 40,796 |                   |  |   | 13,039              |   |  |                  | 8,584  |   |              |   | 3,782  |               |  |   | (12,090 | ) |  |   | 164,562
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Depreciation and Amortization |  |      | 29,524  |      |   | 5,052  |                   |  |   | 1,378               |   |  |                  | 1,002  |   |              |   | 1,167  |               |  |   |        |   |  |   | 38,123 
|Other Operating Expenses      |  |      | 48,395  |      |   | 37,255 |                   |  |   | 12,303              |   |  |                  | 13,201 |   |              |   | 4,545  |               |  |   | (12,090 | ) |  |   | 103,609
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Total Operating Expenses      |  |      | 77,919  |      |   | 42,307 |                   |  |   | 13,681              |   |  |                  | 14,203 |   |              |   | 5,712  |               |  |   | (12,090 | ) |  |   | 141,732
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|                              |  |      |         |      |   |        |                  
|Operating Income (Loss)       |  | $    | 32,532  |      | $ | (1,511 | )                 |  | $ | (642                | ) |  | $                | (5,619 | ) |              | $ | (1,930 | )             |  | $ |        |   |  | $ | 22,830 
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|                              |  |      |         |      |   |        |                  
|2004                          |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Revenues  External           |  | $    | 101,647 |      | $ | 36,183 |                   |  | $ | 10,337              |   |  | $                | 12,923 |   |              | $ | 3,333  |               |  | $ |        |   |  | $ | 164,423
|Revenues  Intercompany       |  |      | 9,314   |      |   | 1,409  |                   |  |   | 21                  |   |  |                  | 54     |   |              |   |       |               |  |   | (10,798 | ) |  |   |       
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Total Revenues                |  |      | 110,961 |      |   | 37,592 |                   |  |   | 10,358              |   |  |                  | 12,977 |   |              |   | 3,333  |               |  |   | (10,798 | ) |  |   | 164,423
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Depreciation and Amortization |  |      | 30,776  |      |   | 4,394  |                   |  |   | 1,083               |   |  |                  | 1,212  |   |              |   | 967    |               |  |   |        |   |  |   | 38,432 
|Other Operating Expenses      |  |      | 51,023  |      |   | 35,893 |                   |  |   | 8,948               |   |  |                  | 16,208 |   |              |   | 3,633  |               |  |   | (10,798 | ) |  |   | 104,907
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Total Operating Expenses      |  |      | 81,799  |      |   | 40,287 |                   |  |   | 10,031              |   |  |                  | 17,420 |   |              |   | 4,600  |               |  |   | (10,798 | ) |  |   | 143,339
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|                              |  |      |         |      |   |        |                  
|Operating Income (Loss)       |  | $    | 29,162  |      | $ | (2,695 | )                 |  | $ | 327                 |   |  | $                | (4,443 | ) |              | $ | (1,267 | )             |  | $ |        |   |  | $ | 21,084 
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        

Historically, we have derived a majority of our revenues and substantially all of our operating
income from the RLEC segment. Our RLEC revenue is derived primarily from local telephone service, network access charges, enhanced telephone services, directory and regional toll service. Our CLEC focuses primarily on businesses, and revenue is
derived primarily from local telephone service, network access charges, enhanced telephone services and long distance service revenue. Our Internet Services revenue is derived from broadband and dial-up Internet access services, web-hosting services
and VoIP service. Our Systems Integration revenue is derived from the sale of professional data and information technology services and equipment that support the design, implementation and maintenance of client-focused technology solutions
including local and wide area networks.

Our operating costs and expenses primarily include wages and related employee benefit costs,
depreciation and amortization, selling and advertising, software and information system services and general and



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administrative expenses. Our RLEC segment incurs costs related to network access charges, directory expense, and other operations expenses such as digital
electronic switch expense, engineering and outside plant costs. Our CLEC incurs costs related to leased network facilities associated with providing local telephone service to customers, engineering costs, and network access costs for local calls
and long distance expense. Our Internet Services segment incurs leased network facilities costs for our broadband and dial-up Internet access services. Our Systems Integration business incurs expenses primarily related to wages and employee benefit
costs, and, to a lesser degree, equipment and materials used in the provision of our services and sales of computer equipment.

We incur
access line-related capital expenditures associated with access line additions, expenditures for upgrading existing facilities to provide broadband services and costs related to the provision of broadband Internet services in our RLEC and CLEC
territories. Our capital expenditures related to CLEC access line growth are generally associated with serving additional customers or servicing existing customers on our own facilities and, therefore, tend to result in incremental revenue or higher
margins from those customers. We believe that our additional capital expenditures relating to our investment in software and systems will allow us to remain competitive in the marketplace and generally allow for corresponding reductions in operating
expenses.

On September 29, 2006, D&E completed the sale of assets of the commercial voice equipment and service operations of the
Systems Integration segment (Voice Systems Business) to eCommunications Systems Corporation (eComm). The fair value of the sale consideration was $3,000 and included $250 in cash paid on the closing date, the receipt of a
$2,400 ($2,500 face value) promissory note issued by eComm and a 10% equity interest in eComm of $350 with a related put right. The promissory note is subordinated to other debt of eComm and is collateralized by the assets of eComm and the joint and
several personal guarantees of the other individual shareholders of eComm. The Voice Systems Business represented a component of our Systems Integration segment and, accordingly, the results of operations have been classified as a discontinued
operation for all periods presented in the consolidated statements of operations.

Consolidated Operations

Overview of 2006 Compared to 2005

In 2006, consolidated operating revenues from continuing operations decreased $2,494, to $162,068, from $164,562 in 2005. The decrease included $1,918 of lower professional services revenue, primarily attributable to the expiration of a
major computer services contract as of June 30, 2005, and approximately $3,018 of lower network access revenues primarily due to lower minutes of use and rates and lower NECA settlements. Long distance toll revenues declined $1,659 due to a
reduction in the average rate per minute of use and lower minutes of use. Computer equipment sales decreased $321 primarily due to several large sales in the prior year, which were not repeated in the current year. Dial-up Internet access revenue
declined $647 as a result of fewer subscribers. Directory revenue decreased $512, primarily as the net result of a $1,851 revenue reduction due to two of our four directories being published under a contract which became effective in the fourth
quarter of 2006 and are accounted for under the net accounting method versus the gross accounting method, partially offset by a revenue increase of $1,283 as a result of the higher published values of the directories prior to the effective date of
the new contract. These decreases were partially offset by increases of $874 in local telephone service primarily from additional CLEC business customers, $3,048 in DSL revenue attributable to additional customers and $1,587 in long distance circuit
revenue attributable to additional circuits in service.

In 2006, consolidated operating income from continuing operations decreased $318,
to $22,512 from $22,830 in 2005. The decrease was attributable to decreased revenues of $2,494, offset by a $2,176 reduction in operating expenses. Wages decreased $1,733 due to fewer employees. Employee benefits decreased $140 as the net result of
an approximate $1,149 decrease due to lower health insurance, pension and payroll tax expenses primarily as a result of fewer employees, partially offset by an approximate $1,009 increase in short and long-term incentive plan benefits. Network
access expense decreased $1,396 due to lower long distance minutes of use and the savings achieved from an agreement to provide a least-cost routing service for completion of long distance toll calls. Subcontractor costs decreased $636 as a result
of lower professional services revenue. Cost of



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goods sold decreased $238 primarily due to lower computer equipment sales. Directory expense decreased $670 due to a $1,636 expense reduction as a result of
two of our four directories being published under a contract which became effective in the fourth quarter of 2006 and are accounted for under the net accounting method versus the gross accounting method, partially offset by an expense increase of
$966 due to higher publishing costs of the directories prior to the effective date of the new contract. Professional services expense decreased $399 primarily from a reduction in consulting fees for Sarbanes-Oxley compliance. Cost of services
increased $1,352 primarily as a result of the increase in facilities that we lease from other companies that provide local service to our increased number of CLEC customers, additional long distance circuits and a one-time vendor billing adjustment
of $248 for fiber circuits. Also contributing to the increased expenses in 2006 was the non-cash intangible asset impairment loss of $2,375 on the customer relationships of the Systems Integration segment in the second quarter of 2006 of which
$1,892 is reported in continuing operations and $483 in discontinued operations.

Net income (loss) decreased $6,969, to net income of
$6,742 in 2006 from a net income of $13,711 in 2005, primarily due to the reduction in gains on investments of $5,860, lower equity in net income (losses) of affiliates of $1,180, the 2006 loss on early extinguishment of debt of $1,103 and the
increased loss from discontinued operations of $1,336, partially offset by the decrease in income taxes of $2,340. The gain on investment of $1,035 in 2006 was a result of a recovery of our advances to Eurotel beyond amounts previously estimated.
Gains on investments were $6,895 in 2005 as a result of the sale of our interests in Pilicka and PenTeleData.

Overview of 2005
Compared to 2004

Consolidated operating revenues from continuing operations in 2005 increased $139, to $164,562, from $164,423 in
2004. The increase included $1,053 in local telephone service primarily from additional CLEC business customers, $1,944 of DSL revenue attributable to additional customers, $1,817 of long-distance circuit revenue due to an increase in dedicated
circuits, $647 of directory revenue and $515 of communications services, primarily equipment rental and support services. These increases were offset by $3,486 of lower professional services revenues partially attributable to the expiration of a
major computer services contract, a $1,687 decline in long distance toll revenues primarily attributable to a reduction in the average rate per minute of use and a computer equipment sales decrease of $709.

Consolidated operating income from continuing operations in 2005 increased $1,746, to $22,830, from $21,084 in 2004. The increase was primarily
attributable to reductions in operating expenses. Expense decreases included $1,678 from lower wages and subcontractors costs, $430 of network access expense partially related to a lower cost contract for completing long distance calls, $1,303
of contracted billing service expenses and $800 of computer equipment sale costs. Offsetting increases included $1,712 in benefits primarily from pension expense and $1,007 of operating taxes primarily as a result of a one-time sales tax refund
received in 2004.

Net income (loss) increased $16,450, to net income of $13,711 in 2005 from a net loss of $2,739 in 2004, partially due
to the increase in operating income described in the preceding paragraph, net of income taxes. Other factors include the increase in equity in net income (losses) of affiliates of $4,172, the increase in gain (loss) on investments of $7,952 and the
reduction in the loss on early extinguishment of debt of $5,252. Gains on investments were $6,895 in 2005 as a result of the sales of our interests in Pilicka and PenTeleData compared to a 2004 other-than-temporary loss on our investment in Eurotel
of $1,057.



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RLEC Segment Results

Summary Operating Results  RLEC Segment



|                               |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                               |  | 2006 |         |   | 2005 |   |         | 2004 | 
|Revenues:                      |  |      |         |   |      |   |         |      |  |   |         |  
|Local Telephone Service        |  | $    | 33,089  |   |      | $ | 33,246  |      |  | $ | 33,607  |  
|Network Access                 |  |      | 52,537  |   |      |   | 55,293  |      |  |   | 54,915  |  
|Directory                      |  |      | 15,355  |   |      |   | 15,923  |      |  |   | 15,335  |  
|Other                          |  |      | 5,645   |   |      |   | 5,989   |      |  |   | 7,104   |  
|                               |  |      |         |   |      |   |         |      |  |   |         |  
|Total Revenues                 |  |      | 106,626 |   |      |   | 110,451 |      |  |   | 110,961 |  
|                               |  |      |         |   |      |   |         |      |  |   |         |  
|Depreciation and Amortization  |  |      | 28,793  |   |      |   | 29,524  |      |  |   | 30,776  |  
|Other Operating Expenses       |  |      | 47,433  |   |      |   | 48,395  |      |  |   | 51,023  |  
|                               |  |      |         |   |      |   |         |      |  |   |         |  
|Total Operating Expenses       |  |      | 76,226  |   |      |   | 77,919  |      |  |   | 81,799  |  
|                               |  |      |         |   |      |   |         |      |  |   |         |  
|Operating Income               |  | $    | 30,400  |   |      | $ | 32,532  |      |  | $ | 29,162  |  
|                               |  |      |         |   |      |   |         |      |  |   |         |  
|Operating Income % of Revenues |  |      | 28.5    | % |      |   | 29.5    | %    |  |   | 26.3    | %
|Access Lines at December 31    |  |      | 129,848 |   |      |   | 134,698 |      |  |   | 139,607 |  

RLEC segment revenues decreased $3,825, or 3.5%, to $106,626 in 2006 and decreased $510, or 0.5%,
to $110,451 in 2005. In 2006, local telephone service revenue decreased $157 as a result of the decrease in access lines, partially offset by an increase in basic service rates effective August 1, 2005. Network access revenue decreased $2,756,
due to decreases of approximately $1,000 in special access revenue primarily from lower rates and fewer circuits, a $1,098 reduction in interstate access revenues primarily due to lower rates and minutes of use, a $663 reduction in NECA settlements
primarily as a result of the changes in the NECA average schedule settlement formulas effective in July 2006, a $782 reduction in intrastate access revenue of primarily from decreased minutes of use offset by the effect of a rate increase on
July 1, 2006, a $224 reduction in intrastate access revenue as a result of a billing error correction in the second quarter of 2006 and a $496 reduction in subscriber line charges due to the decline in access lines. These decreases were
partially offset by a $330 increase in intrastate access revenue as a result of the 2006 reversal of a $165 revenue reserve recorded in 2005 and a $1,102 increase in inter-segment DSL revenue due to an increase in subscribers. Directory revenue
decreased $568 from the net result of a $1,851 revenue reduction due to two of our four directories being published under a contract which became effective in the fourth quarter of 2006 and are accounted for under the net accounting method versus
the gross accounting method, partially offset by a revenue increase of $1,283 as a result of the higher published values of the directories prior to the effective date of the new contract. Other revenue decreased $344 primarily from lower long
distance toll revenue of $304 due to decreased minutes of use.

In 2005, basic area telephone service decreased $237 due to the net effect
of a decrease in access lines, offset by an increase in basic service fees effective August 1, 2005 that resulted in additional revenue of approximately $700. Network access revenue increased $378, primarily from the net effect of increased
NECA settlements of $2,333 partially related to rate changes in the NECA average schedule settlement formulas effective in July 2005, additional inter-segment DSL revenue of $1,055 due to an increase in the number of customers, decreases of
approximately $1,753 from fewer special access circuits, a decline in switched access revenues of $354 and a reduction in interstate access revenues of $681 due to decreases in minutes of use and rates. Long distance revenues decreased $434 and
revenue from inter-segment billing and collection services was down $963. Since November 2004, expenses for preparation of customer billing are charged directly to each segment. Prior to November 2004, certain expenses were recorded in one segment
and then recorded as inter-segment billing and collection revenue.

RLEC segment operating expenses decreased $1,693, or 2.2%, to $76,226
in 2006 and decreased $3,880, or 4.7%, to $77,919 in 2005. In 2006, depreciation decreased $731 due to changes in the estimated lives of various



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fixed asset categories in 2005. Corporate overhead expenses decreased $634 due to a decrease in the total corporate overhead expense allocated to all
business segments. Corporate overhead expenses decreased an additional $226 as a result of our other business segments receiving a larger share of the allocation of corporate overhead expenses, which are allocated to each segment based on the
average of segment revenues, expenses and certain balance sheet amounts. Directory expense decreased $670 from the net result of a $1,636 expense reduction, due to two of our four directories being published under a contract which became effective
in the fourth quarter of 2006 and are accounted for under the net accounting method versus the gross accounting method, partially offset by an expense increase of $966 due to higher publishing costs prior to the effective date of the new contract.
Network access expense decreased $326 primarily from a reduction in long distance minutes of use and a $179 reduction of the estimated costs owed to wireless carriers for local calls made by our customers to the wireless carriers customers.
Consulting fees increased $324 primarily due to the data conversion required in implementing new software to provide enhanced customer service and communication facility maintenance support. Employee benefits increased $335 primarily from short-term
incentive plan expenses. Cost of services increased $292 primarily from additional intersegment costs to provide switched data message services. In 2005, decreases included $1,007 for contracted billing services, $1,252 in depreciation due to
changes in the estimated lives of various fixed asset categories, $454 in network access expenses, $633 in maintenance contracts and $1,151 in corporate overhead expenses as a result of our other business segments receiving a larger share of the
allocation of corporate overhead expenses. These decreases more than offset a $733 increase in the cost of employee benefits. Operating income decreased $2,132, or 6.6%, in 2006, to $30,400, and increased $3,370, or 11.6%, in 2005 to $32,532.

Local telephone revenues are anticipated to continue to decline as the result of continuing access line losses due to increasing
competition from wireless and cable providers offering alternative services, including VoIP. Network access revenues are projected to decrease due to declining minutes of use and less favorable NECA settlements for average schedule companies. Other
revenues, which include enhanced services (voice mail, custom calling features), long distance and other miscellaneous services, are likely to continue the trend of moderate declines. At the same time, we expect declines in directory revenues due to
revised contract terms for two of our four directories.

The FCC has approved NECAs changes in average schedule settlement formulas
effective July 1, 2006, which included a two-year transition period for implementing the new calculations. We estimate that the impact of the new formulas and the transition plan on consolidated network access revenues using actual access lines
and minutes of use for the year 2006 will be a reduction of approximately $1,700 during fiscal year 2007, a reduction of $2,600 during fiscal year 2008 and an annual reduction of $2,700 thereafter.

Additionally, NECA has filed a proposal with the FCC for a change in average schedule settlement formulas to be effective July 1, 2007, which
includes a two-year transition period for implementing the new calculations. If the proposed filing is approved by the FCC, we estimate that the impact of the new proposed formulas and the transition plan on consolidated network access revenues,
based on 2006 actual access lines and minutes of use, will be a reduction of approximately $500 during the last six months of 2007, a reduction of approximately $1,500 during fiscal year 2008, a reduction of approximately $2,000 during fiscal year
2009 and an annual reduction of approximately $2,100 thereafter, based on information provided by NECA. We estimate that the total combined effect of both the approved and proposed changes in NECA average schedule settlement formulas on consolidated
network access revenue will be a reduction of $2,200 in 2007, $4,100 in 2008, $4,700 in 2009 and $4,800 thereafter.

On June 22, 2006,
the PA PUC approved RLEC rate increases to be effective on July 1, 2006. The rate increases were requested in accordance with our PA PUC approved Chapter 30 Plans, as amended pursuant to Act 183. The majority of the rate increases were in
network access revenues and are based on the application of an industry price cap formula, which measures the current rate of inflation. The new monthly rates were calculated using historical data for our access lines and minutes of use and were
designed to generate an increase in annual consolidated revenue of $1,589. The actual annual revenue increase will be different from this amount



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to the extent that actual access lines and minutes of use differ from the historical data that we used in developing the new rates. We estimate that RLEC
access lines will continue to decline due to increasing competition. Verizon filed comments against our increase in intrastate access rates and requested that the PA PUC investigate our ability to increase access rates. On November 9, 2006, the
PA PUC ordered hearings to be held and in its order stated that we may be required to refund any amounts generated by the increased rates subsequent to November 9, 2006. A hearing was held on January 17, 2007. On February 20, 2007,
the Administrative Law Judge issued a recommendation to the PA PUC that no rescission or amendment is warranted to our increase in certain local and intrastate access rates. The PA PUC is expected to provide its final order determining whether the
increases in access rates will remain or whether refunds must be provided to access customers and increases in other rates, such as residential and business local service, be made in the alternative. We recorded a $188 revenue reserve in 2006
pending the decision of the PA PUC regarding the increase in our intrastate access rates effective July 1, 2006, in accordance with our Chapter 30 Plan.

We have entered into a new three-year agreement for the publication of three of our four directories whereby the responsibility for publication and distribution of the directory and the related financial risks became
the responsibility of the publisher beginning in the fourth quarter of 2006 for two of the directories and beginning in the first quarter of 2007 for one directory. As a result, our directory revenue as the three new directories are published will
only be the annual fee paid to the Company for access to our customers. This arrangement decreased directory revenue $1,851 in the fourth quarter of 2006 and will decrease directory revenues, based upon 2006 levels, approximately $10,300 in 2007,
$11,000 in 2008 and $11,200 in 2009. Directory expense decreased $1,636 and operating income decreased $215 in the fourth quarter of 2006 as a result of the new contract. Our directory expense, based on 2006 levels, will also decrease approximately
$9,500 in 2007 and $9,800 in 2008 and 2009. The net effect of the decrease in directory revenue and expense will result in a reduction in operating income of approximately $800 in 2007, $1,200 in 2008 and $1,400 in 2009.

CLEC Segment Results

Summary Operating Results
 CLEC Segment



|                                      |  |      |        |   |      |   |        |      |  |   |        |   
|------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | --
|                                      |  | 2006 |        |   | 2005 |   |        | 2004 | 
|Revenues:                             |  |      |        |   |      |   |        |      |  |   |        |   
|Local Telephone Service               |  | $    | 15,316 |   |      | $ | 14,557 |      |  | $ | 13,123 |   
|Network Access                        |  |      | 6,734  |   |      |   | 5,650  |      |  |   | 3,934  |   
|Long Distance                         |  |      | 20,176 |   |      |   | 19,978 |      |  |   | 19,519 |   
|Other                                 |  |      | 577    |   |      |   | 611    |      |  |   | 1,016  |   
|                                      |  |      |        |   |      |   |        |      |  |   |        |   
|Total Revenues                        |  |      | 42,803 |   |      |   | 40,796 |      |  |   | 37,592 |   
|                                      |  |      |        |   |      |   |        |      |  |   |        |   
|Depreciation and Amortization         |  |      | 5,956  |   |      |   | 5,052  |      |  |   | 4,394  |   
|Other Operating Expenses              |  |      | 36,670 |   |      |   | 37,255 |      |  |   | 35,893 |   
|                                      |  |      |        |   |      |   |        |      |  |   |        |   
|Total Operating Expenses              |  |      | 42,626 |   |      |   | 42,307 |      |  |   | 40,287 |   
|                                      |  |      |        |   |      |   |        |      |  |   |        |   
|Operating Income (Loss)               |  | $    | 177    |   |      | $ | (1,511 | )    |  | $ | (2,695 | ) 
|                                      |  |      |        |   |      |   |        |      |  |   |        |   
|Operating Income (Loss) % of Revenues |  |      | 0.4    | % |      |   | (3.7   | )%   |  |   | (7.2   | )%
|Access Lines at December 31           |  |      | 43,720 |   |      |   | 40,796 |      |  |   | 38,461 |   

CLEC segment revenues increased $2,007, or 4.9%, to $42,803 in 2006 and $3,204, or 8.5%, to
$40,796 in 2005. In 2006, local telephone service revenue increased $759 as a result of increased access lines for new business customers, August 2005 rate increases and growth in private network circuits. Network access revenue increased $1,084
primarily from additional interstate access revenue of $554 due to higher rates and minutes of use and a one-time intrastate access customer billing adjustment of $425, offset by a reduction in intrastate access revenue of $208 primarily due to
lower minutes of use. Long distance circuit revenue increased $1,587 from



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additional circuits while long distance toll revenue decreased $1,389 due to a decline in the average rate per minute of use and lower minutes of use. In
2005, local telephone service revenue increased $1,434 related to the access line increase and growth in private network circuits. Intrastate access revenue increased $936 from higher minutes of use. Long distance circuit revenue increased $1,817
due to growth in the number of circuits. Long distance toll revenues decreased approximately $1,358 due to a decline in the average rate per minute of use and the loss of one significant customer.

CLEC segment operating expenses increased $319, or 0.8%, to $42,626 in 2006 and $2,020, or 5.0% to $42,307 in 2005. In 2006, cost of services increased
$811 as a result of the increase in facilities that we lease from other companies that provide local service to our increased number of CLEC customers, additional long distance circuits, a one-time $181 increase in an estimate for circuit costs and
a one-time vendor billing adjustment of $248 for fiber circuits. Depreciation expense increased $904 from asset additions and decreases in estimated lives of certain assets. Network access expense decreased $690 primarily as a result of savings
achieved from an agreement to provide a least-cost routing service for completion of long distance toll calls and lower minutes of use. Wages decreased $327, primarily as a result of reduced customer service costs. In 2005, wages increased $144 and
benefits increased $453 as a result of our need to support the growth in access lines and increased pension costs. Depreciation increased $658 from asset additions and decreases in estimated lives of certain assets. The cost of services increased
$2,016 as a result of providing more leased facilities required by customer growth. Network access expenses decreased $1,843 as a result of savings achieved from the implementation of a new agreement to provide a least-cost routing service for
completion of long distance toll calls and partially from the loss of one significant customer. Customer billing expenses decreased $165 resulting from completion of the billing conversion during the fourth quarter of 2004. Gross receipts taxes
increased approximately $284 due to a true up of the prior year tax return. Corporate overhead expenses, which are allocated to each segment based on the average of segment revenues, expenses and certain balance sheet amounts, increased $919 as a
result of a higher allocation than in the prior year. In 2006, operating income was $177, an increase of $1,688 over the 2005 operating loss of $1,511. In 2005, the operating loss decreased $1,184, or 43.9%. The improvement in operating income was
primarily due to revenue growth, changes in operating efficiencies and moving more customers to our own network.

Local telephone service
revenues are projected to grow moderately as additional access lines are placed in service in existing markets. Our strategy to place more lines, both new and existing, on our own network is expected to increase the operating margin of those lines
by eliminating the need for leasing more costly facilities from other local exchange carriers, to provide service for those lines. Long distance toll revenues are expected to decrease due to increased competition and tighter margins, as competitors
such as wireless carriers and VoIP providers continue to offer unlimited minute pricing.

Internet Services Segment Results

Summary Operating Results  Internet Services Segment



|                                      |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                      |  | 2006 |        |   | 2005 |   |        | 2004 | 
|                                      |  |      |       
|Revenues                              |  | $    | 15,588 |   |      | $ | 13,039 |      |  | $ | 10,358 |  
|                                      |  |      |       
|Depreciation and Amortization         |  |      | 1,507  |   |      |   | 1,378  |      |  |   | 1,083  |  
|Other Operating Expenses              |  |      | 13,943 |   |      |   | 12,303 |      |  |   | 8,948  |  
|                                      |  |      |        |   |      |   |        |      |  |   |        |  
|Total Operating Expenses              |  |      | 15,450 |   |      |   | 13,681 |      |  |   | 10,031 |  
|                                      |  |      |        |   |      |   |        |      |  |   |        |  
|Operating Income (Loss)               |  | $    | 138    |   |      | $ | (642   | )    |  | $ | 327    |  
|                                      |  |      |        |   |      |   |        |      |  |   |        |  
|Operating Income (Loss) % of Revenues |  |      | 0.9    | % |      |   | (4.9   | %)   |  |   | 3.2    | %
|                                      |  |      |       
|Customers at December 31              |  |      |        |   |      |   |        |      |  |   |        |  
|DSL/High-Speed Internet               |  |      | 31,724 |   |      |   | 22,504 |      |  |   | 13,595 |  
|Dial-up Access                        |  |      | 5,337  |   |      |   | 7,959  |      |  |   | 11,535 |  
|Web-hosting Services                  |  |      | 951    |   |      |   | 952    |      |  |   | 909    |  



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Internet Services segment revenues increased $2,549, or 19.5%, to $15,588 in 2006 and increased $2,681,
or 25.9%, to $13,039 in 2005. In 2006, DSL revenue increased $3,050 as a result of increased subscribers, offset by a reduction in the average revenue per subscriber. The decrease in dial-up subscribers resulted in a $648 decrease in dial-up
revenue. The 2005 increase resulted from additional DSL customers and included approximately $654 of DSL revenue recorded as CLEC revenue in the previous year, prior to the wholesale arrangement effective January 1, 2005. Revenue per DSL
customer declined as a result of temporary promotional rates for new customers and the introduction of lower priced levels of DSL service. The decrease in the number of dial-up subscribers resulted in a 21.9% decrease in dial-up revenue.

Internet Services segment operating expenses increased $1,769, or 12.9%, to $15,450 in 2006 and $3,650, or 36.4%, to $13,681 in 2005. Direct cost of
services increased $865 as a result of higher costs due to DSL subscriber growth partially offset by reductions in broadband transport costs. Wages and benefits increased $506. Other operating expenses, including depreciation, network operations,
customer service and billing expenses, increased as a result of growth in DSL subscribers. The VoIP service costs in 2006 were $378. In 2005, wages and benefits increased $451 resulting from $262 of additional costs for supporting a larger number of
subscribers and $189 related to the initiation of our new VoIP phone service. Other expenses incurred to initiate VoIP service totaled approximately $304. The cost of services increased $1,826 as a result of increased customers and a broadband
capacity upgrade implemented to accommodate expected continued DSL subscriber growth. Depreciation increased $295 as a result of more assets being employed and corporate overhead expenses also increased $295 as a result of a higher percentage
allocation of corporate overhead expense than in the prior year. In 2006, operating income was $138 compared to the 2005 operating loss of $642 and the operating income of $327 in 2004. The decrease in operating income in 2005 resulted primarily
from the initiation of VoIP service, a higher percentage allocation of corporate overhead expenses and a decrease in the revenue per DSL customer.

Growth in providing broadband services is projected to increase in the next several years, as customer demand for greater speed and bandwidth continues. We expect continued growth in DSL customers, while the demand for dial-up access is
decreasing rapidly.

Systems Integration Segment Results

Summary Operating Results  Systems Integration Segment



|                              |  |      |        |    |      |   |        |      |  |   |        |   
|----------------------------- |  | ---- | ------ | -- | ---- | - | ------ | ---- |  | - | ------ | --
|                              |  | 2006 |        |    | 2005 |   |        | 2004 | 
|                              |  |      |       
|Revenues                      |  | $    | 6,665  |    |      | $ | 8,584  |      |  | $ | 12,977 |   
|                              |  |      |       
|Depreciation and Amortization |  |      | 714    |    |      |   | 1,002  |      |  |   | 1,212  |   
|Intangible Asset Impairment   |  |      | 1,892  |    |      |   |       |      |  |   |       |   
|Other Operating Expenses      |  |      | 10,519 |    |      |   | 13,201 |      |  |   | 16,208 |   
|                              |  |      |        |    |      |   |        |      |  |   |        |   
|Total Operating Expenses      |  |      | 13,125 |    |      |   | 14,203 |      |  |   | 17,420 |   
|                              |  |      |        |    |      |   |        |      |  |   |        |   
|Operating Loss                |  | $    | (6,460 | )  |      | $ | (5,619 | )    |  | $ | (4,443 | ) 
|                              |  |      |        |    |      |   |        |      |  |   |        |   
|Operating Loss % of Revenues  |  |      | (96.9  | )% |      |   | (65.5  | )%   |  |   | (34.2  | )%

Systems Integration segment revenues decreased $1,919, or 22.4%, to $6,665 in 2006 and decreased
$4,393, or 33.9%, to 8,584 in 2005. In 2006, communications services revenue decreased $1,781 primarily as a result of the expiration, on June 30, 2005, of a large government services contract and communications products sold decreased $138.
The 2005 decrease consisted of $3,651 in communication services revenue related to a reduction in project hours worked for several large customers, certain price reductions and the expiration, on June 30, 2005, of a large government service
contract and a computer equipment sales reduction of $740.

Operating expenses decreased $1,078, or 7.6%, to $13,125 in 2006 and decreased
$3,217, or 18.5%, to $14,203 in 2005. In 2006, wages, benefits and subcontractor services decreased $2,044, rent expense decreased $226 due to a reduction in office space, depreciation and amortization decreased $287 and the corporate overhead



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expense allocation decreased $276. These expense decreases were partially offset by a non-cash intangible asset impairment loss of $1,892. In 2005, wages,
benefits and subcontractor services decreased $1,909, material costs decreased $872 related to the decline in revenue, depreciation decreased $71 primarily due to certain fixed assets becoming fully depreciated in 2004 and amortization decreased
$141 due to certain intangible assets becoming fully amortized. Operating losses increased $841, to $6,460, in 2006 and $1,176, to $5,619, in 2005.

In the Systems Integration segment there will be a continued focus on the promotion and sale of managed services, professional services and network management, which are believed to generate recurring revenue. On September 29, 2006, we
completed the sale of assets of the commercial voice equipment and service operations of the Systems Integration segment (Voice Systems Business) to eCommunications Systems Corporation (eComm) under an Asset Purchase
Agreement dated September 13, 2006. The fair value of the sale consideration was $3,000 consisting of cash of $250, a promissory note for $2,400 (face value $2,500) issued by eComm and a 10% equity interest in eComm of $350, with a related put
right. We recognized a $1,020 loss, net of taxes, on the sale. The financial results of the Voice Systems Business are reported as discontinued operations for all periods presented. The Voice Systems Business generally consisted of our voice
telephone equipment business, but does not include the professional data and information technology services, security, design and network monitoring operations of our Systems Integration segment.

The Systems Integration segment will now focus on the professional data and information technology services, security, design and network monitoring
operations, which were not included in the sale. The provision of these services is believed to generate recurring revenue from our customers.

On March 31, 2007, a contract with a retail services customer will expire. As a result of the expiration of this contract, Systems Integration revenue is expected to decline, based on 2006 levels, approximately $2,100 in 2007 and
$2,800 in 2008. The effect on operating income (loss) is expected to be minimal.

Other Income (Expense)

Other income (expense) for 2006 was an expense of $10,732 compared to an expense of $3,077 in 2005. The primary reasons for this $7,655 change are as
follows:



| |  |  | Our equity in net income (losses) of affiliates decreased $1,180, to a loss of $180, in 2006 compared to an income of $1,000 in 2005. The 2006 loss of $180 includes
our share of EuroTels operating expenses. Our 2005 equity in net income of EuroTel included our share of EuroTels gain on the sale of its direct ownership interest in Pilicka (see Note 5) in the amount of $1,563 offset by EuroTels
operating expenses in 2005. We did not recognize any equity in losses of Pilicka in 2005 since we wrote our investment in Pilicka to zero at December 31, 2004 and had no legal obligation, nor intention to provide future funding to Pilicka. We
expect to liquidate Eurotel in the first quarter of 2007 and expect losses in equity of EuroTel to be nominal in 2007.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our interest expense increased $1,097, as a result of increases in short-term interest rates.
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | We recorded gains on investments of $1,035 and $6,895 in 2006 and 2005, respectively. We recorded the 2006 gain as a result of a $1,035 recovery of our advances to
Eurotel beyond amounts previously estimated. We sold our interest in PenTeleData in March 2005 resulting in a gain of $2,043. In December 2005, we sold our direct ownership interest in Pilicka resulting in a gain of $4,852.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In 2006, we incurred a loss on early extinguishment of debt of $1,103, consisting of a non-cash write-off of $1,047 of unamortized debt issuance costs of the
previous credit facility and the expensing of $56 of debt issuance costs related to the amended credit facility. There was no similar expense in 2005.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other, net was income of $4,790 in 2006, compared to income of $3,205 in 2005, Other, net included $3,613 of interest income and principal repayments collected in
2006 on the note received from the sale of assets of Conestoga Wireless compared to $2,073 of interest income and principal repayments
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | received in 2005. We recognize income upon collection of the note principal and interest as this note receivable is from a highly leveraged entity and the
business sold had not generated positive cash flows prior to its sale. Therefore, the note receivable has been fully reserved on our balance sheet.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other income (expense) for 2005 was an expense of $3,077 compared to an expense of $22,191 in 2004. The primary reasons for this $19,114 change were as follows:



| |  |  | Our equity in net income (losses) of affiliates increased $4,172, to an income of $1,000, in 2005 compared to a loss of $3,172 in 2004. Our 2005 equity in net
income of EuroTel included our share of EuroTels gain on the sale of its direct ownership interest in Pilicka (see Note 5) in the amount of $1,563 offset by EuroTels operating expenses in 2005. We did not recognize any equity in losses
of Pilicka in 2005 since we wrote our investment in Pilicka to zero at December 31, 2004 and had no legal obligation, nor intention, to provide future funding to Pilicka. The loss in 2004 included $1,068 for our share of an impairment of assets
in Pilicka. We expect to liquidate EuroTel in the first quarter of 2007 and expect losses in equity of EuroTel to be nominal in 2007.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We recorded gains on investments in 2005 of $6,895 compared to a loss on investment in 2004 of $1,057. We sold our interest in PenTeleData in March 2005 resulting
in a gain of $2,043. In December 2005, we sold our direct ownership interest in Pilicka resulting in a gain of $4,852. In 2004, we recognized an other-than-temporary loss of $1,057 on our investment in EuroTel.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In 2004, we incurred a loss on early extinguishment of debt of $5,252 in regard to refinancing and amending our credit facility. There was no similar expense in
2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other, net was income of $3,205 in 2005, compared to income of $1,679 in the same period of 2004, partially from an increase of $191 in the patronage dividend
received as a borrower from a cooperative bank. Other, net also included $2,073 of interest income and principal repayments collected in 2005 on the note received from the sale of assets of Conestoga Wireless compared to $776 of interest income and
principal repayments received in 2004. We recognize income upon collection of the note principal and interest as this note receivable is from a highly leveraged entity and the business sold had not generated positive cash flows prior to its sale.
Therefore, the note receivable has been fully reserved on our balance sheet.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Income Taxes

Federal and state income taxes were an expense of $3,465 in 2006 on the $11,780 income from continuing operations compared to the 2005 income tax expense
of $5,887 on the $19,753 income from continuing operations. The effective tax rates were 29.4% in 2006 and 29.8% in 2005. The 2006 effective income tax rate is lower than the federal statutory rate primarily due to the reversal of temporary book to
tax differences providing deferred state income tax benefits with no corresponding current state income tax expense and a deferred tax benefit on the non-cash intangible asset impairment loss. The 2005 effective income tax rate is lower than the
federal statutory rate primarily from a reduction of income tax expense of $353 due to adjusting federal and state tax provisions for 2004 to the actual tax returns filed in 2005 and due to the gain on the sale of investment not being fully subject
to state income tax. Income taxes for 2005 also include expense of $1,899 as a result of the increase to our deferred tax liabilities calculated at the federal statutory rate of 35% compared to 34% in prior years.

Federal and state income taxes were an expense of $5,887 in 2005 on the $19,753 income from continuing operations compared to the 2004 income tax expense
of $1,494 on the $1,107 loss from continuing operations. The effective tax rates were 29.8% in 2005 and a negative 135.0% in 2004. The 2004 tax expense reflects tax on income in the United States while the Pilicka asset impairment and the impairment
of our investment in EuroTel created a deferred tax deduction that may not be realizable.

Discontinued Operations

The losses from discontinued operations of $1,508, $90 and $73, in 2006, 2005 and 2004, respectively, were from our Voice Systems Business, which was sold
in September 2006.



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Accelerated Vesting of Stock Options

On December 21, 2005, the Executive Committee of the D&E Board of Directors approved the accelerated vesting of certain employee stock options that were granted under the 1999 Long-Term Incentive Plan of
D&E Communications, Inc. or the Conestoga Enterprises, Inc. 1999 Stock Option Plan, which would have been unvested as of December 31, 2005 and had exercise prices greater than the closing price at December 20, 2005 of $8.41 per share.
As a result of this acceleration of the vesting, options to purchase 22,041 shares of our common stock became exercisable immediately. The number of shares, exercise prices and other terms of the options subject to the acceleration remain unchanged.
The decision to accelerate the vesting of these options was made to reduce non-cash compensation expense that would have been recorded in our income statement in future periods upon the adoption of Financial Accounting Standards Board Statement
No. 123R, Share-Based Payment, in January 2006. As a result of this action, we did not recognize compensation expense, net of taxes, of $38 in 2006, nor will we be required to recognize compensation expense relating to stock
options, net of taxes, of $19 in 2007.

Effects of Inflation

It is the opinion of management that the effects of inflation on operating expenses over the past three years have been immaterial. Management anticipates that this trend will continue in 2007. However, changes in
market interest rates can have an impact on our results of operations due to our indebtedness of $207,016 of which $177,500 is variable rate debt as of December 31, 2006.

Financial Condition

Liquidity and Capital Resources

We have historically generated significant cash from our operating activities. Our overall capital resource strategy is to finance capital expenditures
for new and existing lines of businesses with operating cash and to finance acquisitions through external sources, such as bank borrowings and offerings of debt or equity securities.

Net cash provided by continuing operations was $37,754 in 2006, $41,249 in 2005 and $49,013 in 2004. The primary reason for the decrease in 2006 was an
increase in income tax payments of $3,623 and the reduction in operating liabilities in 2006 compared to increases in operating liabilities in 2005. The primary reason for the decrease from 2004 to 2005 was the collection of an income tax refund of
$3,065 in 2004 with no similar refund collected in 2005 and an increase in income tax payments of $5,720 in 2005 over 2004. Heightened competition in the telecommunications industry could affect future cash flows related to continuing operations.
See Business Risks.

Net cash used in investing activities was $28,440 in 2006 and consisted primarily of $24,214 for capital
expenditures, purchase of short-term investments of $16,123 and advances to affiliates of $390 offset by proceeds from sale of short-term investments of $8,377, repayments of advances to EuroTel of $1,035 and $2,875 of principal collected on the
note receivable from the sale of the assets of Conestoga Wireless. The capital additions by major categories and the approximate dollars spent on each were:



| |  |  | digital switching and circuit equipment, computers and software, and poles and cable purchases to upgrade our RLEC and CLEC operating systems  $17,100;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | computers and software separate from the telephone network operations primarily for upgrades to our operating systems  $5,900.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------

Net cash used in investing activities was $20,031 in 2005 and consisted primarily of $30,541 for capital expenditures and advances to affiliates of
$315 offset by proceeds from sale of investments of $7,762, repayments from affiliates of $1,563 and $1,500 of principal collected on the note receivable from the sale of the assets of Conestoga Wireless. The capital additions by major categories
and the approximate dollars spent on each were:



| |  |  | digital switching and circuit equipment, computers and software, and poles and cable purchases to upgrade our RLEC and CLEC operating systems  $19,900;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | computers and software separate from the telephone network operations primarily for upgrades to our operating systems, a service call management system and a
mapping system for our RLEC and CLEC network facilities  $8,300.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Net cash used in investing activities was $25,147
in 2004 and consisted primarily of $24,659 for capital expenditures and a net $613 investment in affiliates offset by $125 of principal collected on the note receivable from the sale of the assets of Conestoga Wireless. The capital additions by
major categories and the approximate dollars spent on each were:



| |  |  | digital switching and circuit equipment, computers and software, and poles and cable purchases to upgrade our RLEC and CLEC operating systems  $15,200;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | computers and software separate from the telephone network operations primarily for an upgrade to our operating system, software for the billing system and expanded
office locations  $8,300.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cash used in financing activities in 2006 was $16,008, consisting primarily of $10,057
used for a net long-term debt reduction, $6,839 used for payment of dividends and $400 used for payment of debt issuance costs related to the amendment of our credit facility in September 2006. We received cash proceeds of $1,064 from the
termination of interest rate swap agreements and $224 for new shares of common stock issued.

Cash used in financing activities in 2005 was
$19,461, consisting primarily of payments on long-term debt of $13,000, dividend payments of $6,825 offset by $364 received for new shares of common stock issued. The payments on long-term debt of $13,000 consisted of scheduled payments of $10,000
and a voluntary prepayment of $3,000.

Cash used in financing activities in 2004 was $27,788, consisting primarily of $13,335 for the
purchase of 1,333,500 shares of treasury stock offset by $430 received for new shares of common stock issued. Additionally, $7,122 was used for payment of dividends and $5,266 was used for a net long-term debt reduction. Debt issuance costs of
$2,495 were paid related to the refinancing and amendment of our credit facility in 2004.

External Sources of Capital at
December 31, 2006

On September 19, 2006, we completed an amendment to our syndicated senior secured debt financing,
consisting of a $25,000 revolving line of credit, Term Loan A in the amount of $36,061, Term Loan B in the amount of $144,689, and $28,875 of term indebtedness. The amendment reduced the interest rates on the indebtedness, provided greater
flexibility in the financial covenants, extended the scheduled amortization of principal, eliminated the $10,000 permanent reduction on the revolving line of credit previously scheduled for December 31, 2006 and eliminated the requirement to
maintain interest rate protection with a weighted average life of at least two years on 50% of total variable rate indebtedness. We also paid off the $7,000 balance on the revolving line of credit by drawing $7,000 from Term Loan A.

The effect of the amendment on interest rates was to reduce the revolving line of credit and Term Loan A U.S. prime and LIBOR margins by 0.75%, the Term
Loan B U.S. prime and LIBOR margins by 0.25% and the average interest rate on the term indebtedness by 0.35%. We anticipate that the reduction in interest rates will result in an average annual cash savings of approximately $600 assuming the margin
added to the U.S. prime or LIBOR rates in effect prior to the amendment would have been in effect throughout the term of the credit facilities using the amended loan amortization schedules. We incurred a loss on early extinguishment of debt of
$1,103, consisting of a non-cash write-off of $1,047 of unamortized debt issuance costs of the previous credit facility and the expensing of $56 of debt issuance costs related to the amended credit facility. We capitalized approximately $344 of debt
issuance costs related to the amended credit facility, which will be amortized into interest expense over the life of the amended credit facility.

The Senior Secured Revolving Loan (Revolving Loan) is a $25,000 senior secured revolving credit facility maturing June 30, 2011. The Revolving Loan requires interest only payments at our option at either the



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U.S. prime rate plus 0.50% to 1.00% or a one, two, three or six month LIBOR rate plus 1.50% to 2.00% depending on the Companys leverage ratio. At
December 31, 2006, the average interest rate was 7.10%. The Revolving Loan also requires a quarterly commitment fee of 0.25% on the unused portion.

The Senior Secured Term Loan A (Term Loan A) is a term note maturing June 30, 2011. Term Loan A bears interest at our option at either the U.S. prime rate plus 0.50% to 1.00% or a one, two, three or
six month LIBOR rate plus 1.50% to 2.00%, depending on the Companys leverage ratio. At December 31, 2006, the average interest rate was 7.14%. Term Loan A requires quarterly principal payments of $500 through the first quarter of 2011 and
one final principal payment in the second quarter of 2011.

The Senior Secured Term Loan B (Term Loan B) is a term note
maturing December 31, 2011. Term Loan B bears interest at our option at either the U.S. prime rate plus 0.75% or a one, two, three or six month LIBOR rate plus 1.75%, regardless of the Companys leverage ratio. At December 31, 2006,
the average interest rate was 7.12%. Term Loan B requires quarterly principal payments of $375 through the fourth quarter of 2010, three quarterly principal payments of $34,875 in 2011 and a final principal payment on December 31, 2011.

The Secured Term Loans bear interest at a fixed rate of 9.0% and require quarterly principal payments of $875 through the fourth quarter
of 2014.

The following table reflects maturities of senior secured debt at December 31, 2006 under the September 19, 2006 credit
facility (Current Credit Facility). The table also reflects the maturities if the previous credit facility was still in place at December 31, 2006.



|           |  |                         |         |                          |   |        
|---------- |  | ----------------------- | ------- | ------------------------ | - | -------
|Year       |  | Current Credit Facility |         | Previous Credit Facility
|2007       |  | $                       | 7,000   |                          | $ | 12,500 
|2008       |  |                         | 7,000   |                          |   | 12,500 
|2009       |  |                         | 7,000   |                          |   | 12,500 
|2010       |  |                         | 7,000   |                          |   | 9,061  
|2011       |  |                         | 167,000 |                          |   | 148,439
|Thereafter |  |                         | 10,500  |                          |   | 10,500 
|           |  |                         |         |                          |   |        
|           |  | $                       | 205,500 |                          | $ | 205,500
|           |  |                         |         |                          |   |        

As of December 31, 2006, $25,000 of the Revolving Loan was available for borrowing without
violating any of the covenants. Our ratio of total debt to total debt plus capital decreased to 52.5% at December 31, 2006 from 53.7% at December 31, 2005 due to the increase in shareholders equity and decrease in long-term debt
during 2006. The amended credit facility continues to include a number of significant covenants that impose restrictions on our business. These covenants include, among others, a limit of $10,000 in annual dividend payments, and restrictions upon
additional indebtedness, mergers, acquisitions, the disposition of assets, sale and leaseback transactions and capital lease payments.

The
following table reflects the financial covenant ratio requirements, at December 31, 2006, under the September 19, 2006 credit facility (Current Credit Facility). The table also reflects the ratio requirements if the previous
credit facility was still in place at December 31, 2006.



|                                                                                     |  |                        |   |  |                         |  
|------------------------------------------------------------------------------------ |  | ---------------------- | - |  | ----------------------- | -
|                                                                                     |  | Current CreditFacility |   |  | Previous CreditFacility |  
|Total Leverage Ratio = Indebtedness divided by Cash Flow                             |  | <3.75                  |   |  | <3.50                   |  
|Total Indebtedness to Total Capitalization Ratio                                     |  | <60                    | % |  | <60                     | %
|Proforma Debt Service Coverage Ratio = Cash Flow divided by next years Debt Service |  | >1.75                  |   |  | >1.75                   |  
|Fixed Charge Coverage Ratio = Cash Flow divided by Fixed Charges                     |  | >1.05                  |   |  | >1.05                   |  



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The maximum Total Leverage Ratio covenant requirement in the September 19, 2006 credit facility
declines to less than 3.25 after January 1, 2010. The maximum Total Leverage Ratio covenant requirement in the previous credit facility declines to less than 2.75 after January 1, 2008.

Off-Balance Sheet Arrangements and Contractual Obligations

The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, subordinated retained interest or other contingent arrangements that expose the Company to
material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company.

Except for operating leases listed in the table of commitments below, the Company has no off-balance sheet:



| |  |  | obligation under a guarantee contract;
| | - |  | --------------------------------------



| |  |  | contingent interest in assets transferred to an unconsolidated entity;
| | - |  | ----------------------------------------------------------------------



| |  |  | obligation under a contract that would be accounted for as a derivative instrument;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | obligation arising out of a variable interest in an unconsolidated entity held by the Company.
| | - |  | ----------------------------------------------------------------------------------------------

Commitments, Contingencies and Projected Uses of Capital

Our most significant commitments for 2007 other than for operations, include capital expenditures, payment of principal and interest on our outstanding debt, the payment of common stock dividends, when and if
declared, and other contractual obligations and commitments which are presented below. Scheduled principal payments totaling $7,000 are due in 2007. We believe that we will have sufficient resources to meet these commitments, contingencies and
projected uses of funds.

We hold a 33.3% interest in EuroTel, which we account for under the equity method of accounting. Neither the
assets nor the liabilities of EuroTel are presented on a consolidated basis on our balance sheets. In 2006, we made advances of $390 to EuroTel. We do not expect to make any advances in 2007 since we and the other owners of Eurotel are in the
process of dissolving EuroTel, which we expect to complete in the first quarter of 2007.

At December 31, 2006, the long-term debt
maturing within one year consisted of principal payments of $2,000 on Term Loan A, $1,500 on Term Loan B and $3,500 on the secured fixed rate term loans.

The following table sets forth our contractual obligations and the periods in which payments are due:



|                              |  |                        |         |        |   |           |  |           |        |               |   |         |  |   |       
|----------------------------- |  | ---------------------- | ------- | ------ | - | --------- |  | --------- | ------ | ------------- | - | ------- |  | - | ------
|                              |  | Payments Due by Period
|Obligation                    |  | Total                  |         | Year 1 |   | Years 2-3 |  | Years 4-5 |        | After 5 Years
|Debt maturing within one year |  | $                      | 7,000   |        | $ | 7,000     |  | $         |       |               | $ |        |  | $ |      
|Long-term debt                |  |                        | 198,500 |        |   |          |  |           | 14,000 |               |   | 174,000 |  |   | 10,500
|Interest expense              |  |                        | 71,211  |        |   | 14,876    |  |           | 28,061 |               |   | 25,806  |  |   | 2,468 
|Operating leases              |  |                        | 1,572   |        |   | 686       |  |           | 587    |               |   | 214     |  |   | 85    
|Capital lease obligation      |  |                        | 2,370   |        |   | 168       |  |           | 336    |               |   | 336     |  |   | 1,530 
|Purchase commitments          |  |                        | 11,412  |        |   | 4,740     |  |           | 4,243  |               |   | 2,429   |  |   |      
|                              |  |                        |         |        |   |           |  |           |        |               |   |         |  |   |       
|Total                         |  | $                      | 292,065 |        | $ | 27,470    |  | $         | 47,227 |               | $ | 202,785 |  | $ | 14,583
|                              |  |                        |         |        |   |           |  |           |        |               |   |         |  |   |       

We have contract commitments to purchase telecommunication services for the use of third-party
network circuits, and to maintain minimum monthly volumes of long distance delivery services. These commitments represent the total gross payments due under contract. We expect to contribute $4,800 and $3,600 to our defined benefit pension plans
during 2007 and 2008, respectively.



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Critical Accounting Policies and Estimates

Our discussion and analysis of our results of operations and financial condition is based upon our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of the financial statements requires us to make estimates and judgments that affect the reported amounts. On an on-going basis, we evaluate
our estimates, including those related to intangible assets, income taxes, revenues, contingencies and impairment of long-lived assets. We base our estimates on historical experience and other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different assumptions or conditions, as further described below.

Note
2 to the consolidated financial statements provides a summary of all significant accounting policies that we follow in the preparation of our financial statements. We have identified the following critical accounting policies as those that are the
most significant to our financial statement presentation and that require difficult, subjective and complex judgments.

Revenue
Recognition

Revenue for all of our business segments is recorded when services are provided or products are delivered, when the
price is fixed or determinable, persuasive evidence of an arrangement exists, and the collectibility of the resulting receivable is reasonably assured. Our RLEC and CLEC pricing is subject to oversight by both state and federal regulatory
commissions.

Such regulation also covers services, competition and other public policy issues. Different interpretations by regulatory
bodies may result in adjustments in future periods to revenues derived from our RLEC and CLEC operations. We monitor these proceedings closely and make adjustments to revenue accordingly.

We receive a portion of our interstate access revenues in our RLEC segment from settlement pools in which we participate with other telephone companies
through NECA. These pools were established at the direction of the FCC and are funded by interstate access service revenues, which the FCC regulates. Revenues earned through this pooling process are initially recognized based on estimates and are
subject to adjustments that may either increase or decrease the amount of interstate access revenues. If the actual amounts that we receive from or pay into the settlement pools differ from the amounts that we have recorded as accounts receivables
or accrued liabilities on our balance sheets, we are required to record the amount of such a reduction or increase as an adjustment to our earnings. In 2006, we recorded an increase in communications service revenue of approximately $668 as a result
of a change in our estimated interstate revenue earned from the NECA pooling process. Our estimate is based on an FCC rule that mandates that refunds payable to long distance communication providers are not required for periods in which interstate
rate-of-return exceeds FCC authorized levels if the rates for those periods were deemed to be lawful rates. In 2005 and 2004, we recorded communication service revenue of $601 and $163, respectively, related to adjustments to this estimate.

Regulated Asset Depreciation

We use a composite group remaining life method and straight-line composite rates to depreciate the regulated property assets of our RLEC and CLEC segments. Under this method, when we replace or retire such assets, the
original cost of the asset, net of any salvage, is charged to accumulated depreciation. The effect of this accounting is to amortize any gains or losses on dispositions over the service lives of the remaining regulated telephone property assets
rather than recognizing such gain or loss in the period of retirement.

In addition, use of the composite group remaining life method
requires that we periodically revise our depreciation rates. Such revisions are based on asset retirement activity, and often require that we make related estimates and assumptions. If actual outcomes differ from our estimates and assumptions, we
may be required to adjust depreciation and amortization expense, which could impact our earnings. During 2005, we revised the estimated useful lives of certain fixed assets to update composite rates for our regulated telephone property.



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Impairment of Long-Lived Assets

Long-lived assets, including our property, plant and equipment and our finite-lived intangibles, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Recoverability is assessed based on future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the undiscounted cash flows is less than the carrying value of the asset, an impairment loss
is recognized. Any impairment loss, if indicated, would be measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. In the second quarter of 2006, we recorded a non-cash impairment charge for
our Systems Integration intangible asset of $2,375 ($1,390 net of tax) for customer relationships of which $1,892 and $483 were reported in continuing and discontinued operations, respectively. Additionally, future events or changes in circumstances
could also result in a material charge to earnings.

Impairment of Goodwill and Indefinite-Lived Intangibles

SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), requires that goodwill and intangible assets with indefinite lives no
longer be amortized to earnings, but instead be subject to at least an annual assessment for impairment and between annual tests in certain circumstances by comparing carrying value to fair value. There is a two-step process for goodwill. The first
step is to identify a potential impairment by comparing the fair value of reporting units to their carrying value. If the results of the first step of the impairment testing indicate a potential impairment, the second step would be completed to
measure the amount of any impairment loss. We continually evaluate whether events and circumstances have occurred that indicate the remaining balances of goodwill and indefinite-lived intangibles may not be recoverable. In evaluating impairment, we
estimate the sum of the expected future cash flows derived from such goodwill and indefinite-lived intangibles. Such evaluations for impairment are significantly impacted by estimates of future revenues, costs and expenses, the market price of our
stock and other factors.

The Company performed its annual impairment test as of April 30, 2006. Based on the results of
managements assessment, no impairment of goodwill and indefinite-lived intangible assets was deemed necessary. Significant judgment is required to determine the fair value of reporting units, the estimation of future cash flows, the estimation
of discount rates, and other assumptions. Changes in these estimates and assumptions could have a significant impact on the fair value and/or goodwill impairment of each reporting unit. If forecasts and assumptions used in the assessment analysis
change in the future, significant impairment charges could result that would adversely affect our results of operations and financial condition.

Retirement Benefits

Retirement benefits are a significant cost of doing business and yet represent obligations that
will be settled in the future. Retirement benefit accounting is intended to reflect the recognition of future benefit costs over the employees approximate service period based on the terms of the plans and the investment and funding decisions
made by a company. Effective December 31, 2006, the Company adopted SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106 and 132R
(SFAS 158). SFAS 158 requires the overfunded or underfunded status of a defined benefit postretirement plan to be recognized as an asset or liability in a companys statement of financial position and the changes in that funded
status to be recognized through other comprehensive income in the year in which the changes occur. Prior to the adoption of SFAS 158, we accounted for our retirement benefit plans in accordance with SFAS No. 87 Employers Accounting
for Pensions. Our estimates include assumptions regarding the discount rate to value the future obligation and the expected return on our plan assets. We use discount rates in line with current market interest rates on high quality fixed rate
debt securities. Our return on assets is based on our current expectation of the long-term returns on assets held by the plan. Changes in these key assumptions can have a significant impact on the projected benefit obligations, funding requirements
and



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periodic benefit costs that we incur. Our pension expense for 2006 would have increased approximately $97 if our assumed investment return were one quarter
of a percent lower. The expense would have increased approximately $260 if our assumed discount rate were one quarter of a percent lower or decreased $251 if our assumed discount rate were one quarter of a percent higher.

Income Taxes

We file a
consolidated federal income tax return. We have two categories of income taxes: current and deferred. Current taxes are those amounts we expect to pay when we file our tax returns. Since we must report some of our revenues and expenses differently
for our financial statements than we do for income tax purposes, we record the tax effects of those differences as deferred tax assets and liabilities in our consolidated balance sheets. These deferred tax assets and liabilities are measured using
the enacted tax rates that are currently in effect.

Managements judgment is required in determining the provision for current income
taxes, deferred tax assets and liabilities, and any valuation allowance recorded against the net deferred tax assets. A valuation allowance is established for any deferred tax asset that we may not be able to use in the preparation and filing of our
future tax returns. We have recorded a valuation allowance due to uncertainties related to the ability to utilize some of the deferred tax assets.

Recent Accounting Pronouncements

In January 2006, the Company adopted SFAS No. 154, Accounting Changes and Error
Corrections (SFAS 154). SFAS 154 requires retrospective application to reflect the period-specific effects of applying a new accounting principle, unless it is impracticable to do so. When it is impracticable to calculate the
effects on all prior periods, SFAS 154 requires that the new principle be applied to the earliest period practicable. However, when a new accounting pronouncement is issued, the specific transition provisions of that guidance are applied. The
adoption of SFAS 154 has not had a significant effect on the Companys financial position, results of operations or cash flows.

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R revises SFAS No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This standard generally requires share-based payments to be measured at grant-date fair value, with the related
expense recognized over the requisite service period. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based Payment (SFAS 107). SAB 107 provides further guidance based on the SEC staff views regarding
the implementation of SFAS 123R.

The Company adopted the provisions of SFAS 123R using the modified prospective transition method. Under
this method, a company records compensation expense for all new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation expense is recorded for the unvested portion of previously granted
awards that remain outstanding at the date of adoption. The cost of the unvested portion of the award is recognized as the requisite service is rendered on or after the required effective date. Under this method, results for prior periods have not
been restated. The adoption of SFAS 123R resulted in lower stock compensation expense of $130 and increased net income of $76 in 2006 than would have been reported under APB Opinion No. 25.

In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a two-step process for recognizing and measuring a tax position taken or expected to be taken in a tax return. The first step involves evaluating if a tax
position is more likely than not to be sustained upon examination based on the technical merits of the position. In applying this threshold, it should be presumed that the appropriate taxing authority will examine the tax position and that the
authority is fully knowledgeable of all relevant information.



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The second step requires a tax position that meets the more likely than not recognition threshold to be measured at the largest amount of benefit that is
greater than 50 percent likely of being realized upon ultimate settlement. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company does not expect the Interpretation will have a material impact on its financial position, results of operations and cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, creates a
framework within GAAP for measuring fair value, and expands disclosures about fair value measurements. In defining fair value, the Statement emphasizes a market-based measurement approach that is based on the assumptions that market participants
would use in pricing an asset or liability. The Statement does not require any new fair value measurements, but does generally apply to other accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for fiscal
years beginning after November 15, 2007, and accordingly, the Company expects to adopt SFAS 157 in January 2008. The Company is currently evaluating the impact, if any, this Statement will have on its financial position, results of operations
and cash flows.

Effective December 31, 2006, the Company adopted SFAS No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS 158). SFAS 158 requires the overfunded or underfunded status of a defined benefit postretirement plan to be
recognized as an asset or liability in a companys statement of financial position and the changes in that funded status to be recognized through other comprehensive income in the year in which the changes occur. Based on the funded status of
our plans as of December 31, 2006, the adoption of SFAS 158 reduced total assets by $165, increased total liabilities by $1,937 and reduced shareholders equity by $2,102, net of tax. The adoption of SFAS 158 had no impact on our results
of operations and cash flows. See Note 17 for additional information on the adoption of SFAS 158.

Effective December 31, 2006, the
Company adopted Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
(SAB 108). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that
registrants should quantify the effects of misstatements using both a balance sheet iron curtain and income statement rollover approach, and consider the results of both, along with all other relevant quantitative and
qualitative factors, in evaluating the materiality of unadjusted misstatements to the related financial statements. The adoption of SAB 108 did not have an impact on the Companys financial position, results of operations and cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 offers companies an irrevocable option to measure most financial assets and liabilities at fair value, with changes in fair value recorded in earnings. SFAS 159 is effective for fiscal years beginning after
November 15, 2007, and accordingly, the Company expects to adopt the Statement in January 2008. The Company is currently evaluating the impact, if any, SFAS 159 will have on its financial position, results of operations and cash flows.



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|Item 7A. | Quantitative and Qualitative Disclosure About Market Risks.
|-------- | -----------------------------------------------------------

Monetary amounts presented in the following discussion are in thousands.

We are highly leveraged
and, as a result, our cash flows and earnings are exposed to fluctuations in interest rates. Our debt obligations are U.S. dollar denominated. Our market risk, therefore, is the potential loss arising from adverse changes in interest rates and
changes in our leverage ratio which may increase the margin added to the interest rate as provided in our loan agreement. As of December 31, 2006, our debt can be categorized as follows:



|                                       |  |           |         |             |      |   |            |   |        
|-------------------------------------- |  | --------- | ------- | ----------- | ---- | - | ---------- | - | -------
|                                       |  | Principal |         | AverageRate |      |   | Fair Value
|Fixed interest rates:                  |  |           |         |             |      |   |            |   |        
|Secured Term Loans                     |  | $         | 28,000  |             | 9.00 | % |            | $ | 29,794 
|Subject to interest rate fluctuations: |  |           |         |             |      |   |            |   |        
|Senior Secured Term Loans              |  |           | 177,500 |             | 7.12 | % |            |   | 177,500
|                                       |  |           |         |             |      |   |            |   |        
|Total debt                             |  | $         | 205,500 |             | 7.38 | % |            | $ | 207,294
|                                       |  |           |         |             |      |   |            |   |        

Prior to the amendment to our credit facilities on September 19, 2006, we were required to
maintain interest rate protection on at least one-half of the total amount of senior indebtedness outstanding, with a weighted average life of at least two years. In connection with the amendment to the credit facility, this requirement was
eliminated and interest rate swap agreements with a notional amount of $75,000 were terminated by one of the lending institutions. We received cash termination payments of $1,064, which will be amortized as a reduction of interest expense over the
remainder of the respective terms of the interest rate swap agreements. These agreements were due to mature between November 2008 and December 2009. On November 27, 2006, one remaining interest swap agreement matured. At December 31, 2006,
we had no interest rate swap agreements in place.

If interest rates rise above the rates of the variable debt, we could incur extra
interest expense of $887 for each 50 basis points above the current rates. If rates were to decline, we would realize reductions in interest expense of approximately $887 for each 50 basis point decrease in rates.

Our cash and cash equivalents consist of cash and highly liquid investments having initial maturities of three months or less. While these investments
are subject to a degree of interest rate risk, it is not considered to be material.



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

Information called for by this Item is set forth beginning on page F-1. See Index to Financial Statements.



|Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------

There were no changes in or disagreements with accountants on accounting and financial disclosure.



|Item 9A. | Controls and Procedures
|-------- | -----------------------

As of
December 31, 2006, the Company carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 (Exchange Act), Rules 13a-15(e). Disclosure controls and procedures are controls and procedures that are designed to
ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules
and forms. These controls



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and procedures, without limitation, include controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports
that it files under the Exchange Act is accumulated and communicated to the issuers management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Based upon that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective as of the end of the
period covered by this Annual Report.

Based on an evaluation and assessment of internal controls over financial reporting, management has
concluded that there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) during the quarter ended December 31, 2006 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

Section 404 of the Sarbanes-Oxley Act of 2002 (Section
404) requires D&E to include a report regarding the effectiveness of its internal control over financial reporting, in its Annual Report on Form 10-K for the year ending December 31, 2006. That report includes an assessment by
D&Es management on the design and operating effectiveness of its internal control over financial reporting as of the end of the fiscal year. To comply with the requirements of Section 404, the Company designed and implemented a
comprehensive compliance process to evaluate its internal control over financial reporting across the enterprise. Managements report and assessment on the effectiveness of its internal control over financial reporting is included herein on
page F-2.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not
absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control
systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions, regardless of how remote.

Attached as exhibits to this Annual Report are the certifications of the Chief Executive Officer and the Chief Financial Officer required in accordance with Rules 13a-14(a) of the Exchange Act. This section of the
Companys Annual Report includes the information concerning the controls evaluation referred to in the certifications and should be read in conjunction with the certifications for a more complete understanding of the topics presented.



|Item 9B. | Other Information
|-------- | -----------------

None



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PART III



|Item 10. | Directors, Executive Officers and Corporate Governance
|-------- | ------------------------------------------------------

The information required under this Item is incorporated by reference from the material captioned Directors, Biographies of Non-Director Officers, Section 16(A) Beneficial Ownership
Reporting Compliance and Corporate Governance in our definitive proxy statement for our annual meeting which will be filed within 120 days after the end of the fiscal year covered by this report.



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

The
information required under this Item is incorporated by reference from the material captioned Executive Compensation, Corporate Governance  Compensation Committee Interlocks and Insider Participation and Board
Committee Reports  Compensation Committee Report in our definitive proxy statement for our annual meeting which will be filed within 120 days after the end of the fiscal year covered by this report.



|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------

The information required under this Item is incorporated by reference from the material captioned Security Ownership of Management and
Security Ownership of Certain Beneficial Owners in our definitive proxy statement for our annual meeting which will be filed within 120 days after the end of the fiscal year covered by this report.

Equity Compensation Plan Information

At December 31, 2006



|                                                           |  |                                                                                     |  |                                                                            |       |                                                                                                                                          |          
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------- | ----- | ---------------------------------------------------------------------------------------------------------------------------------------- | ---------
|Plan Category                                              |  | (A) Number ofsecuritiesissued uponexercise ofoutstandingoptions, warrantsand rights |  | (B) Weighted-averageexerciseprice ofoutstandingoptions, warrantsand rights |       | (C)Number of securitiesremaining available forfuture issuance underequity compensationplans
(excludingsecurities reflected incolumn (a))
|Equity compensation plans approved by security holders     |  | 221,405                                                                             |  | $                                                                          | 10.06 |                                                                                                                                          | 1,121,576
|Equity compensation plans not approved by security holders |  |                                                                                    |  |                                                                            |       |                                                                                                                                          |         
|                                                           |  |                                                                                     |  |                                                                            |       |                                                                                                                                          |          
|Total                                                      |  | 221,405                                                                             |  | $                                                                          | 10.06 |                                                                                                                                          | 1,121,576
|                                                           |  |                                                                                     |  |                                                                            |       |                                                                                                                                          |          



|Item 13. | Certain Relationships and Related Transactions, and Director Independence
|-------- | -------------------------------------------------------------------------

The information required under this Item is incorporated by reference from the material captioned Directors, Corporate Governance 
Policies and Certain Relationships and Related Transactions in our definitive proxy statement for our annual meeting which will be filed within 120 days after the end of the fiscal year covered by this report.



|Item 14. | Principal Accounting Fees and Services
|-------- | --------------------------------------

The information required under this Item is incorporated by reference from the material captioned Audit Fees in our definitive proxy statement for our annual meeting which will be filed within 120 days after the end of the
fiscal year covered by this report.



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PART IV



|Item 15. | Exhibits, Financial Statement Schedules
|-------- | ---------------------------------------

(a) The following documents are filed as a part of this Annual Report on Form 10-K in the following manner:

(1) The consolidated financial statements of the Registrant and its subsidiaries filed as part of this report are listed in the attached Index to Financial Statements on page F-1.

(2) The financial schedules of the Registrant and its subsidiaries filed as part of this report are listed in the attached Index to
Financial Statements on page F-1.

(3) The exhibits filed as part of this report are listed in the Index to Exhibits.

(b) Exhibits. See Index to Exhibits.

(c) Financial statement schedules of subsidiaries not consolidated and 50% or less owned. On February 8, 2006, the SEC granted a request for waiver made by the Registrant, of the audited financial
statements for Pilicka as of and for the year ended December 31, 2005, and the unaudited financial statements for EuroTel as of and for the year ended December 31, 2005, which are required by Rule 3-09 of Regulation S-X. The remaining
information called for by this Item (15) is set forth in the Index to Financial Statements on page F-1.



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INDEX TO EXHIBITS



|            |  |                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                      
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Identification of Exhibit                                                                                                                                                                                                                                                                                                     |  | Reference                                                                                                                                            
|3.          |  | Articles of Incorporation and By-laws:                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                              
|3.1         |  | Amended and Restated Articles of Incorporation                                                                                                                                                                                                                                                                                |  | Incorporated herein by reference from Exhibit 1 to D&Es definitive proxy statement for its 2005 Annual Meeting of Shareholders filed March 17, 2005.
|            |  |                                                                                                                                                                                                                                                                                                                              
|3.2         |  | By-laws                                                                                                                                                                                                                                                                                                                       |  | Filed herewith.                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                              
|10.         |  | Material Contracts                                                                                                                                                                                                                                                                                                            |  |                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                              
|10.1        |  | AT&T Communications Standard Agreement for the Provision of Telecommunications Services and Facilities between AT&T Communications of Pennsylvania, Inc. and Denver and Ephrata Telephone
and Telegraph Company;                                                                                                              |  | Incorporated herein by reference from Exhibit 10.2 to D&Es Registration Statement on Form 10 filed by D&E on April 30, 1993.                        
|            |  |                                                                                                                                                                                                                                                                                                                              
|            |  | Article 1        General Provisions, effective May 25, 1984;                                                                                                                                                                                                                                                                  |  |                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                              
|10.2        |  | Telecommunications Services and Facilities Agreement between the Bell Telephone Company of Pennsylvania and Denver and Ephrata Telephone and Telegraph Company, effective January 1, 1986; and
Amendment to Telecommunications Services and Facilities Agreement and the IntraLATA Compensation Agreement, dated May 7, 1992; |  | Incorporated herein by reference from Exhibit 10.3 to D&Es Registration Statement on Form 10 filed by D&E on April 30, 1993.                        
|            |  |                                                                                                                                                                                                                                                                                                                              
|            |  | Appendix 1        IntraLATA Telecommunications Services, effective January 1, 1986;                                                                                                                                                                                                                                           |  |                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                              
|            |  | Appendix 2        Ancillary Services, effective January 1, 1986;                                                                                                                                                                                                                                                              |  |                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                              
|            |  | Appendix 5        Jointly Provided Feature Group A Compensation effective July 24, 1986; and                                                                                                                                                                                                                                  |  |                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                              
|            |  | Appendix 7        Extended Area Service, effective October 1, 1988.                                                                                                                                                                                                                                                           |  |                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                              
|10.3        |  | IntraLATA Compensation Agreement between the Pennsylvania Non-Bell Telephone Companies and Denver and Ephrata Telephone and Telegraph Company, effective January 1, 1986; and Amendment to
Telecommunications Services and Facilities Agreement and the IntraLATA Compensation Agreement, dated May 7, 1992.                  |  | Incorporated herein by reference from Exhibit 10.4 to D&Es Registration Statement on Form 10 filed by D&E on April 30, 1993.                        
|            |  |                                                                                                                                                                                                                                                                                                                              
|10.4        |  | Agreement for the Distribution of Interstate Access Revenues between the National Exchange Carrier Association, Inc. and Denver and Ephrata Telephone and Telegraph Company, effective May 25,
1984.                                                                                                                          |  | Incorporated herein by reference from Exhibit 10.6 to D&Es Registration Statement on Form 10 filed by D&E on April 30, 1993.                        
|            |  |                                                                                                                                                                                                                                                                                                                              
|10.5        |  | 1999 Long-Term Incentive Plan of D&E Communications, Inc.                                                                                                                                                                                                                                                                     |  | Filed herewith.                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                              
|10.6        |  | 2001 Stock Compensation Plan and Policy for Non-Employee Directors of D&E Communications, Inc.                                                                                                                                                                                                                                |  | Incorporated herein by reference from Exhibit A to D&Es definitive proxy statement for its 2006 Annual Meeting of Shareholders filed April 14, 2006.



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|            |  |                                                                                                                                                                                                                                           |  |                                                                                                                              
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Identification of Exhibit                                                                                                                                                                                                                 |  | Reference                                                                                                                    
|10.7        |  | Conestoga Enterprises, Inc. 1999 Stock Option Plan.                                                                                                                                                                                       |  | Incorporated herein by reference to Exhibit 99.1 to D&E Registration Statement on Form S-8 filed by D&E on May 24, 2002.     
|            |  |                                                                                                                                                                                                                                          
|10.8        |  | Limited Guarantee Agreement dated June 29, 2001 by Conestoga Enterprises, Inc. with Mountain Union.                                                                                                                                       |  | Incorporated herein by reference from Exhibit 10.19 to D&Es Annual Report on Form 10-K for the year ended December 31, 2002.
|            |  |                                                                                                                                                                                                                                          
|10.9        |  | Third Amended and Restated Credit Agreement Dated as of September 19, 2006 by and among D&E Communications, Inc. as borrower and CoBank, ACB as Administrative Agent, a Lead Arranger and
a Lender and other Lenders referred to therein. |  | Incorporated herein by reference from Exhibit 10.1 to the Current Report on Form 8-K filed by D&E on September 25, 2006.     
|            |  |                                                                                                                                                                                                                                          
|10.10       |  | Employment Agreement dated March 16, 2005 between James W. Morozzi and D&E Communications, Inc.                                                                                                                                           |  | Incorporated herein by reference from Exhibit 99.3 to the Current Report on Form 8-K filed by D&E on March 16, 2005.         
|            |  |                                                                                                                                                                                                                                          
|10.11       |  | Share Purchase Agreement among EuroTel LLC, HunTel Systems, Inc., Consolidated Companies, Inc., D&E Investments, Inc. and MNI S.A. dated November 14, 2005.                                                                               |  | Incorporated herein by reference from Exhibit 10.16 to D&Es Annual Report on Form 10-K for the year ended December 31, 2005.
|            |  |                                                                                                                                                                                                                                          
|10.12       |  | D&E Communications, Inc. Exempt Employee Short-Term Incentive Plan.                                                                                                                                                                       |  | Incorporated herein by reference from Exhibit 10.1 to the Current Report on Form 8-K filed by D&E on January 11, 2006.       
|            |  |                                                                                                                                                                                                                                          
|10.13       |  | Interconnection Agreement between D&E Systems, Inc. and Verizon North Inc., effective September 1, 2001.                                                                                                                                  |  | Incorporated herein by reference from Exhibit 10.18 to D&Es Annual Report on Form 10-K for the year ended December 31, 2005.
|            |  |                                                                                                                                                                                                                                          
|10.14       |  | Interconnection Agreement between D&E Systems, Inc. and Verizon Pennsylvania, Inc., effective September 1, 2001.                                                                                                                          |  | Incorporated herein by reference from Exhibit 10.19 to D&Es Annual Report on Form 10-K for the year ended December 31, 2005.
|            |  |                                                                                                                                                                                                                                          
|10.15       |  | Amendment to Employment Agreement dated January 4, 2007 between James W. Morozzi and D&E Communications, Inc.                                                                                                                             |  | Filed herewith.                                                                                                              
|            |  |                                                                                                                                                                                                                                          
|10.16       |  | Employment Agreement dated January 4, 2007 between Thomas E. Morell and D&E Communications, Inc.                                                                                                                                          |  | Filed herewith.                                                                                                              
|            |  |                                                                                                                                                                                                                                          
|10.17       |  | Employment Agreement dated January 4, 2007 between Albert H. Kramer and D&E Communications, Inc.                                                                                                                                          |  | Filed herewith.                                                                                                              
|            |  |                                                                                                                                                                                                                                          
|10.18       |  | Employment Agreement dated January 4, 2007 between W. Garth Sprecher and D&E Communications, Inc.                                                                                                                                         |  | Filed herewith.                                                                                                              
|            |  |                                                                                                                                                                                                                                          
|21.         |  | Subsidiaries of the Registrant.                                                                                                                                                                                                           |  |                                                                                                                              
|            |  |                                                                                                                                                                                                                                          
|21.1        |  | List of all subsidiaries of D&E Communications, Inc.                                                                                                                                                                                      |  | Filed herewith.                                                                                                              



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|            |  |                                                               |  |                
|----------- |  | ------------------------------------------------------------- |  | ---------------
|Exhibit No. |  | Identification of Exhibit                                     |  | Reference      
|23.         |  | Consents.                                                     |  |                
|            |  |                                                              
|23.1        |  | Consent of PricewaterhouseCoopers LLP, Philadelphia, PA.      |  | Filed herewith.
|            |  |                                                              
|23.2        |  | Consent of Kiesling Associates LLP.                           |  | Filed herewith.
|            |  |                                                              
|23.3        |  | Consent of PricewaterhouseCoopers Sp. z o. o, Warsaw, Poland. |  | Filed herewith.
|            |  |                                                              
|31.1        |  | Certification of Chief Executive Officer.                     |  | Filed herewith.
|            |  |                                                              
|31.2        |  | Certification of Chief Financial Officer.                     |  | Filed herewith.
|            |  |                                                              
|32.1        |  | Certification of Chief Executive Officer.                     |  | Filed herewith.
|            |  |                                                              
|32.2        |  | Certification of Chief Financial Officer.                     |  | Filed herewith.



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SIGNATURES

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

Date: March 14, 2007



D&E COMMUNICATIONS, INC.By:

/s/    D. MARK THOMASD. Mark ThomasChairman of the Board


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                               |  |                                                                                                          |  |               
|---------------------------------------------- |  | -------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                      |  | Title                                                                                                    |  | Date          
|                                               |  |                                                                                                         
|/s/    D. MARK
THOMAS D. Mark Thomas           |  | Chairman of the Board                                                                                    |  | March 14, 2007
|                                               |  |                                                                                                         
|/s/    JAMES W.
MOROZZI James W. Morozzi       |  | President, Chief Executive Officer and Director (Principal executive officer)                            |  | March 14, 2007
|                                               |  |                                                                                                         
|/s/    THOMAS E.
MORELL Thomas E. Morell       |  | Senior Vice President,Chief Financial Officer and Treasurer (Principal financial and accounting officer) |  | March 14, 2007
|                                               |  |                                                                                                         
|/s/    W. GARTH
SPRECHER W. Garth Sprecher     |  | Senior Vice President, Secretaryand Director                                                             |  | March 14, 2007
|                                               |  |                                                                                                         
|/s/    JOHN
AMOS John Amos                     |  | Director                                                                                                 |  | March 14, 2007
|                                               |  |                                                                                                         
|/s/    PAUL W.
BRUBAKER Paul W. Brubaker       |  | Director                                                                                                 |  | March 14, 2007
|                                               |  |                                                                                                         
|/s/    FRANK M.
COUGHLIN Frank M. Coughlin     |  | Director                                                                                                 |  | March 14, 2007
|                                               |  |                                                                                                         
|/s/    HUGH G.
COURTNEY Hugh G. Courtney       |  | Director                                                                                                 |  | March 14, 2007
|                                               |  |                                                                                                         
|/s/    RONALD E.
FRISBIE Ronald E. Frisbie     |  | Director                                                                                                 |  | March 14, 2007
|                                               |  |                                                                                                         
|/s/    JOHN C.
LONG John C. Long               |  | Director                                                                                                 |  | March 14, 2007
|                                               |  |                                                                                                         
|/s/    STEVEN B.
SILVERMAN Steven B. Silverman |  | Director                                                                                                 |  | March 14, 2007
|                                               |  |                                                                                                         
|/s/    G. WILLIAM
RUHL G. William Ruhl         |  | Director                                                                                                 |  | March 14, 2007
|                                               |  |                                                                                                         
|/s/    RICHARD G.
WEIDNER Richard G. Weidner   |  | Director                                                                                                 |  | March 14, 2007



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INDEX TO FINANCIAL STATEMENTS



|              |  |                                                                                                                                           |  |     
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                                                                           |  | Page
|Item 8        |  | D&E Communications, Inc. and Subsidiaries.                                                                                                |  |     
|              |  | Managements Report on Responsibility for Financial Information                                                                           |  | F-2 
|              |  | Managements Report on Internal Control over Financial Reporting                                                                          |  | F-2 
|              |  | Report of Independent Registered Public Accounting Firm                                                                                   |  | F-3 
|              |  | Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004                                                |  | F-5 
|              |  | Consolidated Balance Sheets as of December 31, 2006 and 2005                                                                              |  | F-6 
|              |  | Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004                                                |  | F-7 
|              |  | Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) for the years ended December 31, 2006, 2005 and 2004      |  | F-8 
|              |  | Notes to Consolidated Financial Statements                                                                                                |  | F-9 
|Item 15(a)(2) |  | Financial Schedule II  Valuation and Qualifying Accounts                                                                                 |  | F-41
|Item 15(d)(1) |  | EuroTel L.L.C.                                                                                                                            |  |     
|              |  | Cover Page                                                                                                                                |  | F-42
|              |  | Report of Independent Auditor                                                                                                             |  | F-44
|              |  | Consolidated Balance Sheets as of December 31, 2004 and 2003                                                                              |  | F-45
|              |  | Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002                                                |  | F-47
|              |  | Consolidated Statements of Members Equity (Deficit) and Comprehensive Income (Loss) for the years ended December 31, 2004, 2003 and 2002 |  | F-48
|              |  | Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002                                                |  | F-49
|              |  | Notes to Consolidated Financial Statements                                                                                                |  | F-50
|Item 15(d)(2) |  | Pilicka Telefonia Sp. z o.o.                                                                                                              |  |     
|              |  | Cover Page                                                                                                                                |  | F-56
|              |  | Report of Independent Registered Public Accounting Firm                                                                                   |  | F-58
|              |  | Balance Sheets as of December 31, 2004 and 2003                                                                                           |  | F-59
|              |  | Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002                                                             |  | F-60
|              |  | Statements of Changes in Shareholders Equity for the Years ended December 31, 2004, 2003 and 2002                                        |  | F-61
|              |  | Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002                                                             |  | F-62
|              |  | Notes to the Financial Statements                                                                                                         |  | F-64



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##### Table of Contents

MANAGEMENTS REPORT ON RESPONSIBILITY FOR FINANCIAL INFORMATION

The management of D&E
Communications, Inc. is responsible for the preparation and integrity of the Companys consolidated financial statements and all related information appearing in this Annual Report. Management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934, and for performing an assessment of the effectiveness of internal control over financial reporting.

The Company maintains accounting and internal control systems which are intended to provide reasonable assurance as to the fair and reliable preparation
and presentation of the consolidated financial statements, as well as to safeguard assets from unauthorized use or disposition. Management maintains internal controls to assure that transactions are executed in accordance with managements
authorization and accounting records are reliable for preparing financial statements in accordance with accounting principles generally accepted in the United States of America. We are dedicated to maintain high standards of financial accounting and
reporting and are committed to providing financial information that is transparent, timely, complete, relevant, and accurate. Our systems have been designed to provide reasonable, but not absolute assurance that financial records are adequate to
allow for the completion of reliable financial information. Although there are inherent limitations in the effectiveness of any system of internal control over financial reporting, we believe that these systems are adequate to achieve the stated
objectives.

The Audit Committee of the Board of Directors oversees D&Es financial reporting process on behalf of the Board of
Directors. The Audit Committee is composed solely of outside independent directors, and meets periodically with members of management and the independent auditors to review and discuss internal control over financial reporting, the annual financial
statement audit, and accounting and other financial reporting matters. The Companys internal control over financial reporting is also evaluated on an ongoing basis by its Internal Audit department.

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for
establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. Management performed an assessment of the effectiveness of our internal control over financial
reporting based on the criteria in the Internal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included a review of the documentation of internal control
over financial reporting and an evaluation of the design effectiveness of those controls. We also conducted testing on the design and operating effectiveness of our internal control over financial reporting. Based on our assessment, management has
concluded that our internal control over financial reporting was effective as of December 31, 2006.

PricewaterhouseCoopers LLP, an
independent registered public accounting firm has issued an audit report on managements assessment and on the effectiveness of internal control over financial reporting as of December 31, 2006, which is included herein. As stated in their
report, PricewaterhouseCoopers LLP has also audited D&Es consolidated financial statements included in Item 8.



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders

of D&E Communications, Inc.:

We have completed integrated audits of
D&E Communications, Incs consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of D&E
Communications, Inc and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company changed its methods of accounting for share-based payments,
and defined benefit pension and other post retirement plans in 2006.

Internal control over financial reporting

Also, in our opinion, managements assessment, included in Managements Report on Internal Control Over Financial Reporting appearing under Item 8, that
the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2006, based on criteria established in Internal Control  Integrated Framework issued by the COSO. The Companys management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on managements assessment and on the effectiveness of the Companys internal control over financial reporting
based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over
financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in



F-3



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##### Table of Contents

accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/    PRICEWATERHOUSECOOPERS LLP

Philadelphia, PA

March 13, 2007



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##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                                      |  |                                          |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                      |  | Year Ended December 31,                  |        
|                                                                                                      |  | 2006                                     |         |   | 2005 |   |         | 2004 | 
|                                                                                                      |  | (In thousands, except per-share amounts) |        
|OPERATING REVENUES                                                                                    |  |                                          |         |  
|Communication service revenues                                                                        |  | $                                        | 156,862 |   |      | $ | 158,985 |      |  | $ | 157,706 |  
|Communication products sold                                                                           |  |                                          | 2,252   |   |      |   | 2,653   |      |  |   | 3,924   |  
|Other                                                                                                 |  |                                          | 2,954   |   |      |   | 2,924   |      |  |   | 2,793   |  
|                                                                                                      |  |                                          |         |   |      |   |         |      |  |   |         |  
|Total operating revenues                                                                              |  |                                          | 162,068 |   |      |   | 164,562 |      |  |   | 164,423 |  
|                                                                                                      |  |                                          |         |   |      |   |         |      |  |   |         |  
|OPERATING EXPENSES                                                                                    |  |                                          |         |   |      |   |         |      |  |   |         |  
|Communication service expenses (exclusive of depreciation and amortization below)                     |  |                                          | 60,314  |   |      |   | 63,087  |      |  |   | 62,675  |  
|Cost of communication products sold                                                                   |  |                                          | 1,905   |   |      |   | 2,236   |      |  |   | 3,491   |  
|Depreciation and amortization                                                                         |  |                                          | 38,241  |   |      |   | 38,123  |      |  |   | 38,432  |  
|Marketing and customer services                                                                       |  |                                          | 13,458  |   |      |   | 13,790  |      |  |   | 13,837  |  
|General and administrative services                                                                   |  |                                          | 23,746  |   |      |   | 24,496  |      |  |   | 24,904  |  
|Intangible asset impairment                                                                           |  |                                          | 1,892   |   |      |   |        |      |  |   |        |  
|                                                                                                      |  |                                          |         |   |      |   |         |      |  |   |         |  
|Total operating expenses                                                                              |  |                                          | 139,556 |   |      |   | 141,732 |      |  |   | 143,339 |  
|                                                                                                      |  |                                          |         |   |      |   |         |      |  |   |         |  
|Operating income                                                                                      |  |                                          | 22,512  |   |      |   | 22,830  |      |  |   | 21,084  |  
|OTHER INCOME (EXPENSE)                                                                                |  |                                          |         |   |      |   |         |      |  |   |         |  
|Equity in net income (losses) of affiliates                                                           |  |                                          | (180    | ) |      |   | 1,000   |      |  |   | (3,172  | )
|Interest expense                                                                                      |  |                                          | (15,274 | ) |      |   | (14,177 | )    |  |   | (14,389 | )
|Gain (loss) on investments                                                                            |  |                                          | 1,035   |   |      |   | 6,895   |      |  |   | (1,057  | )
|Loss on early extinguishment of debt                                                                  |  |                                          | (1,103  | ) |      |   |        |      |  |   | (5,252  | )
|Other, net                                                                                            |  |                                          | 4,790   |   |      |   | 3,205   |      |  |   | 1,679   |  
|                                                                                                      |  |                                          |         |   |      |   |         |      |  |   |         |  
|Total other income (expense)                                                                          |  |                                          | (10,732 | ) |      |   | (3,077  | )    |  |   | (22,191 | )
|                                                                                                      |  |                                          |         |   |      |   |         |      |  |   |         |  
|Income (loss) from continuing operations before income taxes and dividends on utility preferred stock |  |                                          | 11,780  |   |      |   | 19,753  |      |  |   | (1,107  | )
|INCOME TAXES AND DIVIDENDS ON UTILITY PREFERRED STOCK                                                 |  |                                          |         |   |      |   |         |      |  |   |         |  
|Income taxes                                                                                          |  |                                          | 3,465   |   |      |   | 5,887   |      |  |   | 1,494   |  
|Dividends on utility preferred stock                                                                  |  |                                          | 65      |   |      |   | 65      |      |  |   | 65      |  
|                                                                                                      |  |                                          |         |   |      |   |         |      |  |   |         |  
|Total income taxes and dividends on utility preferred stock                                           |  |                                          | 3,530   |   |      |   | 5,952   |      |  |   | 1,559   |  
|                                                                                                      |  |                                          |         |   |      |   |         |      |  |   |         |  
|Income (loss) from continuing operations                                                              |  |                                          | 8,250   |   |      |   | 13,801  |      |  |   | (2,666  | )
|Discontinued operations:                                                                              |  |                                          |         |   |      |   |         |      |  |   |         |  
|Loss from operations of Voice Systems Business, net of income tax benefits of ($253), ($81) and ($64) |  |                                          | (488    | ) |      |   | (90     | )    |  |   | (73     | )
|Loss on sale of Voice Systems Business, net of income tax of $164                                     |  |                                          | (1,020  | ) |      |   |        |      |  |   |        |  
|                                                                                                      |  |                                          |         |   |      |   |         |      |  |   |         |  
|Loss from discontinued operations                                                                     |  |                                          | (1,508  | ) |      |   | (90     | )    |  |   | (73     | )
|                                                                                                      |  |                                          |         |   |      |   |         |      |  |   |         |  
|NET INCOME (LOSS)                                                                                     |  | $                                        | 6,742   |   |      | $ | 13,711  |      |  | $ | (2,739  | )
|                                                                                                      |  |                                          |         |   |      |   |         |      |  |   |         |  
|Weighted average common shares outstanding (basic)                                                    |  |                                          | 14,369  |   |      |   | 14,304  |      |  |   | 15,057  |  
|Weighted average common shares outstanding (diluted)                                                  |  |                                          | 14,440  |   |      |   | 14,330  |      |  |   | 15,057  |  
|BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE                                                    |  |                                          |         |   |      |   |         |      |  |   |         |  
|Income (loss) from continuing operations                                                              |  | $                                        | 0.57    |   |      | $ | 0.96    |      |  | $ | (0.18   | )
|Income (loss) from discontinued operations                                                            |  |                                          | (0.10   | ) |      |   |        |      |  |   |        |  
|                                                                                                      |  |                                          |         |   |      |   |         |      |  |   |         |  
|Net income (loss) per common share                                                                    |  | $                                        | 0.47    |   |      | $ | 0.96    |      |  | $ | (0.18   | )
|                                                                                                      |  |                                          |         |   |      |   |         |      |  |   |         |  
|Dividends per common share                                                                            |  | $                                        | 0.50    |   |      | $ | 0.50    |      |  | $ | 0.50    |  
|                                                                                                      |  |                                          |         |   |      |   |         |      |  |   |         |  

See notes to consolidated financial statements.



F-5



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)



|                                                                                                                                                                             |  |              |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                             |  | December 31, |        
|                                                                                                                                                                             |  | 2006         |         |   | 2005 |  
|ASSETS                                                                                                                                                                       |  |              |         |   |      |   |         |  
|CURRENT ASSETS                                                                                                                                                               |  |              |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                                                                    |  | $            | 3,101   |   |      | $ | 10,325  |  
|Short-term investments                                                                                                                                                       |  |              | 7,746   |   |      |   |        |  
|Accounts and notes receivable, net of reserves of $609 and $748                                                                                                              |  |              | 16,037  |   |      |   | 16,864  |  
|Accounts receivable  affiliated company                                                                                                                                     |  |              |        |   |      |   | 351     |  
|Inventories, lower of cost or market, at average cost                                                                                                                        |  |              | 2,704   |   |      |   | 3,645   |  
|Prepaid expenses                                                                                                                                                             |  |              | 3,310   |   |      |   | 8,194   |  
|Other                                                                                                                                                                        |  |              | 1,150   |   |      |   | 1,243   |  
|                                                                                                                                                                             |  |              |         |   |      |   |         |  
|TOTAL CURRENT ASSETS                                                                                                                                                         |  |              | 34,048  |   |      |   | 40,622  |  
|                                                                                                                                                                             |  |              |         |   |      |   |         |  
|PROPERTY, PLANT AND EQUIPMENT                                                                                                                                                |  |              |         |   |      |   |         |  
|In service                                                                                                                                                                   |  |              | 380,630 |   |      |   | 364,638 |  
|Under construction                                                                                                                                                           |  |              | 5,504   |   |      |   | 7,334   |  
|                                                                                                                                                                             |  |              |         |   |      |   |         |  
|                                                                                                                                                                             |  |              | 386,134 |   |      |   | 371,972 |  
|Less accumulated depreciation                                                                                                                                                |  |              | 214,722 |   |      |   | 192,259 |  
|                                                                                                                                                                             |  |              |         |   |      |   |         |  
|                                                                                                                                                                             |  |              | 171,412 |   |      |   | 179,713 |  
|                                                                                                                                                                             |  |              |         |   |      |   |         |  
|OTHER ASSETS                                                                                                                                                                 |  |              |         |   |      |   |         |  
|Goodwill                                                                                                                                                                     |  |              | 143,667 |   |      |   | 145,448 |  
|Intangible assets, net of accumulated amortization                                                                                                                           |  |              | 153,072 |   |      |   | 161,572 |  
|Other                                                                                                                                                                        |  |              | 8,375   |   |      |   | 8,317   |  
|                                                                                                                                                                             |  |              |         |   |      |   |         |  
|                                                                                                                                                                             |  |              | 305,114 |   |      |   | 315,337 |  
|                                                                                                                                                                             |  |              |         |   |      |   |         |  
|TOTAL ASSETS                                                                                                                                                                 |  | $            | 510,574 |   |      | $ | 535,672 |  
|                                                                                                                                                                             |  |              |         |   |      |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                         |  |              |         |   |      |   |         |  
|CURRENT LIABILITIES                                                                                                                                                          |  |              |         |   |      |   |         |  
|Long-term debt maturing within one year                                                                                                                                      |  | $            | 7,066   |   |      | $ | 10,000  |  
|Accounts payable and accrued liabilities                                                                                                                                     |  |              | 13,654  |   |      |   | 18,962  |  
|Accrued taxes                                                                                                                                                                |  |              | 195     |   |      |   | 2,890   |  
|Accrued interest and dividends                                                                                                                                               |  |              | 1,149   |   |      |   | 1,791   |  
|Advance billings, customer deposits and other                                                                                                                                |  |              | 4,880   |   |      |   | 11,087  |  
|                                                                                                                                                                             |  |              |         |   |      |   |         |  
|TOTAL CURRENT LIABILITIES                                                                                                                                                    |  |              | 26,944  |   |      |   | 44,730  |  
|                                                                                                                                                                             |  |              |         |   |      |   |         |  
|LONG-TERM DEBT                                                                                                                                                               |  |              | 199,950 |   |      |   | 205,500 |  
|                                                                                                                                                                             |  |              |         |   |      |   |         |  
|OTHER LIABILITIES                                                                                                                                                            |  |              |         |   |      |   |         |  
|Deferred income taxes                                                                                                                                                        |  |              | 74,849  |   |      |   | 79,063  |  
|Other                                                                                                                                                                        |  |              | 21,806  |   |      |   | 20,587  |  
|                                                                                                                                                                             |  |              |         |   |      |   |         |  
|                                                                                                                                                                             |  |              | 96,655  |   |      |   | 99,650  |  
|                                                                                                                                                                             |  |              |         |   |      |   |         |  
|PREFERRED STOCK OF UTILITY SUBSIDIARY, Series A 41/2%, par value $100, cumulative, callable at par at the option of the Company, authorized 20 shares, outstanding 14 shares |  |              | 1,446   |   |      |   | 1,446   |  
|                                                                                                                                                                             |  |              |         |   |      |   |         |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                |  |              |         |   |      |   |         |  
|SHAREHOLDERS EQUITY                                                                                                                                                         |  |              |         |   |      |   |         |  
|Common stock, par value $0.16, authorized shares: 100,000 at December 31, 2006 and 2005 Outstanding shares: 14,399 at December 31,
2006 and 14,345 at December 31, 2005      |  |              | 2,563   |   |      |   | 2,554   |  
|Additional paid-in capital                                                                                                                                                   |  |              | 162,010 |   |      |   | 160,924 |  
|Accumulated other comprehensive income (loss)                                                                                                                                |  |              | (5,028  | ) |      |   | (5,598  | )
|Retained earnings                                                                                                                                                            |  |              | 44,651  |   |      |   | 45,083  |  
|Treasury stock at cost, 1,640 shares at December 31, 2006 and 2005                                                                                                           |  |              | (18,617 | ) |      |   | (18,617 | )
|                                                                                                                                                                             |  |              |         |   |      |   |         |  
|                                                                                                                                                                             |  |              | 185,579 |   |      |   | 184,346 |  
|                                                                                                                                                                             |  |              |         |   |      |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                   |  | $            | 510,574 |   |      | $ | 535,672 |  
|                                                                                                                                                                             |  |              |         |   |      |   |         |  

See notes to consolidated financial statements.



F-6



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                                    |  |                |          |   |      |   |         |      |  |   |          |  
|------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                                                    |  | 2006           |          |   | 2005 |   |         | 2004 | 
|                                                                                                                    |  | (In thousands) |         
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                                |  |                |          |  
|Net income (loss)                                                                                                   |  | $              | 6,742    |   |      | $ | 13,711  |      |  | $ | (2,739   | )
|Add: Loss from discontinued operations                                                                              |  |                | 1,508    |   |      |   | 90      |      |  |   | 73       |  
|                                                                                                                    |  |                |          |   |      |   |         |      |  |   |          |  
|Income (loss) from continuing operations                                                                            |  |                | 8,250    |   |      |   | 13,801  |      |  |   | (2,666   | )
|Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities: |  |                |          |   |      |   |         |      |  |   |          |  
|Depreciation and amortization                                                                                       |  |                | 38,241   |   |      |   | 38,123  |      |  |   | 38,432   |  
|Bad debt expense                                                                                                    |  |                | 592      |   |      |   | 485     |      |  |   | 551      |  
|Deferred income taxes                                                                                               |  |                | (3,870   | ) |      |   | (3,587  | )    |  |   | (1,859   | )
|Equity in net income (losses) of affiliates                                                                         |  |                | 180      |   |      |   | (1,000  | )    |  |   | 3,172    |  
|(Gain) loss on investments                                                                                          |  |                | (1,035   | ) |      |   | (6,895  | )    |  |   | 1,057    |  
|Gain from cash recovery of note receivable                                                                          |  |                | (2,875   | ) |      |   | (1,500  | )    |  |   | (125     | )
|Loss on retirement of property, plant and equipment                                                                 |  |                | 193      |   |      |   | 53      |      |  |   | 171      |  
|Intangible asset impairment                                                                                         |  |                | 1,892    |   |      |   |        |      |  |   |         |  
|Stock-based compensation expense                                                                                    |  |                | 367      |   |      |   | 175     |      |  |   |         |  
|Loss on early extinguishment of debt                                                                                |  |                | 1,103    |   |      |   |        |      |  |   | 5,252    |  
|Changes in operating assets and liabilities:                                                                        |  |                |          |   |      |   |         |      |  |   |          |  
|Accounts receivable                                                                                                 |  |                | 1,364    |   |      |   | (1,130  | )    |  |   | 3,835    |  
|Inventories                                                                                                         |  |                | 108      |   |      |   | (122    | )    |  |   | 29       |  
|Prepaid expenses                                                                                                    |  |                | 4,955    |   |      |   | 272     |      |  |   | 448      |  
|Accounts payable and accrued liabilities                                                                            |  |                | (5,382   | ) |      |   | 1,000   |      |  |   | (1,061   | )
|Accrued taxes and accrued interest                                                                                  |  |                | (3,476   | ) |      |   | 1,747   |      |  |   | (567     | )
|Advance billings, customer deposits and other                                                                       |  |                | (5,555   | ) |      |   | (497    | )    |  |   | 1,262    |  
|Other, net                                                                                                          |  |                | 2,702    |   |      |   | 324     |      |  |   | 1,082    |  
|                                                                                                                    |  |                |          |   |      |   |         |      |  |   |          |  
|Net Cash Provided by Operating Activities from Continuing Operations                                                |  |                | 37,754   |   |      |   | 41,249  |      |  |   | 49,013   |  
|                                                                                                                    |  |                |          |   |      |   |         |      |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                                |  |                |          |   |      |   |         |      |  |   |          |  
|Capital expenditures, net of proceeds from sales                                                                    |  |                | (24,214  | ) |      |   | (30,541 | )    |  |   | (24,659  | )
|Purchases of short-term investments                                                                                 |  |                | (16,123  | ) |      |   |        |      |  |   |         |  
|Proceeds from sales of short-term investments                                                                       |  |                | 8,377    |   |      |   |        |      |  |   |         |  
|Collection of note receivable                                                                                       |  |                | 2,875    |   |      |   | 1,500   |      |  |   | 125      |  
|Proceeds from sale of investments                                                                                   |  |                |         |   |      |   | 7,762   |      |  |   |         |  
|Investments in and advances to affiliates                                                                           |  |                | (390     | ) |      |   | (315    | )    |  |   | (767     | )
|Investment returns and repayments from affiliates                                                                   |  |                | 1,035    |   |      |   | 1,563   |      |  |   | 154      |  
|                                                                                                                    |  |                |          |   |      |   |         |      |  |   |          |  
|Net Cash Used in Investing Activities from Continuing Operations                                                    |  |                | (28,440  | ) |      |   | (20,031 | )    |  |   | (25,147  | )
|                                                                                                                    |  |                |          |   |      |   |         |      |  |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                                |  |                |          |   |      |   |         |      |  |   |          |  
|Dividends on common stock                                                                                           |  |                | (6,839   | ) |      |   | (6,825  | )    |  |   | (7,122   | )
|Proceeds from long-term debt financing                                                                              |  |                | 180,750  |   |      |   |        |      |  |   | 210,000  |  
|Payment of debt issuance costs                                                                                      |  |                | (400     | ) |      |   |        |      |  |   | (2,495   | )
|Payments on long-term debt                                                                                          |  |                | (190,807 | ) |      |   | (13,000 | )    |  |   | (215,266 | )
|Termination of interest rate swap agreements                                                                        |  |                | 1,064    |   |      |   |        |      |  |   |         |  
|Proceeds from issuance of common stock                                                                              |  |                | 224      |   |      |   | 364     |      |  |   | 430      |  
|Purchase of treasury stock                                                                                          |  |                |         |   |      |   |        |      |  |   | (13,335  | )
|                                                                                                                    |  |                |          |   |      |   |         |      |  |   |          |  
|Net Cash Used in Financing Activities from Continuing Operations                                                    |  |                | (16,008  | ) |      |   | (19,461 | )    |  |   | (27,788  | )
|                                                                                                                    |  |                |          |   |      |   |         |      |  |   |          |  
|CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS                                                                    |  |                | (6,694   | ) |      |   | 1,757   |      |  |   | (3,922   | )
|CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS                                                                  |  |                |          |   |      |   |         |      |  |   |          |  
|Cash provided by (used in) operating activities of discontinued operations                                          |  |                | (248     | ) |      |   | 364     |      |  |   | 580      |  
|Cash used in investing activities of discontinued operations                                                        |  |                | (282     | ) |      |   | (313    | )    |  |   | (587     | )
|                                                                                                                    |  |                |          |   |      |   |         |      |  |   |          |  
|Net Cash Provided by (Used in) Discontinued Operations                                                              |  |                | (530     | ) |      |   | 51      |      |  |   | (7       | )
|                                                                                                                    |  |                |          |   |      |   |         |      |  |   |          |  
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                                    |  |                | (7,224   | ) |      |   | 1,808   |      |  |   | (3,929   | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                                                        |  |                | 10,325   |   |      |   | 8,517   |      |  |   | 12,446   |  
|                                                                                                                    |  |                |          |   |      |   |         |      |  |   |          |  
|CASH AND CASH EQUIVALENTS, END OF YEAR                                                                              |  | $              | 3,101    |   |      | $ | 10,325  |      |  | $ | 8,517    |  
|                                                                                                                    |  |                |          |   |      |   |         |      |  |   |          |  

See notes to consolidated financial statements.



F-7



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

AND COMPREHENSIVE INCOME (LOSS)



|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | - |  | ------ | ------- | - | ------ | ------ | - | ------ | - | ------- | ------ |  | ------ | ------ |  | - | ------- | -
|                                                                                                                                                                    |  | Year Ended December 31, |  
|                                                                                                                                                                    |  | 2006                    |   |  | 2005   |         |   | 2004   |       
|                                                                                                                                                                    |  | Shares                  |   |  | Amount |         |   | Shares |        |   | Amount |   |         | Shares |  |        | Amount | 
|                                                                                                                                                                    |  | (In thousands)          |  
|COMMON STOCK                                                                                                                                                        |  |                         |  
|Balance at beginning of year                                                                                                                                        |  | 15,985                  |   |  | $      | 2,554   |   |        | 15,908 |   |        | $ | 2,542   |        |  | 15,854 |        |  | $ | 2,533   |  
|Common stock issued for Employee Stock Purchase, Long-Term Incentive, Dividend Reinvestment and Stock Compensation Plan and Policy for
Non-Employee Directors Plans |  | 54                      |   |  |        | 9       |   |        | 75     |   |        |   | 12      |        |  | 54     |        |  |   | 9       |  
|Common stock issued for stock options exercised                                                                                                                     |  |                        |   |  |        |        |   |        | 2      |   |        |   |        |        |  |       |        |  |   |        |  
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Balance at end of year                                                                                                                                              |  | 16,039                  |   |  |        | 2,563   |   |        | 15,985 |   |        |   | 2,554   |        |  | 15,908 |        |  |   | 2,542   |  
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|ADDITIONAL PAID-IN CAPITAL                                                                                                                                          |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Balance at beginning of year                                                                                                                                        |  |                         |   |  |        | 160,924 |   |        |        |   |        |   | 160,255 |        |  |        |        |  |   | 159,515 |  
|Common stock issued for Employee Stock Purchase, Long-Term Incentive, Dividend Reinvestment and Stock Compensation Plan and Policy for
Non-Employee Directors Plans |  |                         |   |  |        | 1,086   |   |        |        |   |        |   | 652     |        |  |        |        |  |   | 740     |  
|Common stock issued for stock options exercised                                                                                                                     |  |                         |   |  |        |        |   |        |        |   |        |   | 17      |        |  |        |        |  |   |        |  
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Balance at end of year                                                                                                                                              |  |                         |   |  |        | 162,010 |   |        |        |   |        |   | 160,924 |        |  |        |        |  |   | 160,255 |  
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)                                                                                                                       |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Balance at beginning of year                                                                                                                                        |  |                         |   |  |        | (5,598  | ) |        |        |   |        |   | (6,574  | )      |  |        |        |  |   | (4,865  | )
|Adjustment to initially apply SFAS 158, net of tax                                                                                                                  |  |                         |   |  |        | (2,102  | ) |        |        |   |        |   |        |        |  |        |        |  |   |        |  
|Equity adjustment for minimum pension liability, net of tax                                                                                                         |  |                         |   |  |        | 2,787   |   |        |        |   |        |   | 173     |        |  |        |        |  |   | (2,744  | )
|Currency translation adjustment from EuroTel                                                                                                                        |  |                         |   |  |        |        |   |        |        |   |        |   |        |        |  |        |        |  |   | 57      |  
|Reclassification adjustment for realized gain on derivative financial instruments, net of tax                                                                       |  |                         |   |  |        | (106    | ) |        |        |   |        |   |        |        |  |        |        |  |   |        |  
|Unrealized gain (loss) on derivative financial instruments, net of tax                                                                                              |  |                         |   |  |        | (9      | ) |        |        |   |        |   | 803     |        |  |        |        |  |   | 978     |  
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Balance at end of year                                                                                                                                              |  |                         |   |  |        | (5,028  | ) |        |        |   |        |   | (5,598  | )      |  |        |        |  |   | (6,574  | )
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|RETAINED EARNINGS                                                                                                                                                   |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Balance at beginning of year                                                                                                                                        |  |                         |   |  |        | 45,083  |   |        |        |   |        |   | 38,513  |        |  |        |        |  |   | 48,693  |  
|Net income (loss)                                                                                                                                                   |  |                         |   |  |        | 6,742   |   |        |        |   |        |   | 13,711  |        |  |        |        |  |   | (2,739  | )
|Dividends on common stock: $.50 per share for each year                                                                                                             |  |                         |   |  |        | (7,174  | ) |        |        |   |        |   | (7,141  | )      |  |        |        |  |   | (7,441  | )
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Balance at end of year                                                                                                                                              |  |                         |   |  |        | 44,651  |   |        |        |   |        |   | 45,083  |        |  |        |        |  |   | 38,513  |  
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|TREASURY STOCK                                                                                                                                                      |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Balance at beginning of year                                                                                                                                        |  | (1,640                  | ) |  |        | (18,617 | ) |        | (1,640 | ) |        |   | (18,617 | )      |  | (307   | )      |  |   | (5,282  | )
|Treasury stock acquired                                                                                                                                             |  |                        |   |  |        |        |   |        |       |   |        |   |        |        |  | (1,333 | )      |  |   | (13,335 | )
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Balance at end of year                                                                                                                                              |  | (1,640                  | ) |  |        | (18,617 | ) |        | (1,640 | ) |        |   | (18,617 | )      |  | (1,640 | )      |  |   | (18,617 | )
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                          |  | 14,399                  |   |  | $      | 185,579 |   |        | 14,345 |   |        | $ | 184,346 |        |  | 14,268 |        |  | $ | 176,119 |  
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|COMPREHENSIVE INCOME (LOSS)                                                                                                                                         |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Net income (loss)                                                                                                                                                   |  |                         |   |  | $      | 6,742   |   |        |        |   |        | $ | 13,711  |        |  |        |        |  | $ | (2,739  | )
|Equity adjustment for minimum pension liability, net of income taxes of $1,977, ($44) and ($1,876)                                                                  |  |                         |   |  |        | 2,787   |   |        |        |   |        |   | 173     |        |  |        |        |  |   | (2,744  | )
|Currency translation adjustment from EuroTel                                                                                                                        |  |                         |   |  |        |        |   |        |        |   |        |   |        |        |  |        |        |  |   | 57      |  
|Reclassification adjustment for realized gain on derivative financial instruments, net of income taxes of ($75)                                                     |  |                         |   |  |        | (106    | ) |        |        |   |        |   |        |        |  |        |        |  |   |        |  
|Unrealized gain (loss) on derivative financial instruments, net of income taxes of ($6), $566 and $668                                                              |  |                         |   |  |        | (9      | ) |        |        |   |        |   | 803     |        |  |        |        |  |   | 978     |  
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Total comprehensive income (loss)                                                                                                                                   |  |                         |   |  | $      | 9,414   |   |        |        |   |        | $ | 14,687  |        |  |        |        |  | $ | (4,448  | )
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  

See notes to consolidated financial statements.



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##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per-share amounts)

1. Nature of Business

Description and Principles of Consolidation

D&E Communications, Inc. (D&E or the Company) provides integrated communications services to residential and business
customers in markets throughout the eastern half of Pennsylvania. D&Es consolidated financial statements include the accounts of Denver and Ephrata Telephone and Telegraph Company; Conestoga Telephone and Telegraph Company; Buffalo Valley
Telephone Company; D&E Systems, Inc.; CEI Networks, Inc.; D&E Networks, Inc.; Infocore, Inc.; D&E Wireless, Inc.; Conestoga Wireless Company and D&E Investments, Inc. for all periods presented. On January 1, 2006, CEI Networks,
Inc. was merged into D&E Systems, Inc. All significant intercompany balances and transactions are eliminated in consolidation.

D&Es business segments are as follows: incumbent rural local exchange carrier (RLEC), competitive local exchange carrier (CLEC), internet services, systems integration, and corporate and other. The RLEC
provides local and long distance telephone services in a franchised territory, including custom calling features and directory advertising. The CLEC provides telecommunication services in markets near those served by the RLEC. Internet services
include Internet access and web-hosting services. Systems integration provides professional data and information technology services and equipment that support the design, implementation and maintenance of client-focused technology solutions
including local and wide area networks. Corporate and other includes D&Es cable television operations in State College, PA and video operations in Lewisburg, PA.

Effective January 1, 2007, the Company reorganized its business segments in order to better align them with our management structure and organized
our segments based on the similar nature of products and services, production processes and distribution methods. Based on that reorganization, the RLEC, CLEC and Internet Services business units and the cable television and video operations
currently reported in the corporate and other segment will be combined into one reportable segment, Wireline. The Systems Integration and Corporate and Other units will continue as distinct, reportable business segments.

D&E has a one-third interest in EuroTel, L.L.C. (EuroTel), a domestic corporate joint venture that held an investment in Pilicka
Telefonia Sp. z o.o. (Pilicka), a telecommunications company located in Poland. D&E also owned a direct investment in Pilicka (see Note 5). On December 19, 2005, D&E sold its direct and indirect interest in Pilicka. D&E
accounts for its investments in EuroTel and accounted for its investment in Pilicka using the equity method of accounting. Under the equity method, D&E reports its interest in the entity as an investment in its consolidated balance sheets and
its percentage share of the earnings or losses from the entity in its consolidated statements of operations.

Regulatory Environment and Competition

D&Es RLEC and CLEC operations are subject to regulation at both the federal and state levels by the Federal Communications
Commission (FCC) and the Pennsylvania Public Utility Commission (PUC). The passage of the Telecommunications Act of 1996 (TA-96) provided comprehensive changes to federal and state regulations that govern
telecommunications. On November 30, 2004, the Governor of Pennsylvania signed into law new Chapter 30 regulations that impacted D&Es RLECs. The law provides additional options to promote broadband deployment in the state and encourage
faster rollout of broadband capability to all consumers. RLECs have the opportunity to make capital expenditures to have broadband services available to all consumers by December 31, 2008. As an offset to the increased capital expenditure
requirements, the new law removes the two percentage points reduction used to calculate intrastate rates annually. The new law adds other provisions to further the advancement of broadband services to schools in Pennsylvania and provides a
suspension of certain interconnection requirements until December 31, 2008 to companies with less than 50,000 access lines, which



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



have agreed to accelerate universal broadband deployment. Consequently, in D&Es two largest RLEC companies, competitors are still permitted to seek
removal of the rural exemption from the more burdensome interconnection obligations for the purposes of entering those territories and using its services and facilities through interconnection agreements to provide competitive services. However,
they are unable to do so in Buffalo Valleys RLEC territory until after December 31, 2008.

D&E files its own tariff rates
with the PUC for such services as dial-tone and custom calling features. D&E is a member of the National Exchange Carrier Association (NECA) and participates in their pools for settlement of interstate access revenues.

D&E expects to experience an increasing amount of both competitive pressures and opportunities in its markets. No estimate can be made of the
financial impacts of these changes.

Concentrations of Credit Risk

Financial instruments that subject D&E to concentrations of credit risk consist primarily of trade receivables. Concentrations of credit risk with respect to trade receivables are primarily limited due to the
large number of residential and business customers in D&Es customer base. The systems integration segment receives a significant portion of its revenue from one large customer; however, this customer does not represent more than 10% of the
Companys revenue.

2. Significant Accounting Policies

Basis of Presentation

The preparation of financial statements in accordance with U.S. generally accepted accounting
principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts or certain disclosures. Management bases its estimates on historical results and other assumptions that are believed to be
reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Estimates are used when accounting for the allowance for doubtful accounts, pension costs, intangible assets, NECA access
revenues, depreciation expense, network access expenses and deferred income taxes.

Recent Accounting Pronouncements

In January 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error
Corrections (SFAS 154). SFAS 154 requires retrospective application to reflect the period-specific effects of applying a new accounting principle, unless it is impracticable to do so. When it is impracticable to calculate the
effects on all prior periods, SFAS 154 requires that the new principle be applied to the earliest period practicable. However, when a new accounting pronouncement is issued, the specific transition provisions of that guidance are applied. The
adoption of SFAS 154 has not had a significant effect on the Companys financial position, results of operations or cash flows.

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R revises SFAS No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This standard generally requires share-based payments to be measured at grant-date fair value, with the related
expense recognized over the requisite service period. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107). SAB 107 provides further guidance based on the SEC staff views
regarding the implementation of SFAS 123R.



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company adopted the provisions of SFAS 123R using the modified prospective transition method.
Under this method a company records compensation expense for all new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation expense is recorded for the unvested portion of previously
granted awards that remain outstanding at the date of adoption. The Cost of the unvested portion of the award is recognized as the requisite service is rendered on or after the required effective date. Under this method, results for prior periods
have not been restated. The adoption of SFAS 123R resulted in lower stock compensation expense of $130 and increased net income of $76 in 2006 than would have been reported under APB Opinion No. 25. See Note 16 for additional information on
this recently adopted accounting pronouncement.

In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a two-step process for recognizing and measuring a tax position taken or expected to be taken in a
tax return. The first step involves evaluating if a tax position is more likely than not to be sustained upon examination based on the technical merits of the position. In applying this threshold, it should be presumed that the appropriate taxing
authority will examine the tax position and that the authority is fully knowledgeable of all relevant information. The second step requires a tax position that meets the more likely than not recognition threshold to be measured at the largest amount
of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect the Interpretation will have a material impact on its financial position, results of operations and cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, creates a
framework within GAAP for measuring fair value, and expands disclosures about fair value measurements. In defining fair value, the Statement emphasizes a market-based measurement approach that is based on the assumptions that market participants
would use in pricing an asset or liability. The Statement does not require any new fair value measurements, but does generally apply to other accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for fiscal
years beginning after November 15, 2007, and accordingly, the Company expects to adopt SFAS 157 in January 2008. The Company is currently evaluating the impact, if any, this Statement will have on its financial position, results of operations
and cash flows.

Effective December 31, 2006, the Company adopted SFAS No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). SFAS 158 requires the overfunded or underfunded status of a defined benefit postretirement plan to be
recognized as an asset or liability in a companys statement of financial position and the changes in that funded status to be recognized through other comprehensive income in the year in which the changes occur. Based on the funded status of
our plans as of December 31, 2006, the adoption of SFAS 158 reduced total assets by $165, increased total liabilities by $1,937 and reduced shareholders equity by $2,102, net of tax. The adoption of SFAS 158 had no impact on our results
of operations and cash flows. See Note 17 for additional information on the adoption of SFAS 158.

Effective December 31, 2006, the
Company adopted Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
(SAB 108). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that
registrants should quantify the effects of misstatements using both a balance sheet iron curtain and income statement rollover approach, and consider the results of



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



both, along with all other relevant quantitative and qualitative factors, in evaluating the materiality of unadjusted misstatements to the related financial
statements. The adoption of SAB 108 did not have an impact on the Companys financial position, results of operations and cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 offers companies an irrevocable option to measure most financial assets
and liabilities at fair value, with changes in fair value recorded in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007, and accordingly, the Company expects to adopt the Statement in January 2008. The Company
is currently evaluating the impact, if any, SFAS 159 will have on its financial position, results of operations and cash flows.

Revenue Recognition

The Company recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104,
Revenue Recognition and EITF 00-21, Revenue Arrangements with Multiple Deliverables. Revenue is recognized when the service is rendered or the product is delivered, the price is fixed or determinable, persuasive evidence of
an arrangement exists and the collectibility of the resulting receivable is reasonably assured. D&Es RLEC and CLEC pricing is subject to oversight by both state and federal regulatory commissions. Such regulation also covers services,
competition and other public policy issues. Different interpretations by regulatory bodies may result in adjustments in future periods to revenues derived from D&Es RLEC and CLEC operations. D&E monitors these proceedings closely and
makes adjustments to revenue accordingly. Certain non-recurring fees, such as service activation and installation fees, and associated incremental direct costs up to the amount of fees are deferred and recognized over the expected term of the
customer relationship, which is deemed to be 3 to 8.5 years. Any direct costs in excess of fees deferred are expensed immediately.

The
RLEC business segment receives a portion of its interstate access revenues from settlement pools in which it participates with other telephone companies through NECA. These pools were established at the direction of the FCC and are funded by access
service charges, which the FCC regulates. Revenues earned through this pooling process are initially recognized based on estimates and are subject to adjustments that may either increase or decrease the amount of interstate access revenues. If the
actual amounts that the Company receives from the settlement pools differ from the estimated amounts recorded, the Company records the change as a current adjustment to earnings. In 2006, the Company recorded an increase in communications services
revenue of approximately $668 as a result of a change in its estimated interstate revenue earned from the NECA pooling process. Our estimate is based on an FCC rule that mandates that refunds payable to long distance communication providers are not
required for periods in which the interstate rate-of-return exceeds FCC authorized levels if the rates for those periods were deemed to be lawful rates. In 2005 and 2004, D&E recorded communications services revenue of $601 and $163,
respectively, related to adjustments to this estimate. D&E continues to monitor ongoing proceedings at the FCC and will evaluate and revise its estimates accordingly.

Cash and Cash Equivalents

Cash and cash equivalents consist of all highly liquid investments
purchased with an original maturity of three months or less. Cash balances may exceed F.D.I.C. insured limits at times.

Short-term Investments

Short-term investments consist of variable rate demand notes and auction rate securities with interest rate reset periods of less than
or equal to 35 days. These investments are classified as available-for-sale securities. Realized gains and losses on these investments are reported in other income in the consolidated statement of



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



operations. Unrealized gains and losses, net of tax, are reported in accumulated other comprehensive income in the consolidated balance sheet. At
December 31, 2006, there were no unrealized gains or losses related to the Companys short-term investments.

Reserve for Doubtful Accounts

The reserve for doubtful accounts reflects our best estimate of probable losses inherent in our accounts receivable determined based on
historical experience, specific reserves for known doubtful accounts and other available evidence.

Prepaid Directory

Directory advertising revenues and costs are deferred and amortized over the 12-month period related to the directory publication. In the fourth quarter
of 2006, D&E entered into a new three-year agreement for the publication of three of our four directories whereby the responsibility for publication and distribution of the directory and the related financial risks became the responsibility of
the publisher. As a result, directory revenue for these three directories will only be the annual fee paid to the Company for access to its customers. Prepaid directory advertising costs, included in prepaid expenses, at December 31, 2006 and
2005 were $466 and $6,072, respectively. Deferred directory revenues, included in advance billings, customer deposits and other, at December 31, 2006 and 2005 were $599 and $6,317, respectively.

Investments In and Advances To Affiliated Companies and Equity in Net Losses of Affiliates in Excess of Investments and Advances

Investments in and advances to unconsolidated affiliates consist of the Companys investments in EuroTel, in Pilicka until its sale on
December 19, 2005 and loans to EuroTel. The investments are accounted for under the equity method of accounting. The Company periodically evaluates whether there have been declines in value in these investments, and if so, whether these
declines are considered temporary or other-than-temporary. Other-than-temporary declines would be recognized as realized losses in earnings. Evidence of a loss in value includes, but is not limited to, the Companys inability to recover the
carrying amount of the investment or the inability of the investee to sustain an earnings capacity, which would justify the carrying amount of the investment. The fair value of an investment that is less than its book value may indicate a loss in
value of the investment. The Companys evaluations are based on many factors, including the duration and extent to which the fair value is less than carrying amount; the financial health of and business outlook for the investee, including
industry performance, changes in technology, and operational and financing cash flow factors; and the Companys intent and ability to hold the investment, including strategic factors.

Property, Plant and Equipment

Property, plant and
equipment is stated at cost and depreciated using a composite group remaining life method and straight-line composite rates for the regulated telephone property of the RLEC and CLEC segments and the straight-line method of depreciation for other
depreciable property. Use of the composite group remaining life method requires the periodic revision of estimated useful lives. Such revisions are based on fixed asset retirement activity, and often require related estimates and assumptions. The
estimated useful lives on the majority of property, plant and equipment are 5 to 34 years for buildings, 5 to 18 years for digital switching equipment, 7 to 61 years for outside plant facilities and 3 to 39 years for other equipment. During 2005,
D&E revised the estimated useful lives of certain fixed assets to update its composite rates for regulated telephone property. This change resulted in lower depreciation expense in 2005 of approximately $3,304.

Depreciation expense as a percentage of average depreciable plant in service amounted to 8.9% in 2006, 9.5% in 2005 and 10.1% in 2004. The costs of
maintenance and repairs are charged to operating expense.



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



When depreciable regulated telephone property is retired, the original cost of the asset, net of
salvage, is charged to accumulated depreciation. Any gains or losses on disposition are amortized over the useful lives of the remaining regulated telephone property rather than recognizing such gain or loss in the period of retirement. When other
depreciable property is retired, the gain or loss is recognized in the statement of operations.

Capitalized Interest

The cost of funds used to finance construction projects is reflected as part of the construction costs and a reduction of interest expense. Interest costs
capitalized on assets were $411 for 2006, $405 for 2005 and $323 for 2004.

Intangible Assets

Intangible assets represent the estimated value of franchises, acquired customer bases, trademarks and non-compete agreements at the dates of
acquisitions. Franchise and FCC license intangible assets are determined to have indefinite lives. Finite-lived intangible assets are amortized over their estimated useful lives: 10 to 15 years for customer bases, 3 years for trademarks and 5 years
for non-compete agreements.

Impairment of Long-Lived Assets

Long-lived assets, including property, plant and equipment and finite-lived intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be
recoverable in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). Recoverability is assessed based on future cash flows expected to result from the use of the asset,
or group of assets, and its eventual disposition. If the sum of the undiscounted cash flows is less than the carrying value of the asset, or group of assets, an impairment loss is recognized. Any impairment loss, if indicated, would be measured as
the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset, or group of assets. In the second quarter of 2006, the Company recorded a non-cash charge for a Systems Integration intangible asset of $2,375
($1,390 net of tax) for customer relationships of which $1,892 and $483 are reported in continuing and discontinued operations, respectively.

Impairment of Goodwill and Indefinite-Lived Intangibles

In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, goodwill and indefinite-lived intangibles are no longer subject to amortization. Goodwill and indefinite-lived intangibles are subject to at least an annual assessment for impairment by comparing carrying value to fair
value. There is a two-step process for goodwill. The first step is to identify a potential impairment by comparing the fair value of reporting units to their carrying value. If the results of the first step of the impairment testing indicate a
potential impairment, the second step would be completed to measure the amount of any impairment loss. In April 2006, 2005 and 2004, the Company completed its annual impairment reviews and determined that no impairment charge was required. D&E
continually evaluates whether events and circumstances have occurred that indicate the remaining balances of goodwill and indefinite-lived intangibles may not be recoverable. In evaluating impairment, D&E estimates the sum of the expected future
cash flows derived from such goodwill and indefinite-lived intangibles. Such evaluations for impairment are significantly impacted by estimates of future revenues, costs and expenses, the market price of our stock and other factors.

Advertising

D&E expenses advertising costs as
incurred. Advertising expense was $1,579 for 2006, $1,680 for 2005 and $1,387 for 2004.



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Income Taxes

D&E files a consolidated federal income tax return. D&E has two categories of income taxes: current and deferred. Current taxes are those amounts D&E expects to pay when it files its tax returns. Since
D&E must report some of its revenues and expenses differently for its financial statements than it does for income tax purposes, it records the tax effects of those differences as deferred tax assets and liabilities in its consolidated balance
sheets. These deferred tax assets and liabilities are measured using the enacted tax rates that are currently in effect. A valuation allowance is established for any deferred tax asset for which management determines, based on the weight of
available evidence, it is more likely than not that the deferred tax asset will not be realized.

Derivative Financial Instruments

D&E accounts for derivative financial instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended (SFAS 133). The Companys derivative financial instruments were comprised of interest rate swap agreements that the Company utilized to manage changes in interest rate payments on its variable rate debt
obligations. These derivative financial instruments, which qualify as cash flow hedges, are reflected on the balance sheet at their fair market value and changes in their fair value are reflected in Accumulated Other Comprehensive Income (Loss) and
reclassified into interest expense as the underlying hedged variable rate interest payments are reflected in interest expense. The ineffective portion of the gain or loss on a derivative, if any, is recognized into earnings within other income or
expense. No hedge ineffectiveness for existing derivative instruments has been recorded. The Company had no interest swap agreements at December 31, 2006.

Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of SFAS No. 123R.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income or loss and other gains and losses affecting shareholders equity that, under accounting principles generally accepted in the United States of America, are excluded from net income.
Other gains and losses excluded from net income in D&Es financial statements include unrealized gains or losses on derivative financial instruments, an equity adjustment for a minimum pension liability and the Companys share of
currency translation adjustments from EuroTel and Pilicka.

Foreign Currency Translations and Transactions

The functional currency for PenneCom B.V. and Pilicka, D&E and EuroTels foreign operations, is the local currency. For the foreign operations,
EuroTel translated assets and liabilities at end-of-period exchange rates. EuroTel recorded these translation adjustments in accumulated other comprehensive income (loss), a separate component of equity in their balance sheets. For revenues,
expenses, gains and losses, the average translation rate for the period is used to translate those elements. Foreign currency transaction gains and losses related to the foreign operations are reported in earnings. D&E records its share of
EuroTels foreign currency transaction gains and losses as part of its equity in net income or losses of affiliates. In addition, D&E has recorded its share of EuroTels currency translation adjustments in accumulated other
comprehensive income (loss).

Reclassifications

For comparative purposes, certain amounts have been reclassified to conform to the current-year presentation. The reclassifications had no impact on net income.



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



3. Cash Flow Information and Short-Term Investments

Cash paid for income taxes and interest expense for the years ended December 31 was as follows:



|                 |  |      |        |      |   |        |  |   |       
|---------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                 |  | 2006 |        | 2005 |   | 2004  
|Interest expense |  | $    | 15,458 |      | $ | 13,293 |  | $ | 13,694
|Income taxes     |  |      | 11,330 |      |   | 7,707  |  |   | 1,987 

Noncash investing and financing activities for the years ended December 31 were as follows:



|                                                                |  |      |       |      |   |      |  |   |      
|--------------------------------------------------------------- |  | ---- | ----- | ---- | - | ---- |  | - | -----
|                                                                |  | 2006 |       | 2005 |   | 2004
|Capital expenditures included in accounts payable at year end   |  | $    | 1,048 |      | $ | 961  |  | $ | 1,700
|Dividends reinvested in common stock                            |  |      | 335   |      |   | 316  |  |   | 319  
|Assumption of capital lease obligation for use of equipment     |  |      | 1,573 |      |   |     |  |   |     
|Sale of assets in exchange for a note receivable                |  |      | 2,400 |      |   |     |  |   |     
|Sale of assets in exchange for a 10% equity investment in buyer |  |      | 350   |      |   |     |  |   |     

Short-term investments at December 31 were as follows:



|                |  |            |       |            |   |      
|--------------- |  | ---------- | ----- | ---------- | - | -----
|                |  | 2006      
|                |  | Cost Basis |       | Fair Value
|Municipal bonds |  | $          | 5,475 |            | $ | 5,475
|Corporate bonds |  |            | 2,271 |            |   | 2,271
|                |  |            |       |            |   |      
|Total           |  | $          | 7,746 |            | $ | 7,746
|                |  |            |       |            |   |      

4. Investments in and Advances to Affiliated Companies and Equity in Net Losses of Affiliates in Excess of
Investments and Advances

D&E owns a one-third investment in EuroTel, a domestic corporate joint venture. EuroTel held a 100%
investment in PenneCom, B.V. (PenneCom), an international telecommunications holding company, until its dissolution effective January 26, 2007 and held a 27.85% investment in Pilicka, a telecommunications company located in Poland, until its
sale on December 19, 2005 (See Note 5). D&E also owned a 28.88% direct investment in Pilicka until the sale on December 19, 2005. D&E accounts for both its investment in EuroTel and did account for its investment in Pilicka using
the equity method of accounting.

D&E recognized a gain of $1,035 in 2006 as a result of a recovery of advances to our international
operations that had been written off in a previous year. Pilicka recognized an asset impairment late in 2004 requiring D&E to recognize a $1,068 loss for its equity share of the impairment. Since D&E and EuroTel have no legal obligation or
intention to provide future funding to Pilicka, both wrote their investment in Pilicka to zero and discontinued recognizing their equity share of Pilickas ongoing losses. EuroTel no longer recorded any value to its investment in Pilicka and,
therefore, the value of D&Es investment in EuroTel was written down as an other-than-temporary loss on investments of $1,057.

Prior to the sale of Pilicka, the equity investments in EuroTel and Pilicka were subject to the risks of foreign currency transactions, which were included in the results of PenneCom and Pilicka.



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Summarized financial information for EuroTel is presented as follows:



|                            |  |      |         |   |      |   |         |      |  |   |         |  
|--------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                            |  | 2006 |         |   | 2005 |   |         | 2004 | 
|Years ended December 31:    |  |      |         |   |      |   |         |      |  |   |         |  
|Equity in loss of affiliate |  | $    |        |   |      | $ |        |      |  | $ | (2,560  | )
|Net income (loss)           |  |      | (578    | ) |      |   | 3,000   |      |  |   | (4,426  | )
|                            |  |      |        
|At December 31:             |  |      |         |   |      |   |         |      |  |   |         |  
|Current assets              |  | $    | 51      |   |      | $ | 81      |      |  | $ | 199     |  
|Noncurrent assets           |  |      |        |   |      |   | 1       |      |  |   | 1       |  
|Current liabilities         |  |      | 31,182  |   |      |   | 30,635  |      |  |   | 33,753  |  
|Members equity (deficit)   |  |      | (31,131 | ) |      |   | (30,553 | )    |  |   | (33,553 | )

Summarized financial information for Pilicka is presented as follows:



|                         |  |      |        |      |   |         |  
|------------------------ |  | ---- | ------ | ---- | - | ------- | -
|                         |  | 2005 |        | 2004 |  
|Years ended December 31: |  |      |        |      |   |         |  
|Net sales                |  | $    | 12,258 |      | $ | 14,131  |  
|Net income (loss)        |  |      | 446    |      |   | (23,237 | )
|                         |  |     
|At December 31:          |  |      |        |      |   |         |  
|Current assets           |  | $    | 7,123  |      |   |         |  
|Noncurrent assets        |  |      | 21,380 |      |   |         |  
|Current liabilities      |  |      | 2,180  |      |   |         |  
|Noncurrent liabilities   |  |      | 53     |      |   |         |  
|Shareholders equity     |  |      | 26,270 |      |   |         |  

A summary of changes for the investments in and advances to EuroTel, Pilicka and affiliates
follows:



|                                                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                     |  | 2006 |         |   | 2005 |   |         | 2004 | 
|Investment in EuroTel:                                                                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Beginning balance (deficit)                                                                                          |  | $    | (11,278 | ) |      | $ | (12,278 | )    |  | $ | (9,804  | )
|Equity in income (losses)                                                                                            |  |      | (180    | ) |      |   | 1,000   |      |  |   | (1,474  | )
|Equity in currency translation adjustments                                                                           |  |      |        |   |      |   |        |      |  |   | 57      |  
|Gain (loss) on investment                                                                                            |  |      | 1,035   |   |      |   |        |      |  |   | (1,057  | )
|                                                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Ending balance (deficit)                                                                                             |  |      | (10,423 | ) |      |   | (11,278 | )    |  |   | (12,278 | )
|                                                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|                                                                                                                     |  |      |        
|Advances to EuroTel and affiliates:                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Beginning balance                                                                                                    |  |      | 11,082  |   |      |   | 12,330  |      |  |   | 11,717  |  
|Advances                                                                                                             |  |      | 390     |   |      |   | 315     |      |  |   | 767     |  
|Repayments                                                                                                           |  |      | (1,035  | ) |      |   | (1,563  | )    |  |   | (154    | )
|                                                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Ending balance                                                                                                       |  |      | 10,437  |   |      |   | 11,082  |      |  |   | 12,330  |  
|                                                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Investment in Pilicka:                                                                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Beginning balance                                                                                                    |  |      |        |   |      |   |        |      |  |   | 1,698   |  
|Equity in losses                                                                                                     |  |      |        |   |      |   |        |      |  |   | (1,233  | )
|Investments amortization                                                                                             |  |      |        |   |      |   |        |      |  |   | (465    | )
|                                                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Ending balance                                                                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|                                                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Investments in and advances to affiliates (Equity in net losses of affiliates in excess of investments and advances) |  | $    | 14      |   |      | $ | (196    | )    |  | $ | 52      |  
|                                                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  



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##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The investments in and advances to affiliates of $14 at December 31, 2006 is reported in other
long-term assets on the balance sheet. The equity in net losses of affiliates in excess of investments and advances of $196 at December 31, 2005 is reported in other long-term liabilities on the balance sheet.

In addition to loans, D&E provides support services to EuroTel and its affiliates. Amounts owed to D&E for services performed for EuroTel and
affiliates at December 31, 2006 and 2005 were $0 and $351, respectively. These amounts are reported as accounts receivable-affiliated company.

5.
Sale of Investments

On December 19, 2005, D&E, along with EuroTel and the other Pilicka shareholders, sold their ownership
interests in Pilicka for a final purchase price of $16,835. D&E owned a 38.16% interest, 9.28% through its one-third interest in EuroTel, LLC, and 28.88% directly, in Pilicka. D&E recorded pre-tax income of $4,852, net of sale costs, from
the sale of its 28.88% direct investment, which is reported in gain (loss) on investments in the consolidated statement of operations. The pre-tax income from the sale of its 9.28% indirect investment amounted to $1,563 and is reported in equity in
net income (losses) of affiliates in the consolidated statement of operations.

On February 28, 2005, D&E sold its interest in
PenTeleData Limited Partnership I for $2,900, resulting in a gain of $2,043 before taxes.

6. Discontinued Operations

On September 29, 2006, D&E completed the sale of assets of the commercial voice equipment and service operations of its Systems Integration
segment (Voice Systems Business) to eCommunications Systems Corporation (eComm) under an Asset Purchase Agreement dated September 13, 2006. The Voice Systems Business generally consisted of D&Es voice telephone
equipment business, but does not include the professional data and information technology services, security, design and network monitoring operations of D&Es Systems Integration segment.

The fair value of the sale consideration was $3,000 consisting of cash of $250, a promissory note for $2,400 (face value $2,500) issued by eComm and a
10% equity interest in eComm of $350, with a related put right. The promissory note is subordinated to other debt of eComm and is collateralized by the assets of eComm and the joint and several personal guarantees of the other individual
shareholders of eComm. The note receivable requires interest only payments through December 31, 2006 and equal monthly principal payments plus interest beginning February 1, 2007 and continuing through October 2009. The note bears interest
at the U.S. prime rate plus 1.75%, with a minimum interest rate of 7.5%. The 10% equity ownership interest in eComm is accounted for under the cost method in accordance with Accounting Principles Board Opinion No 18, The Equity Method of
Accounting for Investments in Common Stock. The Company expects to have no significant continuing involvement in the Voice Systems Business after the sale.



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The results of operations of the Voice Systems Business are reported as discontinued operations in
accordance with SFAS 144. Summarized income statement information for the discontinued operations of the Voice Systems Business are as follows:



|                                                |  |      |       |   |      |   |        |      |  |   |        |  
|----------------------------------------------- |  | ---- | ----- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                |  | 2006 |       |   | 2005 |   |        | 2004 | 
|Revenue                                         |  | $    | 6,998 |   |      | $ | 11,684 |      |  | $ | 11,848 |  
|                                                |  |      |      
|Depreciation and amortization                   |  |      | 397   |   |      |   | 623    |      |  |   | 686    |  
|Intangible asset impairment                     |  |      | 483   |   |      |   |       |      |  |   |       |  
|Other operating expenses                        |  |      | 6,859 |   |      |   | 11,232 |      |  |   | 11,299 |  
|                                                |  |      |       |   |      |   |        |      |  |   |        |  
|Total operating expenses                        |  |      | 7,739 |   |      |   | 11,855 |      |  |   | 11,985 |  
|                                                |  |      |       |   |      |   |        |      |  |   |        |  
|                                                |  |      |      
|Operating loss                                  |  |      | (741  | ) |      |   | (171   | )    |  |   | (137   | )
|Income tax (benefit)                            |  |      | (253  | ) |      |   | (81    | )    |  |   | (64    | )
|                                                |  |      |       |   |      |   |        |      |  |   |        |  
|Loss from discontinued operations, net of taxes |  | $    | (488  | ) |      | $ | (90    | )    |  | $ | (73    | )
|                                                |  |      |       |   |      |   |        |      |  |   |        |  

The carrying amounts of the major classes of assets and liabilities included as part of the Voice
Systems Business sold were as follows:



|                                       |  |   |       |  
|-------------------------------------- |  | - | ----- | -
|Inventory                              |  | $ | 835   |  
|Work in process                        |  |   | 165   |  
|Property and equipment                 |  |   | 1,082 |  
|Customer relationship intangible asset |  |   | 740   |  
|Goodwill                               |  |   | 1,631 |  
|Accrued warranty liabilities           |  |   | (70   | )
|Advance billings and customer deposits |  |   | (653  | )
|                                       |  |   |       |  
|Net assets sold                        |  | $ | 3,730 |  
|                                       |  |   |       |  

The loss on the sale is calculated as follows:



|                                                            |  |   |        |  
|----------------------------------------------------------- |  | - | ------ | -
|Fair value of sale consideration                            |  | $ | 3,000  |  
|Net assets sold                                             |  |   | (3,730 | )
|Sale costs                                                  |  |   | (126   | )
|                                                            |  |   |        |  
|Loss on sale before income taxes                            |  |   | (856   | )
|Income taxes                                                |  |   | 164    |  
|                                                            |  |   |        |  
|Loss on sale of Voice Systems Business, net of income taxes |  | $ | (1,020 | )
|                                                            |  |   |        |  

The effective tax rate of (19.2)% on the loss on sale of the Voice Systems Business was primarily
due to a permanent tax difference of $1,265 from the goodwill included in the net assets sold.

The note receivable of $2,400 (face value
$2,500) is reported in the consolidated balance sheets at December 31, 2006 as follows:



|                              |  |   |      
|----------------------------- |  | - | -----
|Accounts and notes receivable |  | $ | 778  
|Other long-term assets        |  | $ | 1,622



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##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



7. Property, Plant and Equipment

Property, plant and equipment is summarized as follows at December 31:



|                                    |  |      |          |   |      |   |          |  
|----------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                    |  | 2006 |          |   | 2005 |  
|Land and buildings                  |  | $    | 53,475   |   |      | $ | 53,505   |  
|Digital switching equipment         |  |      | 131,721  |   |      |   | 121,574  |  
|Outside plant facilities            |  |      | 135,265  |   |      |   | 129,075  |  
|Other equipment                     |  |      | 60,169   |   |      |   | 60,484   |  
|Plant under construction            |  |      | 5,504    |   |      |   | 7,334    |  
|                                    |  |      |          |   |      |   |          |  
|Total property, plant and equipment |  |      | 386,134  |   |      |   | 371,972  |  
|Less accumulated depreciation       |  |      | (214,722 | ) |      |   | (192,259 | )
|                                    |  |      |          |   |      |   |          |  
|Property, plant and equipment, net  |  | $    | 171,412  |   |      | $ | 179,713  |  
|                                    |  |      |          |   |      |   |          |  

8. Goodwill and Intangible Assets

The goodwill and intangible assets are primarily the result of D&Es May 24, 2002 acquisition of Conestoga Enterprises, Inc., a neighboring
rural local telephone company providing integrated communications services in markets throughout the eastern half of Pennsylvania.

In
2006, goodwill decreased $65 as a result of a reduction in a valuation allowance on deferred tax assets recognized in connection with the Conestoga acquisition and decreased $85 due to the receipt of a tax refund for a year prior to the Conestoga
acquisition. Goodwill of $1,631 was included in the net assets sold described in Note 6.

In 2005, goodwill decreased $3,566 due to a
reclassification of certain deferred tax liabilities related to the Conestoga acquisition and decreased $18 as a result of a reduction in a valuation allowance on deferred tax assets recognized in connection with the Conestoga acquisition. In 2004,
goodwill related to the Conestoga acquisition decreased $95 as a result of a reduction in a valuation allowance on deferred tax assets recognized in connection with the Conestoga acquisition.

In the second quarter of 2006, management revised its forecast to lower the expected value of its customer relationships in the Systems Integration
segment. Based on the results of managements assessment, the Company recorded a non-cash intangible asset impairment charge of $2,375 for the customer relationships of the Systems Integration segment in the second quarter of 2006, of which
$1,892 and $483 was reported in continuing and discontinued operations, respectively.

Intangible assets and related accumulated
amortization recorded on the Companys balance sheets are as follows:



|                                               |  |      |         |   |      |   |         |  
|---------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                               |  | 2006 |         |   | 2005 |  
|Indefinite-lived intangibles:                  |  |      |         |   |      |   |         |  
|Franchises                                     |  | $    | 104,800 |   |      | $ | 104,800 |  
|FCC licenses                                   |  |      | 828     |   |      |   | 828     |  
|Finite-lived intangibles:                      |  |      |         |   |      |   |         |  
|Customer relationships:                        |  |      |         |   |      |   |         |  
|Gross carrying amount                          |  |      | 74,000  |   |      |   | 75,700  |  
|Accumulated amortization and impairment charge |  |      | (26,556 | ) |      |   | (19,756 | )
|                                               |  |      |         |   |      |   |         |  
|Net intangible assets                          |  | $    | 153,072 |   |      | $ | 161,572 |  
|                                               |  |      |         |   |      |   |         |  



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company has concluded that there are no legal, regulatory, contractual, competitive, economic, or
other factors that currently limit the useful life of our franchise intangible assets. These intangible assets continue to generate adequate cash flow for the incumbent rural local exchange carrier (RLEC) segment, and the cash flows are
expected to continue. The FCC licenses are deemed to have an indefinite life as there is an observable market and perfunctory renewal provisions.

Aggregate amortization expense related to the finite-lived intangible assets for the years ended December 31, 2006, 2005 and 2004 was $5,385, $5,824 and $6,198, respectively. A non-cash customer relationship impairment charge of $2,375
was recorded in the year ended December 31, 2006. A customer relationship intangible asset with a net book value of $740 was included in the sale of assets described in Note 6.

Estimated amortization expense for the succeeding five years is as follows:



|     |  |        |      
|---- |  | ------ | -----
|Year |  | Amount
|2007 |  | $      | 5,227
|2008 |  |        | 5,227
|2009 |  |        | 5,227
|2010 |  |        | 5,227
|2011 |  |        | 5,227

9. Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities are summarized as follows at December 31:



|                                               |  |      |        |      |   |       
|---------------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                               |  | 2006 |        | 2005
|Trade payables                                 |  | $    | 5,882  |      | $ | 7,102 
|Accrued compensation                           |  |      | 3,153  |      |   | 2,618 
|Accrued pension and post-retirement benefits   |  |      | 237    |      |   | 3,133 
|Other                                          |  |      | 4,382  |      |   | 6,109 
|                                               |  |      |        |      |   |       
|Total accounts payable and accrued liabilities |  | $    | 13,654 |      | $ | 18,962
|                                               |  |      |        |      |   |       

10. Long-Term Debt

On September 19, 2006, the Company completed an amendment to its syndicated senior secured debt financing, consisting of a $25,000 revolving line of credit, Term Loan A in the amount of $36,061, Term Loan B in
the amount of $144,689, and $28,875 of term indebtedness. The amendment reduced the interest rates on the indebtedness, provided greater flexibility in the financial covenants, extended the scheduled amortization of principal, eliminated the $10,000
permanent reduction on the revolving line of credit previously scheduled for December 31, 2006 and eliminated the requirement to maintain interest rate protection with a weighted average life at least two years on 50% of total variable rate
indebtedness. The Company also paid off the $7,000 balance on the revolving line of credit by drawing $7,000 from Term Loan A.

The effect
of the amendment on interest rates was to reduce the revolving line of credit and Term Loan A U.S. prime and LIBOR margins by 0.75%, the Term Loan B U.S. prime and LIBOR margins by 0.25% and the average interest rate on the term indebtedness by
0.35%. The Company incurred a loss on early extinguishment of debt of $1,103, consisting of a non-cash write-off of $1,047 of unamortized debt issuance costs of the previous credit facility and the expensing of $56 of debt issuance costs related to
the amended credit facility. The Company capitalized approximately $344 of debt issuance costs related to the amended credit facility, which will



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



be amortized into interest expense over the life of the amended credit facility. In connection with the amendment, interest rate swap agreements were
terminated and the Company received a cash termination payment of $1,064, which will be amortized as a reduction of interest expense and accumulated other comprehensive income (loss) over the remainder of the original respective terms of the
interest rate swap agreements.

Long-term debt at December 31 consisted of the following:



|                              |  |                                        |   |  |          |  |      |         |      |   |        
|----------------------------- |  | -------------------------------------- | - |  | -------- |  | ---- | ------- | ---- | - | -------
|                              |  | December 31,2006 Average Interest Rate |   |  | Maturity |  | 2006 |         | 2005
|Senior Secured Revolving Loan |  | 7.10                                   | % |  | 2011     |  | $    |        |      | $ | 7,000  
|Senior Secured Term Loan A    |  | 7.14                                   | % |  | 2011     |  |      | 33,980  |      |   | 31,561 
|Senior Secured Term Loan B    |  | 7.12                                   | % |  | 2011     |  |      | 143,520 |      |   | 145,439
|Secured Term Loan             |  | 9.00                                   | % |  | 2014     |  |      | 16,000  |      |   | 18,000 
|Secured Term Loan             |  | 9.00                                   | % |  | 2014     |  |      | 12,000  |      |   | 13,500 
|Capital lease obligation      |  |                                        |   |  |          |  |      | 1,516   |      |   |       
|                              |  |                                        |   |  |          |  |      |         |      |   |        
|                              |  |                                        |   |  |          |  |      | 207,016 |      |   | 215,500
|Less current maturities       |  |                                        |   |  |          |  |      | 7,066   |      |   | 10,000 
|                              |  |                                        |   |  |          |  |      |         |      |   |        
|Total long-term debt          |  |                                        |   |  |          |  | $    | 199,950 |      | $ | 205,500
|                              |  |                                        |   |  |          |  |      |         |      |   |        

The Senior Secured Revolving Loan (Revolving Loan) is a $25,000 senior secured
revolving credit facility maturing June 30, 2011. The Revolving Loan requires interest only payments at our option at either the U.S. prime rate plus 0.50% to 1.00% or a one, two, three or six-month LIBOR rate plus 1.50% to 2.00% depending on
the Companys leverage ratio. The weighted average annual interest rate for 2006 was 7.44%. The Revolving Loan also requires a quarterly commitment fee of 0.25% on the unused portion.

The Senior Secured Term Loan A (Term Loan A) is a term note maturing June 30, 2011. Term Loan A bears interest at our option at either
the U.S. prime rate plus 0.50% to 1.00% or a one, two, three or six-month LIBOR rate plus 1.50% to 2.00%, depending on the Companys leverage ratio. The weighted average annual interest rate for 2006 was 7.44%. Term Loan A requires quarterly
principal payments of $500 through the first quarter of 2011 and one final principal payment in the second quarter of 2011.

The Senior
Secured Term Loan B (Term Loan B) is a term note maturing December 31, 2011. Term Loan B bears interest at our option at either the U.S. prime rate plus 0.75% or a one, two, three or six-month LIBOR rate plus 1.75%, regardless
of the Companys leverage ratio. The weighted average annual interest rate for 2006 was 6.49%. Term Loan B requires quarterly principal payments of $375 through the fourth quarter of 2010, three quarterly principal payments of $34,875 in 2011
and a final principal payment on December 31, 2011.

The Secured Term Loans bear interest at a fixed rate of 9.0% and require
quarterly principal payments of $875 through the fourth quarter of 2014.

During 2006 the Company made voluntary principal payments
totaling $1,500, of which $1,081 was applied to Term Loan A and $419 was applied to Term Loan B according to the terms of the credit facility.

D&Es indebtedness requires the Company to maintain compliance with certain financial and operational covenants. The most restrictive covenant is the fixed charge coverage ratio. The covenants include a limit of $10,000 in annual
dividend payments. At December 31, 2006, D&E was in compliance with all covenants. The loans are collateralized by D&Es personal property, land and buildings, and the capital stock and guarantees of its subsidiaries.



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Based on the borrowing rate currently available to the Company for bank loans, the fair market value
of long-term debt at December 31, 2006 is $207,294.

Maturities of long-term debt, excluding capital lease obligations, for each year
ending December 31, 2006 through 2011 are as follows:



|           |  |        |        
|---------- |  | ------ | -------
|Year       |  | Amount
|2007       |  | $      | 7,000  
|2008       |  |        | 7,000  
|2009       |  |        | 7,000  
|2010       |  |        | 7,000  
|2011       |  |        | 167,000
|Thereafter |  |        | 10,500 

In January 2006, D&E entered into a long-term capital lease obligation for the use of outside
plant equipment in the amount of $1,573. Future minimum capital lease payments are as follows:



|                                          |  |        |      
|----------------------------------------- |  | ------ | -----
|Year                                      |  | Amount
|2007                                      |  | $      | 168  
|2008                                      |  |        | 168  
|2009                                      |  |        | 168  
|2010                                      |  |        | 168  
|2011                                      |  |        | 168  
|Thereafter                                |  |        | 1,530
|                                          |  |        |      
|Total minimum lease commitment            |  |        | 2,370
|Less interest                             |  |        | 854  
|                                          |  |        |      
|Present value of minimum lease commitment |  |        | 1,516
|Less current maturities                   |  |        | 66   
|                                          |  |        |      
|Long-term obligation                      |  | $      | 1,450
|                                          |  |        |      

In June 2004, a long-term capital lease obligation of $2,613 was eliminated in connection with the
purchase of an office building previously held under a capital lease arrangement. The transaction did not materially impact the results of operations for the year ending December 31, 2004.

11. Derivative Financial Instruments

The Company
utilized interest rate swap derivatives to manage changes in market conditions related to interest rate payments on its variable rate debt obligations. These swap agreements provided for the exchange of variable rate payments for fixed rate payments
without the exchange of the underlying notional amounts by agreeing to pay an amount equal to a specified fixed rate of interest times the notional principal amount and to receive in turn an amount equal to a specified variable rate of interest
times the same notional amount.

In connection with the amendment to the senior secured debt financing described in Note 10, interest rate
swap agreements with a notional amount of $75,000 were terminated. D&E received cash termination payments of $1,064, which will be amortized as a reduction of interest expense and accumulated other comprehensive income (loss) over the remainder
of the original respective terms of the interest rate swap agreements. These agreements were due to mature between November 2008 and December 2009. During the year ending December 31, 2006, the Company amortized $182 ($106 net of tax) of the
termination payments as a reduction of interest expense. At December 31, 2006, Accumulated Other Comprehensive Income (Loss) included unrealized net gains on the terminated agreements of $882 ($516 net of tax).



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company had no interest rate swap agreements at December 31, 2006. At December 31,
2005, the Company had interest rate swap agreements with total notional amounts of $110,000 with maturity dates ranging from November 2006 to December 2009. The Company recognized all derivatives on the balance sheet at fair value. Changes in the
fair value for the effective portion of the gain or loss on a derivative that is designated as, and meets all the required criteria for, a cash flow hedge were recorded in Accumulated Other Comprehensive Income (Loss) and reclassified into earnings
as the underlying hedged items affect earnings. Amounts reclassified into earnings related to interest rate swap agreements are included in interest expense. The ineffective portion of the gain or loss on a derivative is recognized in earnings
within other income or expense. The fair value of the derivatives was recorded as a long-term asset of $1,079 at December 31, 2005. Unrealized net gains of $1,079 ($631 net of tax) at December 31, 2005 related to these interest rate swaps
were included in Accumulated Other Comprehensive Income (Loss). No hedge ineffectiveness has been recorded for existing derivative instruments based on calculations in accordance with SFAS 133, as amended.

12. Commitments and Contingencies

D&E leases
buildings and other property under various operating lease agreements that expire between 2007 and 2023. Future minimum lease payments under operating leases are as follows:



|           |  |        |    
|---------- |  | ------ | ---
|Year       |  | Amount
|2007       |  | $      | 686
|2008       |  |        | 352
|2009       |  |        | 235
|2010       |  |        | 168
|2011       |  |        | 46 
|Thereafter |  |        | 85 

Total rent expense for the years ended December 31 was approximately $3,034 in 2006, $2,722
in 2005 and $2,642 in 2004.

D&E has agreements for compensation payments due to former employees and existing employees. These
agreements require future annual payments as listed below.



|           |  |        |      
|---------- |  | ------ | -----
|Year       |  | Amount
|2007       |  | $      | 1,662
|2008       |  |        | 816  
|2009       |  |        | 676  
|2010       |  |        | 57   
|2011       |  |        | 57   
|Thereafter |  |        | 85   

D&E had obligations under a Build-to-Suit agreement (BTS) with Crown Castle
International, Inc. (Crown) who acquired Mountain Union Telecom LLC on July 1, 2006. The obligations related to the construction of 20 wireless tower sites for Conestogas wireless subsidiary, Conestoga Wireless Company
(CWC). Under the BTS, D&E was obligated to work with Crown to find and develop 20 wireless tower sites and, in the event its obligations under the BTS were not timely fulfilled, D&E was obligated to pay a penalty to Crown for
nonperformance. In January 2003, D&E sold the assets of Conestoga Wireless to Keystone Wireless, LLC. (Keystone), a wireless communications company. Under the terms of the Asset Purchase Agreement, Keystone is obligated to reimburse
D&E for one-half of the penalties paid under the BTS, not to exceed $125. In December 2006, D&E has completed its obligations in connection with the BTS. The final cost of the obligation was $95. Keystone has fulfilled its obligation to
D&E under the Asset Purchase Agreement.



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



D&E has a guarantee agreement with Crown for lease obligations on wireless tower sites. When
D&E entered into the Asset Purchase Agreement with Keystone Wireless, whereby Keystone Wireless was assigned the responsibility for the leases, Crown declined to release D&E from its guarantee. In the event of a default by Keystone Wireless,
D&E continues to guarantee the wireless tower site lease payments, which cover a 10-year period beginning on the commencement date of the lease of each tower. As such, the guarantee is a continuing guarantee provided on an individual tower site
basis. The lease payments start at $1.5 per site per month, with provision for an increase of 4% per year. The maximum potential amount of undiscounted future payments that D&E could be required to make under the guarantee as of
December 31, 2006 is $9,593. The majority of these tower site leases and the Companys guarantee will expire between 2011 and 2013. As of December 31, 2006, D&E has recorded a liability for the lease guarantees of $3,200. In the
event that D&E is required to pay in excess of $100 to Crown under D&Es guarantee of the wireless tower site lease payments, a default would occur on Keystone Wireless note payable to D&E, received in connection with the sale
of the assets of CWC. Upon such default, the entire remaining balance of the note, which was $5,500 as of December 31, 2006 and fully reserved on the balance sheet, would be immediately due and payable, and D&E could exercise its rights and
remedies as the holder of a second lien security interest in all of the assets of Keystone Wireless. D&E will recognize release from risk for the guarantee upon expiration or settlement of the guarantee.

D&E is required under Pennsylvania PUC Chapter 30 regulations to make broadband services available to all of its RLEC customers by December 31,
2008. The Company is currently capable of providing broadband services as defined by the law to 99% of its RLEC customers and anticipate that the additional capital expenditures required to satisfy that commitment will be less than $715.

13. Income Taxes

The provision for income taxes
consists of the following:



|                                         |  |      |        |   |      |   |        |      |  |   |        |  
|---------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                         |  | 2006 |        |   | 2005 |   |        | 2004 | 
|Current:                                 |  |      |        |   |      |   |        |      |  |   |        |  
|Federal                                  |  | $    | 7,937  |   |      | $ | 9,202  |      |  | $ | 2,990  |  
|State                                    |  |      | 34     |   |      |   | 360    |      |  |   | 332    |  
|                                         |  |      |        |   |      |   |        |      |  |   |        |  
|                                         |  |      | 7,971  |   |      |   | 9,562  |      |  |   | 3,322  |  
|                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Deferred:                                |  |      |        |   |      |   |        |      |  |   |        |  
|Federal                                  |  |      | (3,725 | ) |      |   | (2,540 | )    |  |   | (938   | )
|State                                    |  |      | (870   | ) |      |   | (1,216 | )    |  |   | (954   | )
|                                         |  |      |        |   |      |   |        |      |  |   |        |  
|                                         |  |      | (4,595 | ) |      |   | (3,756 | )    |  |   | (1,892 | )
|                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Total income taxes                       |  |      | 3,376  |   |      |   | 5,806  |      |  |   | 1,430  |  
|Tax benefit from discontinued operations |  |      | 89     |   |      |   | 81     |      |  |   | 64     |  
|                                         |  |      |        |   |      |   |        |      |  |   |        |  
|Income taxes from continuing operations  |  | $    | 3,465  |   |      | $ | 5,887  |      |  | $ | 1,494  |  
|                                         |  |      |        |   |      |   |        |      |  |   |        |  



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The effective income tax rate on consolidated pre-tax earnings from continuing operations differs
from the federal income tax statutory rate for the following reasons:



|                                                |  |      |   |  |       |   |  |        |   
|----------------------------------------------- |  | ---- | - |  | ----- | - |  | ------ | --
|                                                |  | 2006 |   |  | 2005  |   |  | 2004   |   
|Federal statutory rate                          |  | 35.0 | % |  | 35.0  | % |  | 34.0   | % 
|Increase (decrease) resulting from:             |  |      |   |  |       |   |  |        |   
|State income taxes, net of federal tax benefits |  | (4.5 | ) |  | (2.7  | ) |  | 35.3   |   
|Valuation allowance                             |  |     |   |  | (11.1 | ) |  | (198.2 | ) 
|Effect of change in deferred income tax rate    |  |     |   |  | 9.6   |   |  |       |   
|Prior-period tax                                |  |     |   |  |      |   |  | (7.7   | ) 
|Other, net                                      |  | (1.1 | ) |  | (1.0  | ) |  | 1.6    |   
|                                                |  |      |   |  |       |   |  |        |   
|Effective income tax rate                       |  | 29.4 | % |  | 29.8  | % |  | (135.0 | )%
|                                                |  |      |   |  |       |   |  |        |   

The significant components of the net deferred income tax liability were as follows at
December 31:



|                                      |  |      |         |   |      |   |         |  
|------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                      |  | 2006 |         |   | 2005 |  
|Deferred tax liabilities:             |  |      |         |   |      |   |         |  
|Depreciation                          |  | $    | 20,463  |   |      | $ | 23,143  |  
|Intangible assets                     |  |      | 62,833  |   |      |   | 66,984  |  
|Investments                           |  |      | 738     |   |      |   | 376     |  
|                                      |  |      |         |   |      |   |         |  
|                                      |  |      | 84,034  |   |      |   | 90,503  |  
|Deferred tax assets:                  |  |      |         |   |      |   |         |  
|Employee benefits                     |  |      | 5,134   |   |      |   | 6,221   |  
|Net operating loss carryforwards      |  |      | 16,781  |   |      |   | 13,969  |  
|Other, net                            |  |      | 4,246   |   |      |   | 5,437   |  
|                                      |  |      |         |   |      |   |         |  
|                                      |  |      | 26,161  |   |      |   | 25,627  |  
|Valuation allowance                   |  |      | (16,781 | ) |      |   | (13,969 | )
|                                      |  |      |         |   |      |   |         |  
|Net deferred tax assets (liabilities) |  | $    | (74,654 | ) |      | $ | (78,845 | )
|                                      |  |      |         |   |      |   |         |  

The components of the net deferred tax balances are as follows:



|                                             |  |      |         |   |      |   |         |  
|-------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                             |  | 2006 |         |   | 2005 |  
|Deferred income tax assetcurrent            |  | $    | 195     |   |      | $ | 218     |  
|Deferred income tax liabilitynon-current    |  |      | (74,849 | ) |      |   | (79,063 | )
|                                             |  |      |         |   |      |   |         |  
|Net deferred income tax assets (liabilities) |  | $    | (74,654 | ) |      | $ | (78,845 | )
|                                             |  |      |         |   |      |   |         |  

The net deferred taxes reported in the Consolidated Balance Sheet are as follows:



|                                        |  |      |         |   |      |   |         |  
|--------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                        |  | 2006 |         |   | 2005 |  
|Current assetsother                    |  | $    | 195     |   |      | $ | 218     |  
|Other liabilitiesdeferred income taxes |  |      | (74,849 | ) |      |   | (79,063 | )

Approximately $258,420 of state net operating loss carryforwards remained at December 31,
2006. These carryforwards are due to the operations of D&Es subsidiaries and will expire in the years 2007 through 2026. The benefit of these carryforwards is dependent on the taxable income of these subsidiaries during the carryforward
period.



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company has established a combined valuation allowance of $16,781 due to the uncertainty
regarding the ability to utilize state net operating loss carryforwards. The increase in the valuation allowance in 2006 was the result of additional state net operating losses generated in 2006 that are not expected to be utilized. The amount of
the deferred tax asset valuation could change if estimates of future taxable income during the carryforward period are revised.

14. Shareholders
Equity

D&E has an Employee Stock Purchase Plan (ESPP), which provides D&Es eligible employees the opportunity
to purchase shares of D&Es common stock through payroll deductions. There are 425,094 shares of common stock reserved for issuance pursuant to the ESPP at December 31, 2006. The total number of shares purchased pursuant to the ESPP
during 2006, 2005 and 2004 was 12,561, 23,513 and 24,827, respectively. Through December 31, 2005, shares for the ESPP could be purchased at a 10% discount from fair market value. Beginning in 2006, ESPP shares may be purchased at a 5% discount
from fair market value. If no shares were traded on the day of purchase, then the prices on the previous day are used to compute the per-share price.

D&E offers a Dividend Reinvestment and Stock Purchase Plan (DRP) to D&Es shareholders. The DRP provides all shareholders of D&Es common stock the opportunity to purchase additional
shares of common stock by: 1) reinvesting all cash dividends paid on their shares of common stock; 2) making optional cash purchases of common stock, up to a maximum amount per quarter, while continuing to receive cash dividends; or 3) both
reinvesting all cash dividends and making such optional cash purchases. In 2006, D&E registered an additional 300,000 shares for issuance pursuant to the DRP. There are 295,633 shares of common stock reserved for issuance pursuant to the DRP at
December 31, 2006. The total number of shares purchased through the DRP during 2006, 2005 and 2004 was 31,479, 42,296 and 27,534, respectively. Shares for the DRP are purchased by participants at fair market value, which is defined as the
average of the highest and lowest per-share sale prices as reported by the NASDAQ Global Market on the day of the purchase.

D&E has a
Stock Compensation Plan and Policy for Non-Employee Directors. Certain non-employee directors receive common stock in payment for their services as a director of the company. In 2006, D&E registered an additional 85,000 shares for issuance
pursuant to the plan. There are 81,189 shares of common stock reserved for issuance pursuant to the plan at December 31, 2006. The total number of shares issued under this plan during 2006, 2005 and 2004 was 6,235, 6,936 and 2,000,
respectively.

There are 1,243,981 shares of D&Es common stock reserved for issuance at December 31, 2006 under the 1999
Long-Term Incentive Plan of D&E Communications, Inc. and the Conestoga Enterprises, Inc. 1999 Stock Option Plan. Shares issued and granted pursuant to these plans are more fully described in Note 16.

On August 13, 2004, D&E purchased 1,333,500 shares of its common stock at a total purchase price of $13,335 from Citizens Communication Company,
or approximately 8.56% of the outstanding common stock of D&E. The negotiated repurchase also terminated a 1997 Stock Acquisition Agreement pursuant to which an affiliate of Citizens originally acquired 1,300,000 shares of D&E common stock
in consideration for $27,015. Under that agreement, Citizens was required, among other things, to provide D&E with an opportunity to purchase the shares prior to selling those shares generally. There were no treasury stock purchases in 2006 and
2005.



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



At December 31, 2006 and 2005, accumulated other comprehensive income (loss) consisted of the
following items:



|                                                                |  |      |        |   |      |   |        |  
|--------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                |  | 2006 |        |   | 2005 |  
|Defined benefit retirement plans, net of tax                    |  | $    | (5,544 | ) |      | $ | (6,229 | )
|Unrealized gain on derivative financial instruments, net of tax |  |      | 516    |   |      |   | 631    |  
|                                                                |  |      |        |   |      |   |        |  
|Total accumulated other comprehensive income (loss)             |  | $    | (5,028 | ) |      | $ | (5,598 | )
|                                                                |  |      |        |   |      |   |        |  

15. Earnings per Common Share

Basic earnings per common share is calculated by dividing net income (the numerator) by the weighted average number of common shares outstanding (the denominator) during the period. The computation of diluted earnings
per share is similar to basic earnings per share except the denominator is increased to include the number of additional common shares that would have been outstanding for dilutive potential common shares. D&E has potential common shares as a
result of outstanding stock option grants to purchase our common stock and contingently issuable shares of common stock. However, including potential common shares in the denominator of a diluted per-share computation for continuing operations
always will result in an antidilutive per-share amount when D&E has a loss from continuing operations.



|                                                                                                    |  |                                  |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                    |  | For the years ended December 31, |       
|                                                                                                    |  | 2006                             |        |   | 2005 |   |        | 2004 | 
|Income (loss) from continuing operations                                                            |  | $                                | 8,250  |   |      | $ | 13,801 |      |  | $ | (2,666 | )
|Loss from discontinued operations                                                                   |  |                                  | (1,508 | ) |      |   | (90    | )    |  |   | (73    | )
|                                                                                                    |  |                                  |        |   |      |   |        |      |  |   |        |  
|Net income (loss)                                                                                   |  | $                                | 6,742  |   |      | $ | 13,711 |      |  | $ | (2,739 | )
|                                                                                                    |  |                                  |        |   |      |   |        |      |  |   |        |  
|Basic earnings per share:                                                                           |  |                                  |        |   |      |   |        |      |  |   |        |  
|Weighted average shares outstanding (thousands)                                                     |  |                                  | 14,369 |   |      |   | 14,304 |      |  |   | 15,057 |  
|                                                                                                    |  |                                  |        |   |      |   |        |      |  |   |        |  
|Income (loss) from continuing operations                                                            |  | $                                | 0.57   |   |      | $ | 0.96   |      |  | $ | (0.18  | )
|Loss from discontinued operations                                                                   |  |                                  | (0.10  | ) |      |   |       |      |  |   |       |  
|                                                                                                    |  |                                  |        |   |      |   |        |      |  |   |        |  
|Net income (loss) per common share                                                                  |  | $                                | 0.47   |   |      | $ | 0.96   |      |  | $ | (0.18  | )
|                                                                                                    |  |                                  |        |   |      |   |        |      |  |   |        |  
|Diluted earnings per share:                                                                         |  |                                  |        |   |      |   |        |      |  |   |        |  
|Weighted average shares outstanding (thousands)                                                     |  |                                  | 14,369 |   |      |   | 14,304 |      |  |   | 15,057 |  
|Incremental shares from assumed stock option exercises and contingently issuable shares (thousands) |  |                                  | 71     |   |      |   | 26     |      |  |   |       |  
|                                                                                                    |  |                                  |        |   |      |   |        |      |  |   |        |  
|Adjusted weighted average shares outstanding (thousands)                                            |  |                                  | 14,440 |   |      |   | 14,330 |      |  |   | 15,057 |  
|                                                                                                    |  |                                  |        |   |      |   |        |      |  |   |        |  
|Income (loss) from continuing operations                                                            |  | $                                | 0.57   |   |      | $ | 0.96   |      |  | $ | (0.18  | )
|Income (loss) from discontinued operations                                                          |  |                                  | (0.10  | ) |      |   |       |      |  |   |       |  
|                                                                                                    |  |                                  |        |   |      |   |        |      |  |   |        |  
|Net income (loss) per common share                                                                  |  | $                                | 0.47   |   |      | $ | 0.96   |      |  | $ | (0.18  | )
|                                                                                                    |  |                                  |        |   |      |   |        |      |  |   |        |  

Options to purchase 55,104 and 86,312 shares as of December 31, 2006 and 2005, respectively,
were not included in the computation of earnings per share assuming dilution because the exercise price of the option to purchase shares exceeded the average closing price of the Companys common stock for the year and the effect on earnings
per share would have been antidilutive. D&E had a loss from continuing operations during 2004 when 221,358 common stock options were outstanding and, as such, diluted earnings per share in 2004 are equivalent to basic earnings per share.



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



16. Stock Compensation

In January 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R revises SFAS
No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This standard generally requires share-based
payments to be measured at grant-date fair value, with the related expense recognized over the requisite service period. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107). SAB
107 provides further guidance based on the SEC staff views regarding the implementation of SFAS 123R.

The Company adopted the provisions
of SFAS 123R using the modified prospective transition method. Under this method, a company records compensation expense for all new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally,
compensation expense is recorded for the unvested portion of previously granted awards that remain outstanding at the date of adoption. The cost of the unvested portion of the award is recognized as the requisite service is rendered on or after the
required effective date. Under this method, results for prior periods have not been restated. The adoption of SFAS 123R resulted in lower stock compensation expense of $130 and increased net income of $76 in 2006 than would have been reported under
APB Opinion No. 25.

Prior to the adoption of SFAS 123R, the Company accounted for stock-based compensation under the intrinsic value
method of APB Opinion 25. The Company applied the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation as if the fair value method had been applied in measuring compensation expense. In accordance with the
provisions of SFAS 123R, the Company recorded total stock-based compensation expense of $367 in general and administrative services expense for the year ended December 31, 2006. The related tax benefits for the year ended December 31, 2006
were $152.

The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation to its stock-based employee compensation plans for the years ended December 31, 2005 and 2004:



|                                                                                                                     |  |                                         |        |   |      |   |        |  
|-------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                                     |  | Years Ended December 31,                |       
|                                                                                                                     |  | 2005                                    |        |   | 2004 |  
|                                                                                                                     |  | (In thousands, except pershare amounts) |       
|Net income (loss), as reported                                                                                       |  | $                                       | 13,711 |   |      | $ | (2,739 | )
|Add: stock-based employee compensation included in reported net income (loss), net of related tax                    |  |                                         | 105    |   |      |   |       |  
|Deduct: total stock-based employee compensation expense determined under fair value-based method, net of related tax |  |                                         | (220   | ) |      |   | (39    | )
|                                                                                                                     |  |                                         |        |   |      |   |        |  
|Pro forma net income (loss)                                                                                          |  | $                                       | 13,596 |   |      | $ | (2,778 | )
|                                                                                                                     |  |                                         |        |   |      |   |        |  
|Basic earnings (loss) per share:                                                                                     |  |                                         |        |   |      |   |        |  
|As reported                                                                                                          |  | $                                       | 0.96   |   |      | $ | (0.18  | )
|Pro forma                                                                                                            |  | $                                       | 0.95   |   |      | $ | (0.18  | )
|                                                                                                                     |  |                                        
|Diluted earnings (loss) per share:                                                                                   |  |                                         |        |   |      |   |        |  
|As reported                                                                                                          |  | $                                       | 0.96   |   |      | $ | (0.18  | )
|Pro forma                                                                                                            |  | $                                       | 0.95   |   |      | $ | (0.18  | )

The Company has D&E common stock reserved for issuance under the 1999 Long-Term Incentive Plan
of D&E Communications, Inc. and the Conestoga Enterprises, Inc. 1999 Stock Option Plan. The per-share exercise price of a stock option shall be not less than the fair market value of the underlying common stock on the date the



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##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



option is granted. The fair value of share awards is based on the market price of the Companys common stock on the grant date. There were a combined
total of 1,243,981 shares of common stock reserved for issuance under the plans at December 31, 2006.

Stock Options

On December 21, 2005, the Executive Committee of the D&E Board of Directors approved the accelerated vesting of certain
employee stock options that were granted under the 1999 Long-Term Incentive Plan of D&E Communications, Inc. or the Conestoga Enterprises, Inc. 1999 Stock Option Plan, which would have been unvested as of December 31, 2005 and had exercise
prices greater than the closing price at December 20, 2005 of $8.41 per share. As a result of this acceleration of the vesting, options to purchase 22,041 shares of D&Es common stock became exercisable immediately. The number of
shares, exercise prices and other terms of the options subject to the acceleration remain unchanged. The decision to accelerate the vesting of these options was made to reduce non-cash compensation expense that would have been recorded in
D&Es income statement in periods subsequent to the adoption of SFAS No. 123R.

There were no stock option grants awarded in
2006 or 2004. The fair value of option grants of $3.13 in the year ended December 31, 2005, was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:



|                        |  |         |  
|----------------------- |  | ------- | -
|Dividend yield          |  | 5.05    | %
|Expected life           |  | 5 years |  
|Expected volatility     |  | 50.06   | %
|Risk-free interest rate |  | 4.18    | %

A summary of the stock option activity and related information for the years ended
December 31 follows:



|                                         |  |         |  |                              |       |         |         |   |                              |   |         |  |         |                              |  |   |      
|---------------------------------------- |  | ------- |  | ---------------------------- | ----- | ------- | ------- | - | ---------------------------- | - | ------- |  | ------- | ---------------------------- |  | - | -----
|                                         |  | 2006    |  | 2005                         |       | 2004   
|                                         |  | Options |  | AverageWeightedExercisePrice |       | Options |         |   | AverageWeightedExercisePrice |   | Options |  |         | AverageWeightedExercisePrice
|Outstanding options at beginning of year |  | 221,405 |  | $                            | 10.06 |         | 221,358 |   |                              | $ | 10.01   |  | 256,915 |                              |  | $ | 10.20
|Granted                                  |  |        |  |                              |       |         | 10,000  |   |                              |   | 9.92    |  |        |                              |  |   |      
|Exercised                                |  |        |  |                              |       |         | (2,000  | ) |                              |   | 8.24    |  |        |                              |  |   |      
|Cancelled                                |  |        |  |                              |       |         | (7,953  | ) |                              |   | 9.00    |  | (35,557 | )                            |  |   | 11.39
|                                         |  |         |  |                              |       |         |         |   |                              |   |         |  |         |                              |  |   |      
|Outstanding options at end of year       |  | 221,405 |  | $                            | 10.06 |         | 221,405 |   |                              | $ | 10.06   |  | 221,358 |                              |  | $ | 10.01
|                                         |  |         |  |                              |       |         |         |   |                              |   |         |  |         |                              |  |   |      

The following table presents summarized information about stock options outstanding at
December 31, 2006:



|                         |  |                                        |  |                                |       |                                           |           |                                         |         |                                |   |      
|------------------------ |  | -------------------------------------- |  | ------------------------------ | ----- | ----------------------------------------- | --------- | --------------------------------------- | ------- | ------------------------------ | - | -----
|Range of Exercise Prices |  | OptionsOutstanding AtDecember 31, 2006 |  | Weighted AverageExercise Price |       | Weighted AverageContractualRemaining Life |           | Options Exercisable atDecember 31, 2006 |         | Weighted AverageExercise Price
|$8.24-$14.50             |  | 221,405                                |  | $                              | 10.06 |                                           | 4.1 years |                                         | 221,405 |                                | $ | 10.06

The total intrinsic value was approximately $660 for stock options outstanding and exercisable as
of December 31, 2006.



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Performance Restricted Shares

In the years ended December 31, 2006 and 2005, 39,200 and 37,400 common shares, respectively, were granted as performance restricted shares with
performance conditions. There were no grants of performance restricted shares in 2004. The service period for the grants is three years. A performance restricted share of common stock entitles a participant to receive a target number of shares of
common stock after a minimum vesting period based upon the Companys attainment of a predetermined goal during a specified performance period. If the minimum goal or service period is not met, no performance restricted shares will be earned by
the participant. If the performance goal and service period are fully achieved, 100% of the performance restricted shares will be earned by the participant. During the performance period, each performance restricted share is considered equal to one
share of common stock for dividend (but not voting) purposes, and the participant is entitled to dividend equivalents, which are reinvested in additional performance restricted shares. At the end of the vesting period, any performance restricted
shares that have been earned will be converted to shares of common stock through the issuance of shares. D&E accrues compensation cost related to these performance restricted shares on a straight-line basis over the requisite service period
based upon the probability that the conditions to receive these shares will be met.

The performance condition related to the 2005
restricted share awards was met as of December 31, 2005. The performance condition related to the 2006 share awards is deemed probable of being met within the designated performance period.

During the year ended December 31, 2005, 10,000 shares of common stock were granted with market conditions. For share awards with market conditions,
the effect of the condition on fair value was considered in the estimate of grant-date fair value using a binomial lattice model with the following assumptions:



|                        |  |         |  
|----------------------- |  | ------- | -
|Dividend yield          |  | 4.70    | %
|Expected life           |  | 3 Years |  
|Expected volatility     |  | 37.55   | %
|Risk-free interest rate |  | 4.75    | %

The fair value of performance restricted shares is determined based on the market value of the
Companys shares on the grant date. A summary of the performance restricted share award activity and related information for the year ended December 31, 2006 is summarized as follows:



|                                |  |        |   |  |                                       |     
|------------------------------- |  | ------ | - |  | ------------------------------------- | ----
|                                |  | Shares |   |  | Weighted-AverageGrant-Date Fair Value
|Non-vested at December 31, 2005 |  | 43,400 |   |  | $                                     | 8.89
|Granted                         |  | 39,200 |   |  |                                       | 8.85
|Forfeited                       |  | (200   | ) |  |                                       | 9.32
|                                |  |        |   |  |                                       |     
|Non-vested at December 31, 2006 |  | 82,400 |   |  | $                                     | 8.87
|                                |  |        |   |  |                                       |     

As of December 31, 2006, there was $363 of total unrecognized compensation expense related to
performance restricted shares. The unrecognized compensation expense is expected to be recognized over the period ended December 31, 2008. The total fair value of non-vested shares granted that was recognized as compensation during the year
ended December 31, 2006 was $284. The related tax benefits were $118 for the year ended December 31, 2006.



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Fully Vested Shares

During the years ended December 31, 2006 and 2005, there were 7,100 and 2,297 fully vested shares of common stock, respectively, issued to the
employees and a non-employee director of the Company. The total fair value of fully vested shares issued during the year ended December 31, 2006 and 2005 was $83 and $23, respectively, and the related tax benefits were $35 and $9, respectively.
There were no fully vested shares issued during 2004.

17. Employee Benefit Plans

Employees Retirement Plan and Postretirement Health Care Benefits

D&Es pension plans
are noncontributory defined benefit plans computed on an actuarial basis covering all eligible employees. The plan provides benefits based on specific retirement factors, years of service and the employees final average pensionable
compensation at retirement. Accrued benefits are vested after five years of participation in the plan. The Company sponsors two pension plans: the D&E Communications, Inc. Employees Retirement Plan and the Conestoga Telephone &
Telegraph Company Pension Plan for Members of Local 1671.

D&E also provides certain basic health care benefits to eligible individuals
who retired under the D&E Communications, Inc. Employees Retirement Plan between the period of December 31, 1972, and July 1, 1992. Effective July 1992, retiree health care benefits were discontinued for active employees
participating in the D&E Communications, Inc. Employees Retirement Plan. Through December 31, 2005, these benefits were provided by the Employee Benefit Plan Trust, a self-insured plan, and by individual policies from an insurance
company. Beginning January 1, 2006, all applicable benefits are provided by individual policies from an insurance company.

D&E
also provides an opportunity for grandfathered retiring members of the former Pension Plan for Employees of Buffalo Valley and the Conestoga Telephone & Telegraph Company Pension Plan for Members of Local 1671 to purchase health care
benefits under the Companys fully-insured plan. Members of these two Plans who elect to continue their coverage at retirement pay 100% of the applicable premiums. In addition, D&E provides an opportunity for grandfathered retiring members
of the former Conestoga Telephone & Telegraph Company Pension Plan to purchase health care benefits under the Companys fully-insured plan. The Company pays 50% of the premium for members of this Plan who elect to continue coverage at
retirement.

The applicable annual accruals represent the estimated cost of providing these benefits to current and future retirees and is
determined on an actuarial basis. The accrued postretirement benefit liability of $2,481 is included in other current and long-term liabilities in the accompanying consolidated balance sheets.

During the first quarter of 2006, the Company expensed $112 related to its commitment to provide long-term care policy reimbursement agreements included
in the retirement packages for two senior executives. This amount has been incorporated into the accumulated post retirement obligation, and the ongoing annual postretirement benefits expense has increased by approximately $5.

On August 3, 2006, the Company approved a reduction in the future benefit accruals for certain employees under the D&E Communications, Inc.
Employees Retirement Plan (Retirement Plan).Following a comprehensive evaluation of the plan, the Company decided to maintain a single formula for service after October 1, 2006. Under this formula,
alleligible participants of the Retirement Plan will receive 1.1% of their final average compensation for each year of service rendered beginning on October 1, 2006. In addition, as of April 1, 2007, there will be
a change to the definition of pensionable compensation under the Retirement Plan to include only base pay and a limited amount of commissions for a select group of participants so that their



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



pensionable compensation is comparable to their peers. As a result of these changes, the expense for 2006 was reduced by approximately $200. Ongoing
annual expense thereafter is estimated to be $693 lower than previously anticipated due to these modifications to the plan.

On
September 29, 2006, the Company sold its Voice Systems Business. As a result of this sale and related workforce reduction of 53 employees, the D&E Communications, Inc. Employees Retirement Plan experienced a curtailment in accordance
with SFAS No. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits. Based on a discount rate of 6% and the September 30, 2006 asset values, the Company
recorded two adjustments as of September 30, 2006. These adjustments were a curtailment credit in the amount of $116, which reduced the Companys pension liability, and a reduction to the Companys Accumulated Other Comprehensive
Income (Loss) in the amount of $1,802. As a result of the sale and based on the September 30, 2006 assets and discount rate, the expense for the remainder of 2006 was reduced by $157. Ongoing annual expense in the future is estimated to be $226
lower than previously anticipated due to the reduction in future benefit accruals for the portion of the business sold.

The obligations
and funded status of the plans are as follows:



|                                                  |  |                  |        |   |                        |   |        |      |  |   |       |   |  |   |       |  
|------------------------------------------------- |  | ---------------- | ------ | - | ---------------------- | - | ------ | ---- |  | - | ----- | - |  | - | ----- | -
|                                                  |  | Pension Benefits |        |   | PostretirementBenefits |  
|                                                  |  | 2006             |        |   | 2005                   |   |        | 2006 |  |   | 2005  |  
|Change in Benefit Obligation:                     |  |                  |        |   |                        |   |        |      |  |   |       |   |  |   |       |  
|Projected benefit obligation at beginning of year |  | $                | 67,595 |   |                        | $ | 65,390 |      |  | $ | 2,740 |   |  | $ | 4,021 |  
|Service cost                                      |  |                  | 2,115  |   |                        |   | 2,561  |      |  |   | 6     |   |  |   | 20    |  
|Interest cost                                     |  |                  | 3,700  |   |                        |   | 3,603  |      |  |   | 157   |   |  |   | 178   |  
|Actuarial loss (gain)                             |  |                  | (1,133 | ) |                        |   | (804   | )    |  |   | 67    |   |  |   | (310  | )
|Changes in assumptions                            |  |                  | (3,088 | ) |                        |   | 182    |      |  |   |      |   |  |   |      |  
|Amendments                                        |  |                  | (771   | ) |                        |   |       |      |  |   |      |   |  |   | (934  | )
|Curtailments                                      |  |                  | (469   | ) |                        |   |       |      |  |   |      |   |  |   |      |  
|Special termination benefits                      |  |                  |       |   |                        |   |       |      |  |   | 117   |   |  |   |      |  
|Benefits paid                                     |  |                  | (3,695 | ) |                        |   | (3,337 | )    |  |   | (182  | ) |  |   | (235  | )
|                                                  |  |                  |        |   |                        |   |        |      |  |   |       |   |  |   |       |  
|Projected benefit obligation at end of year       |  | $                | 64,254 |   |                        | $ | 67,595 |      |  | $ | 2,905 |   |  | $ | 2,740 |  
|                                                  |  |                  |        |   |                        |   |        |      |  |   |       |   |  |   |       |  



|                                          |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  
|----------------------------------------- |  | ---------------- | ------- | - | ---------------------- | - | ------- | ---- |  | - | ------ | - |  | - | ------ | -
|                                          |  | Pension Benefits |         |   | PostretirementBenefits |  
|                                          |  | 2006             |         |   | 2005                   |   |         | 2006 |  |   | 2005   |  
|Change in Plan Assets:                    |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  
|Fair value of assets at beginning of year |  | $                | 45,696  |   |                        | $ | 43,546  |      |  | $ | 435    |   |  | $ | 495    |  
|Actual return on plan assets              |  |                  | 5,178   |   |                        |   | 2,666   |      |  |   | 38     |   |  |   | 21     |  
|Employer contributions                    |  |                  | 3,500   |   |                        |   | 2,944   |      |  |   | 132    |   |  |   | 129    |  
|Benefits paid                             |  |                  | (3,695  | ) |                        |   | (3,337  | )    |  |   | (182   | ) |  |   | (210   | )
|Other                                     |  |                  |        |   |                        |   | (123    | )    |  |   |       |   |  |   |       |  
|                                          |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  
|Fair value of plan assets at end of year  |  | $                | 50,679  |   |                        | $ | 45,696  |      |  | $ | 423    |   |  | $ | 435    |  
|                                          |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  
|Funded status at end of year              |  | $                | (13,576 | ) |                        | $ | (21,899 | )    |  | $ | (2,481 | ) |  | $ | (2,305 | )
|                                          |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  
|                                          |  |                  |         |  
|Unrecognized actuarial loss (gain)        |  |                  |         |   |                        |   | 18,827  |      |  |   |        |   |  |   | 1,534  |  
|Unrecognized prior service cost           |  |                  |         |   |                        |   | (619    | )    |  |   |        |   |  |   | (1,998 | )
|Unrecognized net initial obligation       |  |                  |         |   |                        |   |        |      |  |   |        |   |  |   |       |  
|                                          |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  
|Net amount recognized                     |  |                  |         |   |                        | $ | (3,691  | )    |  |   |        |   |  | $ | (2,769 | )
|                                          |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



As discussed in Note 2, the Company adopted SFAS 158 effective December 31, 2006. The following
table summarizes the effect of initially applying SFAS 158 and recording the changes in the additional minimum pension liability on individual line items in the consolidated balance sheet:



|                                                          |  |                        |         |   |                                   |   |        |                    |  |   |                       |   |  |   |         |  
|--------------------------------------------------------- |  | ---------------------- | ------- | - | --------------------------------- | - | ------ | ------------------ |  | - | --------------------- | - |  | - | ------- | -
|                                                          |  | BeforeApplyingSFAS 158 |         |   | AdditionalMinimumPensionLiability |   |        | SFAS 158Adjustment |  |   | AfterApplyingSFAS 158 |  
|Prepaid expenses                                          |  | $                      | 3,475   |   |                                   | $ |       |                    |  | $ | (165                  | ) |  | $ | 3,310   |  
|Total assets                                              |  |                        | 510,739 |   |                                   |   |       |                    |  |   | (165                  | ) |  |   | 510,574 |  
|Accounts payable and accrued liabilities                  |  |                        | 13,417  |   |                                   |   |       |                    |  |   | 237                   |   |  |   | 13,654  |  
|Deferred income taxes                                     |  |                        | 74,364  |   |                                   |   | 1,977  |                    |  |   | (1,492                | ) |  |   | 74,849  |  
|Other liabilities                                         |  |                        | 23,378  |   |                                   |   | (4,764 | )                  |  |   | 3,192                 |   |  |   | 21,806  |  
|Total liabilities                                         |  |                        | 324,399 |   |                                   |   | (2,787 | )                  |  |   | 1,937                 |   |  |   | 323,549 |  
|Accumulated other comprehensive income (loss), net of tax |  |                        | (5,713  | ) |                                   |   | 2,787  |                    |  |   | (2,102                | ) |  |   | (5,028  | )
|Total shareholders equity                                |  |                        | 184,894 |   |                                   |   | 2,787  |                    |  |   | (2,102                | ) |  |   | 185,579 |  

The accumulated benefit obligation for all defined benefit pension plans was $60,414 and $60,035
at December 31, 2006 and 2005, respectively. The 2006 change in accumulated other comprehensive income for all defined benefit pension plans due to the adoption of FAS 158 was $2,102.

Information for pension plans with an accumulated benefit obligation in excess of plan assets follows:



|                               |  |      |        |      |   |        |  |   |       
|------------------------------ |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                               |  | 2006 |        | 2005 |   | 2004  
|Projected benefit obligation   |  | $    | 53,022 |      | $ | 67,595 |  | $ | 54,383
|Accumulated benefit obligation |  |      | 50,437 |      |   | 60,035 |  |   | 48,144
|Fair value of plan assets      |  |      | 40,616 |      |   | 45,696 |  |   | 34,003

The costs for the Companys pension plans and postretirement benefits consisted of the
following components:



|                                         |  |                  |        |   |                         |   |        |      |  |   |        |   |  |      |      |   |      |   |      |   |  |   |     |  
|---------------------------------------- |  | ---------------- | ------ | - | ----------------------- | - | ------ | ---- |  | - | ------ | - |  | ---- | ---- | - | ---- | - | ---- | - |  | - | --- | -
|                                         |  | Pension Benefits |        |   | Postretirement Benefits |  
|                                         |  | 2006             |        |   | 2005                    |   |        | 2004 |  |   | 2006   |   |  | 2005 |      |   | 2004 |  
|Components of Net Periodic Benefit Cost: |  |                  |        |   |                         |   |        |      |  |   |        |   |  |      |      |   |      |   |      |   |  |   |     |  
|Service cost                             |  | $                | 2,115  |   |                         | $ | 2,561  |      |  | $ | 2,265  |   |  | $    | 6    |   |      | $ | 20   |   |  | $ | 112 |  
|Interest cost                            |  |                  | 3,700  |   |                         |   | 3,603  |      |  |   | 3,526  |   |  |      | 157  |   |      |   | 178  |   |  |   | 268 |  
|Expected loss (return) on assets         |  |                  | (3,348 | ) |                         |   | (3,333 | )    |  |   | (3,476 | ) |  |      | (29  | ) |      |   | (34  | ) |  |   | (41 | )
|Amortization of:                         |  |                  |        |   |                         |   |        |      |  |   |        |   |  |      |      |   |      |   |      |   |  |   |     |  
|Initial obligation                       |  |                  |       |   |                         |   |       |      |  |   |       |   |  |      |     |   |      |   | 16   |   |  |   | 21  |  
|Prior service cost                       |  |                  | (94    | ) |                         |   | (68    | )    |  |   | (68    | ) |  |      | (162 | ) |      |   | (121 | ) |  |   | (42 | )
|Special termination benefit              |  |                  |       |   |                         |   |       |      |  |   |       |   |  |      | 117  |   |      |   |     |   |  |   |    |  
|Actuarial loss                           |  |                  | 1,325  |   |                         |   | 1,445  |      |  |   | 1,024  |   |  |      | 80   |   |      |   | 78   |   |  |   | 86  |  
|Actuarial (gain) due to curtailment      |  |                  | (116   | ) |                         |   |       |      |  |   |       |   |  |      |     |   |      |   |     |   |  |   |    |  
|                                         |  |                  |        |   |                         |   |        |      |  |   |        |   |  |      |      |   |      |   |      |   |  |   |     |  
|Total net periodic benefit cost          |  | $                | 3,582  |   |                         | $ | 4,208  |      |  | $ | 3,271  |   |  | $    | 169  |   |      | $ | 137  |   |  | $ | 404 |  
|                                         |  |                  |        |   |                         |   |        |      |  |   |        |   |  |      |      |   |      |   |      |   |  |   |     |  

Amounts Expected to be Recognized in Net Periodic Cost in the Coming Year:



|                                           |  |                      |       |   |                             |   |      |  
|------------------------------------------ |  | -------------------- | ----- | - | --------------------------- | - | ---- | -
|                                           |  | PensionBenefits 2006 |       |   | PostretirementBenefits 2006 |  
|(Gain)/loss recognition                    |  | $                    | 1,139 |   |                             | $ | 89   |  
|Prior service cost recognition             |  |                      | (126  | ) |                             |   | (162 | )
|Net initial obligation/(asset) recognition |  |                      |      |   |                             |   |     |  



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Key pension and postretirement assumptions

The Company reviews the appropriateness of the assumptions used to develop the pension and postretirement obligations on a regular basis. Management
develops each assumption using relevant company experience and market-related data to ensure that each assumption is individually reasonable. In addition to company experience and market-related data, management takes into consideration any recent
Plan amendments (i.e., the change in compensation definition effective April 1, 2007) or investment strategy changes, which may have an impact on these assumptions. The company enlists the services of its plan actuaries, who have developed an
interest rate yield curve to assist their clients in evaluating discount rates. Under this approach, the Companys projected benefit cash flows are analyzed using this yield curve to develop a single-point discount rate matching the plans
characteristics. The Company also enlists the services of its investment advisor, who helps to determine the expected return on plan assets assumption by evaluating both historical returns, as well as estimates of future returns, and their
correlation with the actual plan investment allocations, which follow the guidelines outlined in the companys related investment policy statement.

Based on the approaches outlined above, the Company lowered its rates of compensation increase assumption from 4.00% to 3.50% and increased its discount rate assumption for pension benefits from 5.75% to 6.00% as of
December 31, 2006.

The weighted-average assumptions used to determine benefit obligations at December 31 follow:



|                               |  |                  |   |  |                |   |  |      |   |  |      |  
|------------------------------ |  | ---------------- | - |  | -------------- | - |  | ---- | - |  | ---- | -
|                               |  | Pension Benefits |   |  | Other Benefits |  
|                               |  | 2006             |   |  | 2005           |   |  | 2006 |   |  | 2005 |  
|Discount rate                  |  | 6.00             | % |  | 5.75           | % |  | 5.75 | % |  | 5.50 | %
|Rates of compensation increase |  | 3.50             | % |  | 4.00           | % |  | N/A  |   |  | N/A  |  

The weighted-average assumptions used to determine net cost for the years ended December 31
follow:



|                                         |  |                  |   |  |                |   |  |      |   |  |      |  
|---------------------------------------- |  | ---------------- | - |  | -------------- | - |  | ---- | - |  | ---- | -
|                                         |  | Pension Benefits |   |  | Other Benefits |  
|                                         |  | 2006             |   |  | 2005           |   |  | 2006 |   |  | 2005 |  
|Discount rate                            |  | 5.75             | % |  | 5.75           | % |  | 5.50 | % |  | 5.75 | %
|Expected long-term return on plan assets |  | 8.50             | % |  | 8.50           | % |  | 8.75 | % |  | 8.75 | %
|Rate of compensation increase            |  | 4.00             | % |  | 4.50           | % |  | N/A  |   |  | N/A  |  
|Corridor                                 |  | 10.00            | % |  | 10.00          | % |  | N/A  |   |  | N/A  |  
|Average future working lifetime in years |  | 11.965           |   |  | 12.083         |   |  | N/A  |   |  | N/A  |  

The assumed health care cost trend rates at December 31 follow:



|                                                        |  |              |  |              |  |       
|------------------------------------------------------- |  | ------------ |  | ------------ |  | ------
|                                                        |  | 2006         |  | 2005         |  | 2004  
|Health care cost trend rate assumed for next year       |  | 9.00%-12.00% |  | 9.00%-12.00% |  | 10.00%
|Rate to which the cost trend rate is assumed to decline |  | 4.75%        |  | 4.75%        |  | 4.50% 
|Year that the rate reaches the ultimate trend rate      |  | 2011-2013    |  | 2011-2013    |  | 2011  
|Recognition period for gains and losses                 |  | 13.56        |  | 14.06        |  | 14.57 

Assumed health care cost trend rates have a significant effect on the amounts reported for the
health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:



|                                             |  |                            |     |                            |   |      |  
|-------------------------------------------- |  | -------------------------- | --- | -------------------------- | - | ---- | -
|                                             |  | 1-PercentagePoint Increase |     | 1-PercentagePoint Decrease |  
|Effect on total of service and interest cost |  | $                          | 15  |                            | $ | (13  | )
|Effect on postretirement benefit obligation  |  |                            | 233 |                            |   | (206 | )



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Plan Assets

D&Es retirement plan investment strategy is to invest approximately 65% of the plan assets in the equity market and 35% in the fixed income market. The investment advisor reviews the investment performance
with the Benefits Committee several times per year, and investment reallocations or other changes are made when appropriate.

The
Companys pension plan weighted-average asset allocations at December 31, 2006 and 2005, by asset category are as follows:



|                             |  |      |   |  |      |  
|---------------------------- |  | ---- | - |  | ---- | -
|                             |  | 2006 |   |  | 2005 |  
|Asset Category:              |  |      |   |  |      |  
|Equity securities            |  | 65   | % |  | 65   | %
|Debt securities              |  | 30   | % |  | 35   | %
|Debt/equity blend securities |  | 5    | % |  | 0    | %
|                             |  |      |   |  |      |  
|Total                        |  | 100  | % |  | 100  | %
|                             |  |      |   |  |      |  

The Companys other postretirement benefit plan weighted-average asset allocations at
December 31, 2006 and 2005, by asset category are as follows:



|                  |  |      |   |  |      |  
|----------------- |  | ---- | - |  | ---- | -
|                  |  | 2006 |   |  | 2005 |  
|Asset Category:   |  |      |   |  |      |  
|Equity securities |  | 50   | % |  | 51   | %
|Debt securities   |  | 50   | % |  | 49   | %
|                  |  |      |   |  |      |  
|Total             |  | 100  | % |  | 100  | %
|                  |  |      |   |  |      |  

D&E expects to contribute $4,800 to its pension plan and $0 to its other postretirement
benefit plan in 2007. Funding requirements for future years are uncertain and will significantly depend on whether management, upon review with the plans actuary, changes any assumptions used to calculate plan funding levels, the actual return
on plan assets, changes in the employee groups covered by the plans, and any legislative or regulatory changes affecting plan funding requirements. For tax planning, financial planning, cash flow management or cost reduction purposes, the Company
may increase, accelerate, decrease or delay contributions to the plans to the extent permitted by law.

The estimated future benefit
payments are as follows:



|             |  |                  |        |                |   |      
|------------ |  | ---------------- | ------ | -------------- | - | -----
|Year         |  | Pension Benefits |        | Other Benefits
|2007         |  | $                | 3,187  |                | $ | 250  
|2008         |  |                  | 3,278  |                |   | 265  
|2009         |  |                  | 3,351  |                |   | 283  
|2010         |  |                  | 3,440  |                |   | 295  
|2011         |  |                  | 3,561  |                |   | 306  
|2012 to 2016 |  |                  | 20,970 |                |   | 1,266

Employees 401(k) Savings Plan

D&E has two employee savings plans available to all eligible employees: the D&E Communications, Inc. Employees 401(k) Savings Plan and the
Conestoga Telephone & Telegraph Co. Local 1671 Tax Deferred Retirement Plan. Participating employees may contribute a portion of their compensation, up to a maximum



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



percentage, to the Savings Plans, and the Company makes matching contributions based upon the eligible employees contribution. D&E may also make
discretionary profit-sharing contributions.

Company contributions amounted to $1,099 in 2006, $1,204 in 2005 and $1,275 in 2004.

18. Disclosures about Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

a. Cash and short-term investments  The carrying amount approximates fair value because of the short maturity of these
instruments or the interest rate reset periods of 35 days or less on variable rate demand notes and auction rate securities.

b. Investments  Investments consist primarily of investments in and advances to affiliated companies accounted for under the equity method for which disclosure of fair value is not required.

c. Debt  The fair value of fixed rate long-term debt was estimated based on our current incremental borrowing rate for debt
of the similar remaining maturities. The fair value of floating rate debt approximates carrying value since the debt has been repriced no less frequently than every three months during 2006 and 2005.

d. Interest rate swaps  The fair value has been calculated by the counterparties using appropriate valuation methodologies.

The estimated fair value of our financial instruments is as follows:



|                              |  |                |         |            |   |                |  |            |         |  |   |        
|----------------------------- |  | -------------- | ------- | ---------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                              |  | December 31,  
|                              |  | 2006           |         | 2005      
|                              |  | Carrying Value |         | Fair Value |   | Carrying Value |  | Fair Value
|Financial assets:             |  |                |         |            |   |                |  |            |         |  |   |        
|Cash & cash equivalents       |  | $              | 3,101   |            | $ | 3,101          |  | $          | 10,325  |  | $ | 10,325 
|Short-term investments        |  |                | 7,746   |            |   | 7,746          |  |            |        |  |   |       
|Financial liabilities:        |  |                |         |            |   |                |  |            |         |  |   |        
|Fixed rate long-term debt:    |  |                |         |            |   |                |  |            |         |  |   |        
|Secured term loans            |  |                | 28,000  |            |   | 29,794         |  |            | 31,500  |  |   | 35,045 
|Variable rate long-term debt: |  |                |         |            |   |                |  |            |         |  |   |        
|Revolving Loan                |  |                |        |            |   |               |  |            | 7,000   |  |   | 7,000  
|Term Loan A                   |  |                | 33,980  |            |   | 33,980         |  |            | 31,561  |  |   | 31,561 
|Term Loan B                   |  |                | 143,520 |            |   | 143,520        |  |            | 145,439 |  |   | 145,439
|Capital lease obligation      |  |                | 1,517   |            |   | 1,467          |  |            |        |  |   |       
|Interest rate swaps           |  |                |        |            |   |               |  |            | 1,079   |  |   | 1,079  



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



19. Segment Reporting

D&Es business segments are as follows: incumbent rural local exchange carrier (RLEC), competitive local exchange carrier (CLEC), internet services and systems integration. The segments are more fully
described in Note 1. Certain amounts from prior years have been reclassified to conform to the current presentation. Intersegment revenues are recorded at the same rates charged to external customers.



|                                                            |  |      |         |      |   |        |                   |  |   |                     |   |  |                   |        |   |              |   |         |               |  |   |          |   |  |   |         |  
|----------------------------------------------------------- |  | ---- | ------- | ---- | - | ------ | ----------------- |  | - | ------------------- | - |  | ----------------- | ------ | - | ------------ | - | ------- | ------------- |  | - | -------- | - |  | - | ------- | -
|                                                            |  | RLEC |         | CLEC |   |        | Internet Services |  |   | Systems Integration |   |  | Corporate & Other |        |   | Eliminations |   |         | Total Company | 
|2006                                                        |  |      |         |      |   |        |                   |  |   |                     |   |  |                   |        |   |              |   |         |               |  |   |          |   |  |   |         |  
|External customer revenues                                  |  | $    | 96,396  |      | $ | 39,997 |                   |  | $ | 15,503              |   |  | $                 | 6,641  |   |              | $ | 3,531   |               |  | $ |         |   |  | $ | 162,068 |  
|Intersegment revenues                                       |  |      | 10,230  |      |   | 2,806  |                   |  |   | 85                  |   |  |                   | 24     |   |              |   |        |               |  |   | (13,145  | ) |  |   |        |  
|Depreciation & amortization                                 |  |      | 28,793  |      |   | 5,956  |                   |  |   | 1,507               |   |  |                   | 714    |   |              |   | 1,271   |               |  |   |         |   |  |   | 38,241  |  
|Intangible asset impairment                                 |  |      |        |      |   |       |                   |  |   |                    |   |  |                   | 1,892  |   |              |   |        |               |  |   |         |   |  |   | 1,892   |  
|Operating income (loss)                                     |  |      | 30,400  |      |   | 177    |                   |  |   | 138                 |   |  |                   | (6,460 | ) |              |   | (1,743  | )             |  |   |         |   |  |   | 22,512  |  
|Equity in net loss of affiliates                            |  |      |        |      |   |       |                   |  |   |                    |   |  |                   |       |   |              |   | (180    | )             |  |   |         |   |  |   | (180    | )
|Gain (loss) on investments                                  |  |      |        |      |   |       |                   |  |   |                    |   |  |                   |       |   |              |   | 1,035   |               |  |   |         |   |  |   | 1,035   |  
|Segment assets                                              |  |      | 418,500 |      |   | 69,396 |                   |  |   | 3,815               |   |  |                   | 10,628 |   |              |   | 460,047 |               |  |   | (451,812 | ) |  |   | 510,574 |  
|Investment in equity method affiliates                      |  |      |        |      |   |       |                   |  |   |                    |   |  |                   |       |   |              |   | 14      |               |  |   |         |   |  |   | 14      |  
|Capital expenditures                                        |  |      | 14,132  |      |   | 9,903  |                   |  |   | 1,610               |   |  |                   | 173    |   |              |   | 621     |               |  |   |         |   |  |   | 26,439  |  
|                                                            |  |      |         |      |   |        |                  
|2005                                                        |  |      |         |      |   |        |                   |  |   |                     |   |  |                   |        |   |              |   |         |               |  |   |          |   |  |   |         |  
|External customer revenues                                  |  | $    | 100,934 |      | $ | 38,291 |                   |  | $ | 12,999              |   |  | $                 | 8,556  |   |              | $ | 3,782   |               |  | $ |         |   |  | $ | 164,562 |  
|Intersegment revenues                                       |  |      | 9,517   |      |   | 2,505  |                   |  |   | 40                  |   |  |                   | 28     |   |              |   |        |               |  |   | (12,090  | ) |  |   |        |  
|Depreciation & amortization                                 |  |      | 29,524  |      |   | 5,052  |                   |  |   | 1,378               |   |  |                   | 1,002  |   |              |   | 1,167   |               |  |   |         |   |  |   | 38,123  |  
|Operating income (loss)                                     |  |      | 32,532  |      |   | (1,511 | )                 |  |   | (642                | ) |  |                   | (5,619 | ) |              |   | (1,930  | )             |  |   |         |   |  |   | 22,830  |  
|Equity in net income of affiliates                          |  |      |        |      |   |       |                   |  |   |                    |   |  |                   |       |   |              |   | 1,000   |               |  |   |         |   |  |   | 1,000   |  
|Gain (loss) on investments                                  |  |      |        |      |   |       |                   |  |   |                    |   |  |                   |       |   |              |   | 6,895   |               |  |   |         |   |  |   | 6,895   |  
|Segment assets                                              |  |      | 435,193 |      |   | 67,472 |                   |  |   | 3,724               |   |  |                   | 16,792 |   |              |   | 461,931 |               |  |   | (449,440 | ) |  |   | 535,672 |  
|Equity in net losses of affiliates in excess of investments |  |      |        |      |   |       |                   |  |   |                    |   |  |                   |       |   |              |   | (196    | )             |  |   |         |   |  |   | (196    | )
|Capital expenditures                                        |  |      | 23,410  |      |   | 4,331  |                   |  |   | 1,931               |   |  |                   | 134    |   |              |   | 532     |               |  |   |         |   |  |   | 30,338  |  
|                                                            |  |      |         |      |   |        |                  
|2004                                                        |  |      |         |      |   |        |                   |  |   |                     |   |  |                   |        |   |              |   |         |               |  |   |          |   |  |   |         |  
|External customer revenues                                  |  | $    | 101,647 |      | $ | 36,183 |                   |  | $ | 10,337              |   |  | $                 | 12,923 |   |              | $ | 3,333   |               |  | $ |         |   |  | $ | 164,423 |  
|Intersegment revenues                                       |  |      | 9,314   |      |   | 1,409  |                   |  |   | 21                  |   |  |                   | 54     |   |              |   |        |               |  |   | (10,798  | ) |  |   |        |  
|Depreciation & amortization                                 |  |      | 30,776  |      |   | 4,394  |                   |  |   | 1,083               |   |  |                   | 1,212  |   |              |   | 967     |               |  |   |         |   |  |   | 38,432  |  
|Operating income (loss)                                     |  |      | 29,162  |      |   | (2,695 | )                 |  |   | 327                 |   |  |                   | (4,443 | ) |              |   | (1,267  | )             |  |   |         |   |  |   | 21,084  |  
|Equity in net loss of affiliates                            |  |      |        |      |   |       |                   |  |   |                    |   |  |                   |       |   |              |   | (3,172  | )             |  |   |         |   |  |   | (3,172  | )
|Gain (loss) on investments                                  |  |      |        |      |   |       |                   |  |   |                    |   |  |                   |       |   |              |   | (1,057  | )             |  |   |         |   |  |   | (1,057  | )
|Segment assets                                              |  |      | 446,277 |      |   | 67,128 |                   |  |   | 3,009               |   |  |                   | 19,064 |   |              |   | 447,663 |               |  |   | (436,356 | ) |  |   | 546,785 |  
|Investment in equity method affiliates                      |  |      |        |      |   |       |                   |  |   |                    |   |  |                   |       |   |              |   | 52      |               |  |   |         |   |  |   | 52      |  
|Capital expenditures                                        |  |      | 18,910  |      |   | 5,041  |                   |  |   | 1,073               |   |  |                   | 478    |   |              |   | 922     |               |  |   |         |   |  |   | 26,424  |  



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table shows a reconciliation of the results for the business segments to the applicable
line items in the consolidated financial statements as follows:



|                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                      |  | 2006 |         |   | 2005 |   |         | 2004 | 
|Operating income from reportable segments                                                             |  | $    | 24,255  |   |      | $ | 24,760  |      |  | $ | 22,351  |  
|Corporate and other                                                                                   |  |      | (1,743  | ) |      |   | (1,930  | )    |  |   | (1,267  | )
|Equity in net income (losses) of affiliates                                                           |  |      | (180    | ) |      |   | 1,000   |      |  |   | (3,172  | )
|Interest expense                                                                                      |  |      | (15,274 | ) |      |   | (14,177 | )    |  |   | (14,389 | )
|Gain (loss) on investments                                                                            |  |      | 1,035   |   |      |   | 6,895   |      |  |   | (1,057  | )
|Loss on early extinguishment of debt                                                                  |  |      | (1,103  | ) |      |   |        |      |  |   | (5,252  | )
|Other, net                                                                                            |  |      | 4,790   |   |      |   | 3,205   |      |  |   | 1,679   |  
|                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Income (loss) from continuing operations before income taxes and dividends on utility preferred stock |  | $    | 11,780  |   |      | $ | 19,753  |      |  | $ | (1,107  | )
|                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  

20. Quarterly Results of Operations (unaudited)

The following table summarizes D&Es quarterly financial data for the years ended December 31, 2006 and December 31, 2005.



|                                               |  |                                       |        |                |   |               |  |                |        |  |   |       
|---------------------------------------------- |  | ------------------------------------- | ------ | -------------- | - | ------------- |  | -------------- | ------ |  | - | ------
|                                               |  | First Quarter                         |        | Second Quarter |   | Third Quarter |  | Fourth Quarter
|                                               |  | (In thousands, except per share data)
|2006                                           |  |                                       |       
|Total operating revenues                       |  | $                                     | 40,287 |                | $ | 41,359        |  | $              | 40,625 |  | $ | 39,797
|Depreciation and amortization                  |  |                                       | 9,460  |                |   | 9,493         |  |                | 9,536  |  |   | 9,752 
|Intangible asset impairment                    |  |                                       |       |                |   | 1,892         |  |                |       |  |   |      
|Other operating expenses                       |  |                                       | 25,927 |                |   | 25,702        |  |                | 24,918 |  |   | 22,876
|                                               |  |                                       |        |                |   |               |  |                |        |  |   |       
|Total operating expenses                       |  |                                       | 35,387 |                |   | 37,087        |  |                | 34,454 |  |   | 32,628
|                                               |  |                                       |        |                |   |               |  |                |        |  |   |       
|Operating income                               |  |                                       | 4,900  |                |   | 4,272         |  |                | 6,171  |  |   | 7,169 
|Net income                                     |  |                                       | 1,631  |                |   | 897           |  |                | 731    |  |   | 3,483 
|Earnings per common share  basic and diluted: |  |                                       |        |                |   |               |  |                |        |  |   |       
|Net income                                     |  |                                       | 0.11   |                |   | 0.06          |  |                | 0.05   |  |   | 0.24  
|                                               | 
|2005                                           |  |                                       |       
|Total operating revenues                       |  | $                                     | 40,327 |                | $ | 41,276        |  | $              | 41,077 |  | $ | 41,882
|Depreciation and amortization                  |  |                                       | 9,490  |                |   | 9,570         |  |                | 9,663  |  |   | 9,400 
|Other operating expenses                       |  |                                       | 26,072 |                |   | 26,760        |  |                | 25,399 |  |   | 25,378
|                                               |  |                                       |        |                |   |               |  |                |        |  |   |       
|Total operating expenses                       |  |                                       | 35,562 |                |   | 36,330        |  |                | 35,062 |  |   | 34,778
|                                               |  |                                       |        |                |   |               |  |                |        |  |   |       
|Operating income                               |  |                                       | 4,765  |                |   | 4,946         |  |                | 6,015  |  |   | 7,104 
|Net income                                     |  |                                       | 2,888  |                |   | 1,367         |  |                | 2,392  |  |   | 7,064 
|Earnings per common share  basic and diluted: |  |                                       |        |                |   |               |  |                |        |  |   |       
|Net income                                     |  |                                       | 0.20   |                |   | 0.10          |  |                | 0.17   |  |   | 0.49  



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D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Significant quarterly variances of net income (loss) are explained below:

The net income in the second quarter of 2006 included a $2,375 (1,390, or $0.10 per common share, after tax) loss from a customer list intangible asset
impairment.

The net income in the third quarter of 2006 included a $1,094 ($640, or $0.04 per common share, after tax) loss on the early
extinguishment of debt and an $870, or $0.06 per common share, after tax loss on the sale of the Voice Systems Business.

The net income in
the fourth quarter of 2006 included a $1,035 ($673, or $0.05 per common share, after tax) gain on investment due to the cash recovery of our advances to EuroTel beyond amounts previously estimated.

The net income in the first quarter of 2005 included a $2,043 ($1,349, or $0.09 per common share, after tax) gain on the sale of D&Es
investment in PenTeleData.

The increase in net income in the third quarter 2005 compared to the second quarter of 2005 was primarily due
to decreases in employee wages and benefits.

The net income in the fourth quarter of 2005 included $6,415 ($5,969, or $0.42 per common
share after tax) income from the sale of D&Es direct and indirect interests in Pilicka on December 19, 2005.

The following
tables summarizes D&Es operating results for the three months ended December 31, 2006:



|                              |  |      |        |      |   |                   |  |                     |       |  |                   |       |   |              |   |       |               |  |   |        |   |  |   |       
|----------------------------- |  | ---- | ------ | ---- | - | ----------------- |  | ------------------- | ----- |  | ----------------- | ----- | - | ------------ | - | ----- | ------------- |  | - | ------ | - |  | - | ------
|                              |  | RLEC |        | CLEC |   | Internet Services |  | Systems Integration |       |  | Corporate & Other |       |   | Eliminations |   |       | Total Company
|External customer revenues    |  | $    | 22,464 |      | $ | 10,383            |  | $                   | 4,141 |  | $                 | 1,848 |   |              | $ | 961   |               |  | $ |       |   |  | $ | 39,797
|Intersegment revenues         |  |      | 2,611  |      |   | 698               |  |                     | 22    |  |                   |      |   |              |   |      |               |  |   | (3,331 | ) |  |   |      
|                              |  |      |        |      |   |                   |  |                     |       |  |                   |       |   |              |   |       |               |  |   |        |   |  |   |       
|Total revenues                |  |      | 25,075 |      |   | 11,081            |  |                     | 4,163 |  |                   | 1,848 |   |              |   | 961   |               |  |   | (3,331 | ) |  |   | 39,797
|                              |  |      |        |      |   |                   |  |                     |       |  |                   |       |   |              |   |       |               |  |   |        |   |  |   |       
|Depreciation and amortization |  |      | 7,248  |      |   | 1,591             |  |                     | 415   |  |                   | 175   |   |              |   | 323   |               |  |   |       |   |  |   | 9,752 
|Other operating expenses      |  |      | 10,038 |      |   | 9,258             |  |                     | 3,486 |  |                   | 2,517 |   |              |   | 908   |               |  |   | (3,331 | ) |  |   | 22,876
|                              |  |      |        |      |   |                   |  |                     |       |  |                   |       |   |              |   |       |               |  |   |        |   |  |   |       
|Total operating expenses      |  |      | 17,286 |      |   | 10,849            |  |                     | 3,901 |  |                   | 2,692 |   |              |   | 1,231 |               |  |   | (3,331 | ) |  |   | 32,628
|                              |  |      |        |      |   |                   |  |                     |       |  |                   |       |   |              |   |       |               |  |   |        |   |  |   |       
|Operating income (loss)       |  | $    | 7,789  |      | $ | 232               |  | $                   | 262   |  | $                 | (844  | ) |              | $ | (270  | )             |  | $ |       |   |  | $ | 7,169 
|                              |  |      |        |      |   |                   |  |                     |       |  |                   |       |   |              |   |       |               |  |   |        |   |  |   |       



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##### Table of Contents

Item 15(a)(2).Financial Statement Schedules

D&E COMMUNICATIONS, INC.

SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS



|                                             |  |                              |        |                                        |   |                                           |  |                        |       |  |   |       
|-------------------------------------------- |  | ---------------------------- | ------ | -------------------------------------- | - | ----------------------------------------- |  | ---------------------- | ----- |  | - | ------
|                                             |  | Balance at Beginning of Year |        | Additions Charged to Cost
and Expenses |   | Deductions Credited to Costs
and Expenses |  | Balance at End of
Year
|Allowance for doubtful accounts:             |  |                              |        |                                        |   |                                           |  |                        |       |  |   |       
|Year ended December 31, 2006                 |  | $                            | 748    |                                        | $ | 592                                       |  | $                      | 731   |  | $ | 609   
|Year ended December 31, 2005                 |  |                              | 1,024  |                                        |   | 485                                       |  |                        | 761   |  |   | 748   
|Year ended December 31, 2004                 |  |                              | 1,410  |                                        |   | 551                                       |  |                        | 937   |  |   | 1,024 
|                                             |  |                              |        |                                       
|Allowance for inventory obsolescence:        |  |                              |        |                                        |   |                                           |  |                        |       |  |   |       
|Year ended December 31, 2006 *               |  |                              |       |                                        |   | 198                                       |  |                        | 174   |  |   | 24    
|Year ended December 31, 2005                 |  |                              | 115    |                                        |   | 181                                       |  |                        | 296   |  |   |      
|Year ended December 31, 2004                 |  |                              |       |                                        |   | 288                                       |  |                        | 173   |  |   | 115   
|                                             |  |                              |        |                                       
|Valuation Allowance for Deferred Tax Assets: |  |                              |        |                                        |   |                                           |  |                        |       |  |   |       
|Year ended December 31, 2006                 |  |                              | 13,969 |                                        |   | 2,876                                     |  |                        | 64    |  |   | 16,781
|Year ended December 31, 2005                 |  |                              | 14,752 |                                        |   | 1,428                                     |  |                        | 2,211 |  |   | 13,969
|Year ended December 31, 2004                 |  |                              | 11,132 |                                        |   | 3,715                                     |  |                        | 95    |  |   | 14,752

---

|* | Deductions credited to cost and expenses in the year ended December 31, 2006 include $79 in connection with a business sold.
|- | ----------------------------------------------------------------------------------------------------------------------------

All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.



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EUROTEL, L.L.C.

LINCOLN, NEBRASKA

CONSOLIDATED FINANCIAL STATEMENTS WITH INDEPENDENT AUDITORS REPORTS

As
of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004



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EUROTEL, L.L.C.

LINCOLN, NEBRASKA

Contents



|                                           |  |     
|------------------------------------------ |  | ----
|                                           |  | Page
|Independent Auditors Report               |  | F-44
|                                           | 
|Consolidated Financial Statements:         |  |     
|                                           | 
|Consolidated Balance Sheets                |  | F-45
|                                           | 
|Consolidated Statements of Operations      |  | F-47
|                                           | 
|Consolidated Statements of Members Equity |  | F-48
|                                           | 
|Consolidated Statements of Cash Flows      |  | F-49
|                                           | 
|Notes to Consolidated Financial Statements |  | F-50



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##### Table of Contents

INDEPENDENT AUDITORS REPORT

To the Members of

EuroTel, L.L.C.

Lincoln, Nebraska

We have audited the accompanying consolidated balance sheets of EuroTel, L.L.C. (a Nebraska limited liability company) and subsidiary as of December 31, 2004 and 2003, and the related consolidated statements of
operations, members equity, and cash flows for each of the three years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did not audit the December 31, 2004, 2003 and 2002 financial statements of Pilicka Telefonia Sp. z.o.o., (Pilicka), a Polish company owned 27.85% by EuroTel L.L.C., the
investment in which, as discussed in Note 5 of the consolidated financial statements, is accounted for by the equity method of accounting. The investment in Pilicka was $0 and $2,386,208 at December 31, 2004 and 2003, respectively, and the equity in
its net losses were $2,386,208, $956,926, and $966,704 for each of the three years in the period ended December 31, 2004. The financial statements of Pilicka were audited by other auditors whose report has been furnished to us, and our opinion,
insofar as it related to the amounts included for Pilicka, is based solely on the report of the other auditors.

We conducted our audits in
accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as, evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EuroTel, L.L.C. and subsidiary as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

As described in Note 2, the Company is dependent upon the Founders to meet its cash flow requirements for the year 2005.

/S/    KIESLING ASSOCIATES LLP

Colorado Springs, Colorado

January 25, 2005, except for Note 5, for which
the date

is March 1, 2005



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EUROTEL, L.L.C.

LINCOLN, NEBRASKA

CONSOLIDATED BALANCE SHEETS

December 31, 2004 and 2003



|                                   |  |      |         |      |   |          
|---------------------------------- |  | ---- | ------- | ---- | - | ---------
|                                   |  | 2004 |         | 2003
|ASSETS                             |  |      |         |      |   |          
|CURRENT ASSETS                     |  |      |         |      |   |          
|Cash and cash equivalents          |  | $    | 182,516 |      | $ | 106,344  
|Accounts receivable                |  |      | 16,037  |      |   | 17,311   
|                                   |  |      |         |      |   |          
|                                   |  |      | 198,553 |      |   | 123,655  
|                                   |  |      |         |      |   |          
|NONCURRENT ASSETS                  |  |      |         |      |   |          
|Property, plant and equipment, net |  |      | 1,403   |      |   |         
|Investment in affiliate            |  |      |        |      |   | 2,386,208
|                                   |  |      |         |      |   |          
|                                   |  |      | 1,403   |      |   | 2,386,208
|                                   |  |      |         |      |   |          
|TOTAL ASSETS                       |  | $    | 199,956 |      | $ | 2,509,863
|                                   |  |      |         |      |   |          



The accompanying notes are
an integral part of these consolidated financial statements.



F-45



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EUROTEL, L.L.C.

LINCOLN, NEBRASKA

CONSOLIDATED BALANCE SHEETS

December 31, 2004 and 2003



|                                      |  |      |             |   |      |   |             |  
|------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                      |  | 2004 |             |   | 2003 |  
|LIABILITIES AND MEMBERS EOUITY       |  |      |             |   |      |   |             |  
|CURRENT LIABILITIES                   |  |      |             |   |      |   |             |  
|Due to Founders                       |  | $    | 33,708,380  |   |      | $ | 31,740,304  |  
|Accounts payable                      |  |      | 44,886      |   |      |   | 70,464      |  
|                                      |  |      |             |   |      |   |             |  
|                                      |  |      | 33,753,266  |   |      |   | 31,810,768  |  
|                                      |  |      |             |   |      |   |             |  
|MEMBERS EQUITY                       |  |      |             |   |      |   |             |  
|Members capital                      |  |      | (33,553,310 | ) |      |   | (29,127,157 | )
|Cumulative other comprehensive loss   |  |      |            |   |      |   | (173,748    | )
|                                      |  |      |             |   |      |   |             |  
|                                      |  |      | (33,553,310 | ) |      |   | (29,300,905 | )
|                                      |  |      |             |   |      |   |             |  
|TOTAL LIABILITIES AND MEMBERS EQUITY |  | $    | 199,956     |   |      | $ | 2,509,863   |  
|                                      |  |      |             |   |      |   |             |  





The accompanying notes are an integral part of these consolidated financial statements.



F-46



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##### Table of Contents

EUROTEL, L.L.C.

LINCOLN, NEBRASKA

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2004, 2003 and
2002



|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|----------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                          |  | 2004 |            |   | 2003 |   |            | 2002 | 
|OPERATING REVENUES                        |  | $    | 0          |   |      | $ | 0          |      |  | $ | 0          |  
|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|OPERATING EXPENSES                        |  |      |            |   |      |   |            |      |  |   |            |  
|Depreciation and amortization             |  |      | 23         |   |      |   | 806        |      |  |   | 4,025      |  
|General and administrative                |  |      | 578,953    |   |      |   | 530,765    |      |  |   | 1,277,499  |  
|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|                                          |  |      | 578,976    |   |      |   | 531,571    |      |  |   | 1,281,524  |  
|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|OPERATING LOSS                            |  |      | (578,976   | ) |      |   | (531,571   | )    |  |   | (1,281,524 | )
|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|OTHER INCOME (EXPENSE)                    |  |      |            |   |      |   |            |      |  |   |            |  
|Equity in loss of affiliate               |  |      | (2,559,956 | ) |      |   | (956,926   | )    |  |   | (966,704   | )
|Interest income                           |  |      | 710        |   |      |   | 1,736      |      |  |   | 3,361      |  
|Litigation costs due to sale of affiliate |  |      | (1,287,932 | ) |      |   | (1,702,006 | )    |  |   | (2,173,178 | )
|Loss on investment in affiliate           |  |      |           |   |      |   |           |      |  |   | (726,833   | )
|Loss on loan receivable                   |  |      |           |   |      |   |           |      |  |   | (596,849   | )
|Other                                     |  |      |           |   |      |   | (20,138    | )    |  |   | 23,101     |  
|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|                                          |  |      | (3,847,178 | ) |      |   | (2,677,334 | )    |  |   | (4,437,102 | )
|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|                                          |  |      |           |   |      |   |           |      |  |   |           |  
|                                          |  |      |            |   |      |   |            |      |  |   |            |  
|NET LOSS                                  |  | $    | (4,426,154 | ) |      | $ | (3,208,905 | )    |  | $ | (5,718,626 | )
|                                          |  |      |            |   |      |   |            |      |  |   |            |  

The accompanying notes are an integral part of these consolidated financial statements.



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EUROTEL, L.L.C.

LINCOLN, NEBRASKA

CONSOLIDATED STATEMENTS OF MEMBERS EQUITY

Years Ended December 31,
2004, 2003 and 2002



|                                                    |  |                 |             |   |                                     |   |            |                               |  |   |                                  |   |  |   |            |  
|--------------------------------------------------- |  | --------------- | ----------- | - | ----------------------------------- | - | ---------- | ----------------------------- |  | - | -------------------------------- | - |  | - | ---------- | -
|                                                    |  | MembersCapital |             |   | AccumulatedOtherComprehensiveIncome |   |            | TotalMembersEquity (Deficit) |  |   | AnnualComprehensiveIncome (Loss) |  
|Balance at December 31, 2001                        |  | $               | (22,543,956 | ) |                                     | $ | (2,033,392 | )                             |  | $ | (24,577,348                      | ) |  | $ | 2,162,072  |  
|                                                    |  |                 |             |   |                                     |   |            |                               |  |   |                                  |   |  |   |            |  
|Net Loss                                            |  |                 | (5,718,626  | ) |                                     |   |            |                               |  |   | (5,718,626                       | ) |  |   | (5,718,626 | )
|Capital Contributions                               |  |                 | 2,344,331   |   |                                     |   |            |                               |  |   | 2,344,331                        |   |  |   |            |  
|Foreign currency translation adjustment             |  |                 |             |   |                                     |   | (173,748   | )                             |  |   | (173,748                         | ) |  |   | (173,748   | )
|Transfer of foreign currency translation adjustment |  |                 |             |   |                                     |   | 2,033,392  |                               |  |   | 2,033,392                        |   |  |   |            |  
|                                                    |  |                 |             |   |                                     |   |            |                               |  |   |                                  |   |  |   |            |  
|Balance at December 31, 2002                        |  |                 | (25,918,252 | ) |                                     |   | (173,748   | )                             |  |   | (26,092,000                      | ) |  | $ | (5,892,374 | )
|                                                    |  |                 |             |   |                                     |   |            |                               |  |   |                                  |   |  |   |            |  
|Net Loss                                            |  |                 | (3,208,905  | ) |                                     |   |            |                               |  |   | (3,208,905                       | ) |  |   | (3,208,905 | )
|                                                    |  |                 |             |   |                                     |   |            |                               |  |   |                                  |   |  |   |            |  
|Balance December 31, 2003                           |  |                 | (29,127,157 | ) |                                     |   | (173,748   | )                             |  |   | (29,300,905                      | ) |  | $ | (3,208,905 | )
|                                                    |  |                 |             |   |                                     |   |            |                               |  |   |                                  |   |  |   |            |  
|Net Loss                                            |  |                 | (4,426,154  | ) |                                     |   |            |                               |  |   | (4,426,154                       | ) |  |   | (4,426,154 | )
|Foreign currency translation adjustment             |  |                 |             |   |                                     |   | 173,748    |                               |  |   | 173,748                          |   |  |   | 173,748    |  
|                                                    |  |                 |             |   |                                     |   |            |                               |  |   |                                  |   |  |   |            |  
|Balance at December 31, 2004                        |  | $               | (33,553,310 | ) |                                     | $ |           |                               |  |   | (33,553,310                      | ) |  | $ | (4,252,406 | )
|                                                    |  |                 |             |   |                                     |   |            |                               |  |   |                                  |   |  |   |            |  





The accompanying notes are an integral part of these consolidated financial statements.



F-48



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EUROTEL, L.L.C.

LINCOLN, NEBRASKA

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2004, 2003 and
2002



|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                  |  | 2004 |            |   | 2003 |   |            | 2002 | 
|CASH FLOWS FROM OPERATING ACTIVITIES                                                              |  |      |            |   |      |   |            |      |  |   |            |  
|Net income (loss)                                                                                 |  | $    | (4,426,154 | ) |      | $ | (3,208,905 | )    |  | $ | (5,718,626 | )
|Adjustment to reconcile net income (loss) to net cash provided by/(used in) operating activities: |  |      |            |   |      |   |            |      |  |   |            |  
|Loss on write-off of loan receivable                                                              |  |      |           |   |      |   |           |      |  |   | 596,849    |  
|Depreciation and amortization                                                                     |  |      | 23         |   |      |   | 806        |      |  |   | 4,025      |  
|Loss on disposal of equipment                                                                     |  |      |           |   |      |   | 1,074      |      |  |   | 6,143      |  
|Equity in net losses of affiliate                                                                 |  |      | 2,559,956  |   |      |   | 956,926    |      |  |   | 966,704    |  
|Changes in assets and liabilities:                                                                |  |      |            |   |      |   |            |      |  |   |            |  
|(Increase) Decrease in:                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Receivables                                                                                       |  |      | (13,791    | ) |      |   |           |      |  |   | (14,456    | )
|Increase (Decrease) in:                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Accounts payable                                                                                  |  |      | (10,510    | ) |      |   | (319       | )    |  |   | (1,135,801 | )
|Accounts payable to Founders                                                                      |  |      | 1,968,076  |   |      |   | 2,209,099  |      |  |   | 4,279,714  |  
|Accrued liabilities                                                                               |  |      |           |   |      |   |           |      |  |   | (394,023   | )
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash provided by/(used in) operating activities                                               |  |      | 77,600     |   |      |   | (41,319    | )    |  |   | (1,409,471 | )
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                              |  |      |            |   |      |   |            |      |  |   |            |  
|Investment in Pilicka                                                                             |  |      |           |   |      |   |           |      |  |   | (1,100,000 | )
|Cash transferred to Pilicka                                                                       |  |      |           |   |      |   |           |      |  |   | (696,334   | )
|Purchase of property, plant and equipment                                                         |  |      | (1,428     | ) |      |   |           |      |  |   |           |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash used in investing activities                                                             |  |      | (1,428     | ) |      |   |           |      |  |   | (1,796,334 | )
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                              |  |      |            |   |      |   |            |      |  |   |            |  
|Proceeds from member contributions                                                                |  |      |           |   |      |   |           |      |  |   | 2,344,331  |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash provided by financing activities                                                         |  |      |           |   |      |   |           |      |  |   | 2,344,331  |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|                                                                                                  |  |      |           
|Net Increase (Decrease) in Cash and Cash Equivalents                                              |  |      | 76,112     |   |      |   | (41,319    | )    |  |   | (861,474   | )
|                                                                                                  |  |      |           
|Cash and Cash Equivalents at Beginning of Year                                                    |  |      | 106,344    |   |      |   | 147,663    |      |  |   | 1,009,137  |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|                                                                                                  |  |      |           
|Cash and Cash Equivalents at End of Year                                                          |  | $    | 182,516    |   |      | $ | 106,344    |      |  | $ | 147,663    |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|                                                                                                  |  |      |           
|Cash paid for interest                                                                            |  | $    |           |   |      | $ |           |      |  | $ | 50,751     |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|                                                                                                  |  |      |           
|Supplementary Disclosure of Noncash Activity:                                                     |  |      |            |   |      |   |            |      |  |   |            |  
|                                                                                                  |  |      |           
|Transfer of assets and liabilities of Pilicka                                                     |  |      |            |   |      |   |            |      |  |   |            |  
|                                                                                                  |  |      |           
|Current assets                                                                                    |  | $    |           |   |      | $ |           |      |  | $ | 1,729,662  |  
|Noncurrent assets                                                                                 |  |      |           |   |      |   |           |      |  |   | 15,014,449 |  
|Current liabilities                                                                               |  |      |           |   |      |   |           |      |  |   | (3,116,947 | )
|Noncurrent liabilities                                                                            |  |      |           |   |      |   |           |      |  |   | (1,356,890 | )
|Cumulative translation adjustment                                                                 |  |      |           |   |      |   |           |      |  |   | 2,033,392  |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|                                                                                                  |  | $    |           |   |      | $ |           |      |  | $ | 14,303,666 |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|See Notes 4 and 9 for other noncash activities.                                                   |  |      |            |   |      |   |            |      |  |   |            |  

The accompanying notes are an integral part of these consolidated financial statements.



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EUROTEL, L.L.C.

LINCOLN, NEBRASKA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

NOTE 1. ORGANIZATION

EuroTel
L.L.C. (the Company) was organized in December 1993 to act as a holding company for a foreign investment in Pilicka Telefonia Sp. z o.o. (Pilicka). The Company directly held this investment until May 1998. In 1998, the Company organized a
subsidiary, PenneCom B.V. (PenneCom), to act as a Dutch holding company for foreign investments. PenneCom is a wholly-owned subsidiary of the Company. In May 1998, Pilicka was contributed to PenneCom by the Company at its net book value, as the
Company and PenneCom were entities under common control.

Pilicka is involved in the design, construction and operation of a
telecommunications network in the Radom, Piotrków Trybunalski and Tarnobrzeg regions in Poland. During 1999, Pilicka was converted from a Polish S.A. to a Polish Sp. z o.o. The Companys founding members are comprised of three companies:
Consolidated Companies, Inc., D&E Investments, Inc., a wholly-owned subsidiary of D&E Communications, Inc., and HunTel Systems, Inc. (the Founders).

On December 31, 2001, the Company and the Founders entered into an agreement with PenneCom whereby PenneCom transferred 100% of its shares in Pilicka to the Company and the Founders in exchange for partial
satisfaction of loans and interest payable. The Company now owns 27.85% of Pilicka and for the year ended December 31, 2004, and 2003, accounted for its investment under the equity method of accounting.

NOTE 2. LIQUIDITY

The Company is dependent upon the
Founders to provide the liquidity necessary for the Company to meet its cash flow requirements for the year 2005. In 2002, the Founders made equity capital contributions of $2,344,331. In 2003 and 2004, the Founders made short-term advances of
$2,889,334 and $1,908,000, respectively, which are recorded in Current Liabilities as Due to Founders.

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its 100%-owned subsidiary, PenneCom. All material intercompany transactions have been eliminated in consolidation.

Cash and Cash Equivalents

All highly
liquid investments with a maturity of three months or less at the time of purchase are considered cash equivalents.

Investment in
Affiliate

The equity method of accounting is used when the Company has a 20% to 50% interest in other entities. Under the equity
method, original investments are recorded at cost and adjusted by the Companys share of undistributed earnings or losses of these entities.



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EUROTEL, L.L.C.

LINCOLN, NEBRASKA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2004, 2003 and 2002



Comprehensive Income (Loss)

The Company has elected to present comprehensive income (loss) in the Statement of Members Equity. Comprehensive income (loss) consists of the
income (loss) for the period and the change in the foreign currency translation adjustment.

Income Taxes

EuroTels taxable income passes to its members and therefore no taxes are recognized related to its operation. PenneCom B.V. is subject to 35% Dutch
corporate tax. Since PenneCom has no taxable income in 2004, 2003 and 2002, no Dutch taxes have been recorded.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.

Foreign Currency Translation

The financial position and results of operations of Pilicka are measured using the local currency, Polish zlotys, as the functional currency. Assets and
liabilities of this subsidiary are translated at the exchange rate in effect at year-end. Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from differences in
exchange rates from period to period are included in the cumulative other comprehensive income (loss) account in shareholders equity. Foreign currency transaction gains and losses, as well as translation adjustments for monetary assets and
liabilities of Pilicka that are denominated in currencies other than the Polish zloty, are recognized in the statement of operations. Certain foreign currency translations were recorded in 2002 as a result of the exchange of the Pilicka investment,
see Note 4.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Expenditures for repairs and maintenance, which do not materially extend the useful lives of the related asset, are charged to expense as incurred. The cost of assets
retired or otherwise disposed of, and the accumulated depreciation thereon, is removed from the accounts with any gain or loss realized upon sale or disposal charged or credited to operations.

Depreciation expense is recorded in the month following the commencement of use by applying the straight-line method over the estimated useful life of
the assets: leasehold improvements and buildings (10-25 years), telecommunication equipment (10 years), and vehicles and other equipment (5-10 years). As of December 31, 2004 the Company had investments in property, plant, and equipment of $1,403.
Telephone plant is capitalized at original cost including the capitalized cost of salaries and wages, materials, certain payroll taxes, employee benefits, and interest incurred during the construction period.



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EUROTEL, L.L.C.

LINCOLN, NEBRASKA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2004, 2003 and 2002



Concentration of Risk

Financial instruments, which potentially subject the Company to concentrations of risk, include cash and cash equivalents and trade receivables. The
Company limits its risk associated with cash and cash equivalents by placing its investments with highly rated financial institutions, usually as short-term deposits. The Company maintains its checking accounts in three commercial banks. Cash in
these checking accounts at times exceeded $100,000. The Company has not experienced any losses in such accounts.

Reclassifications

Certain reclassifications have been made to the 2003 and 2002 consolidated financial statements to conform with the 2004 presentation.

NOTE 4. EXCHANGE OF PILICKA INVESTMENT

On December 31, 2001, the Company and the Founders entered into an agreement with PenneCom whereby PenneCom transferred 100% of its shares in Pilicka to the Company and the Founders in exchange for satisfaction of loans and interest payable
totaling $15,000,000 with an intended economic effect date of December 31, 2001. As a result of this agreement, the Company recognized a loss of $31,517,480 in 2001, which represents the excess of the carrying value of the net assets over their net
realizable value. The actual share transfer occurred in May 2002. The Company received a 22.56% ownership interest in Pilicka, valued at $3,383,586, as a result of the share transfer. The net assets of Pilicka at December 31, 2001 which were
deconsolidated in 2002 are as follows:



|                                     |  |   |            |  
|------------------------------------ |  | - | ---------- | -
|Cash                                 |  | $ | 696,334    |  
|Receivables and other current assets |  |   | 1,729,662  |  
|Property, plant and equipment        |  |   | 13,265,980 |  
|Intangible assets                    |  |   | 1,563,054  |  
|Other non-current assets             |  |   | 185,415    |  
|Payables and accrued liabilities     |  |   | (3,064,387 | )
|Deferred revenues                    |  |   | (1,409,450 | )
|Cumulative translation adjustment    |  |   | 2,033,392  |  
|                                     |  |   |            |  
|Total net assets                     |  | $ | 15,000,000 |  
|                                     |  |   |            |  

NOTE 5. INVESTMENT IN AFFILIATE

As disclosed in Note 4, the Company received an ownership interest in Pilicka in exchange for the partial satisfaction of loans and interest payable. In
addition, the Company contributed additional capital of $1,100,000 during 2002 to increase its ownership percentage to 27.85%. The investment is being accounted for using the equity method.

Investment in affiliate was recorded in the Consolidated Balance Sheets at December 31, 2004 and 2003 of $0 and $2,386,208, respectively.

Pilicka had a net loss of $23,237,000 in 2004. The Companys portion of the net loss was $6,471,505, of which $2,386,208 was recorded and $4,085,297
was not recorded.



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EUROTEL, L.L.C.

LINCOLN, NEBRASKA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2004, 2003 and 2002



The financial position and results of operations of the Companys equity basis investment are
summarized below:



|                                        |  |      |             |   |      |   |            |  
|--------------------------------------- |  | ---- | ----------- | - | ---- | - | ---------- | -
|                                        |  | 2004 |             |   | 2003 |  
|Condensed balance sheet information:    |  |      |             |   |      |   |            |  
|Current asset                           |  | $    | 6,164,000   |   |      | $ | 2,816,000  |  
|Noncurrent assets                       |  |      | 25,471,000  |   |      |   | 41,106,000 |  
|                                        |  |      |             |   |      |   |            |  
|Total assets                            |  | $    | 31,635,000  |   |      | $ | 43,922,000 |  
|                                        |  |      |             |   |      |   |            |  
|Current liabilities                     |  |      | 2,405,000   |   |      |   | 1,811,000  |  
|Noncurrent liabilities                  |  |      | 745,000     |   |      |   | 932,000    |  
|Shareholders equity                    |  |      | 28,485,000  |   |      |   | 41,179,000 |  
|                                        |  |      |             |   |      |   |            |  
|Total liabilities and equity            |  | $    | 31,635,000  |   |      | $ | 43,922,000 |  
|                                        |  |      |             |   |      |   |            |  
|Condensed income statement information: |  |      |             |   |      |   |            |  
|Operating revenues                      |  | $    | 14,131,000  |   |      | $ | 10,548,000 |  
|Operating expenses                      |  |      | 37,681,000  |   |      |   | 13,752,000 |  
|                                        |  |      |             |   |      |   |            |  
|Operating loss                          |  |      | (23,550,000 | ) |      |   | (3,204,000 | )
|Other income (expense)                  |  |      | 313,000     |   |      |   | (232,000   | )
|                                        |  |      |             |   |      |   |            |  
|Net loss                                |  | $    | (23,237,000 | ) |      | $ | (3,436,000 | )
|                                        |  |      |             |   |      |   |            |  

Reconciliation of equity investment at December 31, 2004 and 2003 is as follows:



|                                       |  |      |            |   |      |   |           |  
|-------------------------------------- |  | ---- | ---------- | - | ---- | - | --------- | -
|                                       |  | 2004 |            |   | 2003 |  
|Beginning balance and initial transfer |  | $    | 2,386,208  |   |      | $ | 3,343,134 |  
|Capital contributions                  |  |      |           |   |      |   |          |  
|Allocation of loss                     |  |      | (2,386,208 | ) |      |   | (956,926  | )
|                                       |  |      |            |   |      |   |           |  
|                                       |  | $    | 0          |   |      | $ | 2,386,208 |  
|                                       |  |      |            |   |      |   |           |  

NOTE 6. LOAN RECEIVABLE

In July 2000, the Company loaned United Food Technologies BV (UFT) $500,000 to expand its network of Wendys restaurants in Hungary. UFT owns equity interests in companies operating Wendys franchises. The
loan earns interest at 20% (10% during the first year) and was due in July 2002. During 2002 interest income related to the loan was $73,425.

During 2002, it was determined that the note receivable and related accrued interest were uncollectible. A loss of $596,849 was recognized in 2002 based on the write-off of the note receivable and accrued interest.

NOTE 7. DUE TO FOUNDERS

Due to Founders consists of
the following at December 31, 2004 and 2003:



|                                                 |  |      |            |      |   |           
|------------------------------------------------ |  | ---- | ---------- | ---- | - | ----------
|                                                 |  | 2004 |            | 2003
|Accounts payable to Founders                     |  |      | 14,687,669 |      |   | 12,719,593
|Accrued interest on accounts payable to Founders |  |      | 1,757,182  |      |   | 1,757,182 
|Advances payable to Founders                     |  |      | 17,263,529 |      |   | 17,263,529
|                                                 |  |      |            |      |   |           
|                                                 |  | $    | 33,708,380 |      | $ | 31,740,304
|                                                 |  |      |            |      |   |           



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EUROTEL, L.L.C.

LINCOLN, NEBRASKA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2004, 2003 and 2002



Accounts payable to Founders represent operating costs paid on behalf of the Company by those
entities. Interest accrued on the accounts payable through December 2001 at the rate of 15% (7% through February 1999). Beginning in 2002, the Company discontinued the interest accrual on these obligations as all operating expenses advanced by the
Founders are being reimbursed on a current basis. In 2004 and 2003, the Founders advanced funds in the amount of $2,889,334 and $l,908,000 respectively.

The loans payable bear interest at a fixed rate of 15%. Interest was accrued on the loans through December 2001. Like the accounts payable, the Company discontinued the accrual on interest on these obligations in
2002.

NOTE 8. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of financial instruments was estimated based on the following methods and assumptions:

Cash
and cash equivalents, accounts receivable and accounts payable: The carrying amount approximates fair value due to the short maturity of these instruments.

Due to Founders: It is not practicable to estimate fair value of these instruments due to the related party nature and unique features of the instruments.

NOTE 9. LOSS ON INVESTMENT IN AFFILIATE

During 2002, EuroTel executed a contract to repurchase a 9%
interest in PenneCom, which had been previously awarded to an affiliate. The value of the 9% interest on the date of award has been recognized as general and administrative expense. The amount of the payments in excess of the amount recorded as
general and administrative expense has been recorded, and to the extent future payments are made will be recorded, as an additional investment in PenneCom. Because PenneCom has neither assets nor operating revenues, and because any future value is
highly speculative, the Company has recorded a loss for all repurchase proceeds paid in 2002 in excess of the amount recorded as general and administrative expense.

NOTE 10. INCOME TAXES

United States

EuroTels taxable income passes to its members and therefore no taxes are recognized related to its operations.

Netherlands

PenneCom is subject to
35% Dutch corporate tax. However, any benefits derived from qualifying subsidiaries, which includes Pilicka, are exempt from Dutch tax. All proceeds derived from the arbitration relating to the sale of Pilicka fall within that exempt
category. In conjunction with the above, all costs that are attributable to such qualifying subsidiaries are not deductible for Dutch tax purposes. Also, the loss that PenneCom has recorded on the transfer of Pilicka in partial satisfaction of its
debt to its various creditors will not be deductible. As a result, PenneCom has no taxable profit or loss for 2004, 2003, and 2002. Therefore, no Dutch taxes have been recorded related to PenneCom.



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EUROTEL, L.L.C.

LINCOLN, NEBRASKA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2004, 2003 and 2002



NOTE 11. RELATED PARTY TRANSACTIONS

The Company paid $751,070, $503,657, and $797,746 to the Founders for various management, accounting, and other administrative functions during the years
ended December 31, 2004, 2003, and 2002, respectively. These amounts are included in general and administrative expenses and in litigation costs related to sale of affiliate in the Consolidated Statements of Operations.

In 2002, the Company paid $307,341 to a law firm for legal services where one of the lawyers was a managing director of the Company. This amount is
included in litigation costs related to sale of affiliate and general and administrative expenses in the Consolidated Statements of Operations.

NOTE
12. GAIN CONTINGENCY

In July 2002, the Company, through its subsidiary PenneCom, initiated a legal action against an investment bank,
and an individual, alleging violations of applicable law relating to the advice given by the investment bank and the individual to a prospective buyer not to close on the purchase of Pilicka. On June 28, 2004, the Second Circuit Court of Appeals
reversed an order of the United States District Court for the Southern District of New York, which earlier had dismissed the case. Management of the Company continues to believe that, based on the advice of its legal counsel, the suit is
meritorious. However, the ultimate outcome of the litigation cannot be determined and no amount has been recognized for possible collection of any claims in the litigation. Legal costs are expected to continue to be incurred in pursuit of such
litigation.



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Pilicka Telefonia Sp. z o.o.

Financial Statements

December 31, 2004



F-56



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##### Table of Contents

Pilicka Telefonia Sp. z o.o.

Index to Financial Statements



|                                                        |  |     
|------------------------------------------------------- |  | ----
|                                                        |  | Page
|Report of Independent Registered Public Accounting Firm |  | F-58
|                                                        | 
|Balance Sheets                                          |  | F-59
|                                                        | 
|Statements of Operations                                |  | F-60
|                                                        | 
|Statements of Changes in Shareholders Equity           |  | F-61
|                                                        | 
|Statements of Cash Flows                                |  | F-62
|                                                        | 
|Notes to Financial Statements                           |  | F-64



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Supervisory Board and Shareholders of Pilicka
Telefonia Sp. z o.o.

We have audited the accompanying balance sheets of Pilicka Telefonia Sp. z o.o. (the Company) as of
December 31, 2004 and 2003 and the related statements of operations, changes in shareholders equity and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our
audits in accordance with the standards of the Public Company Accounting Oversight Board (U.S.). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as
well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2004 and 2003, and the results of its operations, changes in shareholders equity and its
cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

PRICEWATERHOUSECOOPERS SP. Z O.O.

Warsaw, Poland

March 1, 2005



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##### Table of Contents

Pilicka Telefonia Sp. z o.o.

Balance Sheets

(All amounts in thousands)



|                                                                                                                               |  |       |  |                  |   |  |                  |   |  |                                   |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ----- |  | ---------------- | - |  | ---------------- | - |  | --------------------------------- | -
|                                                                                                                               |  |       |  |                  |   |  |                  |   |  | ConvenienceTranslation $ (Note 2) |  
|                                                                                                                               |  | Note  |  | December 31,2003 |   |  | December 31,2004 |   |  | December 31,2004                  |  
|                                                                                                                               |  |       |  | (PLN)            |   |  | (PLN)            |   |  | (Unaudited)                       |  
|Assets                                                                                                                         |  |       |  |                  |   |  |                  |   |  |                                   |  
|Current assets                                                                                                                 |  |       |  |                  |   |  |                  |   |  |                                   |  
|Cash and cash equivalents                                                                                                      |  |       |  | 3,212            |   |  | 10,886           |   |  | 3,641                             |  
|Trade receivables, net of allowance for doubtful accounts of PLN 2,348 at December 31, 2003 and PLN 2,845 at December 31, 2004 |  |       |  | 6,389            |   |  | 6,589            |   |  | 2,203                             |  
|Other current assets                                                                                                           |  | 3,8   |  | 931              |   |  | 957              |   |  | 320                               |  
|                                                                                                                               |  |       |  |                  |   |  |                  |   |  |                                   |  
|Total current assets                                                                                                           |  |       |  | 10,532           |   |  | 18,432           |   |  | 6,164                             |  
|                                                                                                                               |  |       |  |                 
|Property and equipment, net                                                                                                    |  | 4,5   |  | 139,588          |   |  | 70,032           |   |  | 23,419                            |  
|Intangible assets, net                                                                                                         |  | 4,6   |  | 13,651           |   |  | 5,094            |   |  | 1,703                             |  
|Other long-term assets                                                                                                         |  | 8     |  | 518              |   |  | 1,045            |   |  | 349                               |  
|                                                                                                                               |  |       |  |                  |   |  |                  |   |  |                                   |  
|                                                                                                                               |  |       |  |                 
|Total assets                                                                                                                   |  |       |  | 164,289          |   |  | 94,603           |   |  | 31,635                            |  
|                                                                                                                               |  |       |  |                  |   |  |                  |   |  |                                   |  
|Liabilities and shareholders equity                                                                                           |  |       |  |                  |   |  |                  |   |  |                                   |  
|                                                                                                                               |  |       |  |                 
|Current liabilities                                                                                                            |  |       |  |                  |   |  |                  |   |  |                                   |  
|Short-term debt                                                                                                                |  | 10    |  |                 |   |  | 2,000            |   |  | 669                               |  
|Accounts payable                                                                                                               |  | 7     |  | 4,693            |   |  | 4,117            |   |  | 1,377                             |  
|Accrued expenses                                                                                                               |  |       |  | 816              |   |  | 642              |   |  | 214                               |  
|Deferred revenue                                                                                                               |  | 9     |  | 1,266            |   |  | 435              |   |  | 145                               |  
|                                                                                                                               |  |       |  |                  |   |  |                  |   |  |                                   |  
|Total current liabilities                                                                                                      |  |       |  | 6,775            |   |  | 7,194            |   |  | 2,405                             |  
|Long term debt                                                                                                                 |  | 10    |  |                 |   |  | 1,964            |   |  | 657                               |  
|Long-term liabilities for licenses                                                                                             |  | 6     |  | 2,924            |   |  |                 |   |  |                                  |  
|Deferred revenue                                                                                                               |  | 9     |  | 561              |   |  | 262              |   |  | 88                                |  
|                                                                                                                               |  |       |  |                  |   |  |                  |   |  |                                   |  
|                                                                                                                               |  |       |  |                 
|Total liabilities                                                                                                              |  |       |  | 10,260           |   |  | 9,420            |   |  | 3,150                             |  
|                                                                                                                               |  |       |  |                  |   |  |                  |   |  |                                   |  
|Contingencies and commitments                                                                                                  |  | 14,15 |  |                 |   |  |                 |   |  |                                  |  
|                                                                                                                               |  |       |  |                 
|Shareholders equity                                                                                                           |  |       |  |                  |   |  |                  |   |  |                                   |  
|Share capital, issued and outstanding 226,491 common shares at December 31, 2003 and 2004, par value PLN 500 per share         |  | 11    |  | 113,246          |   |  | 113,246          |   |  | 37,869                            |  
|Additional paid-in capital                                                                                                     |  |       |  | 152,093          |   |  | 152,735          |   |  | 51,075                            |  
|Accumulated deficit                                                                                                            |  |       |  | (111,310         | ) |  | (180,798         | ) |  | (60,459                           | )
|                                                                                                                               |  |       |  |                  |   |  |                  |   |  |                                   |  
|                                                                                                                               |  |       |  |                 
|Total shareholders equity                                                                                                     |  |       |  | 154,029          |   |  | 85,183           |   |  | 28,485                            |  
|                                                                                                                               |  |       |  |                  |   |  |                  |   |  |                                   |  
|                                                                                                                               |  |       |  |                 
|Total liabilities and shareholders equity                                                                                     |  |       |  | 164,289          |   |  | 94,603           |   |  | 31,635                            |  
|                                                                                                                               |  |       |  |                  |   |  |                  |   |  |                                   |  



|              |  |                   
|------------- |  | ------------------
|              |  |                   
|John Tesmer   |  | Brian Bode        
|President     |  | Financial Director
|              | 
|Radom, Poland |  |                   
|March 1, 2005 |  |                   



The accompanying notes are an
integral part of the financial statements.



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Pilicka Telefonia Sp. z o.o.

Statements of Operations

(All amounts in thousands)



|                                         |  |      |  |                  |   |  |                                   |   |  |                  |   |  |                   |  
|---------------------------------------- |  | ---- |  | ---------------- | - |  | --------------------------------- | - |  | ---------------- | - |  | ----------------- | -
|                                         |  |      |  | Year ended       |   |  | ConvenienceTranslation $ (Note 2) |  
|                                         |  | Note |  | December 31,2002 |   |  | December 31,2003                  |   |  | December 31,2004 |   |  | December 31, 2004 |  
|                                         |  |      |  | (PLN)            |   |  | (PLN)                             |   |  | (PLN)            |   |  | (Unaudited)       |  
|Revenue                                  |  |      |  |                  |   |  |                                   |   |  |                  |   |  |                   |  
|Telecommunication services revenue       |  |      |  | 36,593           |   |  | 37,481                            |   |  | 40,970           |   |  | 13,700            |  
|Installation fees and sales of equipment |  |      |  | 2,061            |   |  | 1,973                             |   |  | 1,289            |   |  | 431               |  
|                                         |  |      |  |                  |   |  |                                   |   |  |                  |   |  |                   |  
|                                         |  |      |  | 38,654           |   |  | 39,454                            |   |  | 42,259           |   |  | 14,131            |  
|                                         |  |      |  |                  |   |  |                                   |   |  |                  |   |  |                   |  
|Operating expenses                       |  |      |  |                  |   |  |                                   |   |  |                  |   |  |                   |  
|Salaries and benefits                    |  |      |  | (9,209           | ) |  | (9,381                            | ) |  | (9,827           | ) |  | (3,286            | )
|Depreciation and amortization            |  |      |  | (20,476          | ) |  | (21,125                           | ) |  | (21,172          | ) |  | (7,080            | )
|Impairment loss                          |  |      |  | (505             | ) |  | (977                              | ) |  | (61,366          | ) |  | (20,521           | )
|Interconnection charges                  |  |      |  | (8,601           | ) |  | (5,961                            | ) |  | (6,481           | ) |  | (2,167            | )
|Selling, general and administrative      |  |      |  | (13,952          | ) |  | (13,843                           | ) |  | (13,753          | ) |  | (4,599            | )
|Other operating expenses, net            |  |      |  | (261             | ) |  | (152                              | ) |  | (85              | ) |  | (28               | )
|                                         |  |      |  |                  |   |  |                                   |   |  |                  |   |  |                   |  
|                                         |  |      |  | (53,004          | ) |  | (51,439                           | ) |  | (112,684         | ) |  | (37,681           | )
|                                         |  |      |  |                  |   |  |                                   |   |  |                  |   |  |                   |  
|                                         |  |      |  |                  |  
|Operating loss                           |  |      |  | (14,350          | ) |  | (11,985                           | ) |  | (70,425          | ) |  | (23,550           | )
|Financial income/(expense), net          |  | 12   |  | (80              | ) |  | (866                              | ) |  | 937              |   |  | 313               |  
|                                         |  |      |  |                  |   |  |                                   |   |  |                  |   |  |                   |  
|Net loss                                 |  |      |  | (14,430          | ) |  | (12,851                           | ) |  | (69,488          | ) |  | (23,237           | )
|                                         |  |      |  |                  |   |  |                                   |   |  |                  |   |  |                   |  

The accompanying notes are an integral part of the financial statements.



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Pilicka Telefonia Sp. z o.o.

Statements of Changes in Shareholders Equity

(All amounts in thousands)



|                                        |  |              |  |                          |  |                    |   |  |         |  
|--------------------------------------- |  | ------------ |  | ------------------------ |  | ------------------ | - |  | ------- | -
|                                        |  | ShareCapital |  | AdditionalPaid-inCapital |  | AccumulatedDeficit |   |  | Total   |  
|                                        |  | (PLN)        |  | (PLN)                    |  | (PLN)              |   |  | (PLN)   |  
|                                        |  |              |  |                         
|At January 1, 2002                      |  | 109,068      |  | 150,637                  |  | (84,029            | ) |  | 175,676 |  
|Costs paid by shareholders              |  |             |  | 593                      |  |                   |   |  | 593     |  
|Net loss                                |  |             |  |                         |  | (14,430            | ) |  | (14,430 | )
|                                        |  |              |  |                          |  |                    |   |  |         |  
|                                        |  |              |  |                         
|At December 31, 2002                    |  | 109,068      |  | 151,230                  |  | (98,459            | ) |  | 161,839 |  
|                                        |  |              |  |                          |  |                    |   |  |         |  
|Common stock issued                     |  | 4,178        |  |                         |  |                   |   |  | 4,178   |  
|Capital contributions from shareholders |  |             |  | 299                      |  |                   |   |  | 299     |  
|Costs paid by shareholders              |  |             |  | 564                      |  |                   |   |  | 564     |  
|Net loss                                |  |             |  |                         |  | (12,851            | ) |  | (12,851 | )
|                                        |  |              |  |                          |  |                    |   |  |         |  
|                                        |  |              |  |                         
|At December 31, 2003                    |  | 113,246      |  | 152,093                  |  | (111,310           | ) |  | 154,029 |  
|                                        |  |              |  |                          |  |                    |   |  |         |  
|Costs paid by shareholders              |  |             |  | 642                      |  |                   |   |  | 642     |  
|Net loss                                |  |             |  |                         |  | (69,488            | ) |  | (69,488 | )
|                                        |  |              |  |                          |  |                    |   |  |         |  
|                                        |  |              |  |                         
|At December 31, 2004                    |  | 113,246      |  | 152,735                  |  | (180,798           | ) |  | 85,183  |  
|                                        |  |              |  |                          |  |                    |   |  |         |  





The accompanying notes are an integral part of these financial statements.



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Pilicka Telefonia Sp. z o.o.

Statements of Cash Flows

(All amounts in thousands)



|                                                                                      |  |                  |   |  |                                   |   |  |                  |   |  |                  |  
|------------------------------------------------------------------------------------- |  | ---------------- | - |  | --------------------------------- | - |  | ---------------- | - |  | ---------------- | -
|                                                                                      |  | Year ended       |   |  | ConvenienceTranslation $ (Note 2) |  
|                                                                                      |  | December 31,2002 |   |  | December 31,2003                  |   |  | December 31,2004 |   |  | December 31,2004 |  
|                                                                                      |  | (PLN)            |   |  | (PLN)                             |   |  | (PLN)            |   |  | (Unaudited)      |  
|Cash flows from operating activities:                                                 |  |                  |   |  |                                   |   |  |                  |   |  |                  |  
|                                                                                      |  |                  |   | 
|Net loss                                                                              |  | (14,430          | ) |  | (12,851                           | ) |  | (69,488          | ) |  | (23,237          | )
|Adjustments to reconcile net loss to net cash(used)/provided by operating activities: |  |                  |   |  |                                   |   |  |                  |   |  |                  |  
|Depreciation and amortization                                                         |  | 20,476           |   |  | 21,125                            |   |  | 21,172           |   |  | 7,080            |  
|Impairment loss                                                                       |  | 505              |   |  | 977                               |   |  | 61,366           |   |  | 20,521           |  
|Foreign exchange losses/(gains)                                                       |  | 478              |   |  | 894                               |   |  | (573             | ) |  | (192             | )
|Loss on disposal of equipment                                                         |  | 686              |   |  | 958                               |   |  | 1,408            |   |  | 471              |  
|(Increase)/Decrease in trade receivables (gross)                                      |  | (1,238           | ) |  | 38                                |   |  | (697             | ) |  | (233             | )
|Increase/(Decrease) in provision for doubtful accounts                                |  | 935              |   |  | (287                              | ) |  | 498              |   |  | 167              |  
|Increase in other current assets                                                      |  | (621             | ) |  | (119                              | ) |  | (130             | ) |  | (43              | )
|Increase/(Decrease) in accounts payable                                               |  | 420              |   |  | (152                              | ) |  | 307              |   |  | 103              |  
|Decrease in deferred revenue                                                          |  | (1,939           | ) |  | (1,853                            | ) |  | (1,129           | ) |  | (378             | )
|Increase/(Decrease) in accrued expenses                                               |  | 218              |   |  | (212                              | ) |  | (174             | ) |  | (58              | )
|Other                                                                                 |  | 593              |   |  | 563                               |   |  | 641              |   |  | 214              |  
|                                                                                      |  |                  |   |  |                                   |   |  |                  |   |  |                  |  
|                                                                                      |  |                  |   | 
|Net cash provided by operating activities                                             |  | 6,083            |   |  | 9,081                             |   |  | 13,201           |   |  | 4,415            |  
|                                                                                      |  |                  |   |  |                                   |   |  |                  |   |  |                  |  
|Cash flows from investing activities:                                                 |  |                  |   |  |                                   |   |  |                  |   |  |                  |  
|Proceeds from the sale of equipment                                                   |  | 248              |   |  | 237                               |   |  | 165              |   |  | 55               |  
|Purchase of intangible assets                                                         |  | (99              | ) |  | (134                              | ) |  | (267             | ) |  | (89              | )
|Expenditures for property and equipment                                               |  | (10,937          | ) |  | (8,277                            | ) |  | (9,389           | ) |  | (3,140           | )
|                                                                                      |  |                  |   |  |                                   |   |  |                  |   |  |                  |  
|                                                                                      |  |                  |   | 
|Net cash used in investing activities                                                 |  | (10,788          | ) |  | (8,174                            | ) |  | (9,491           | ) |  | (3,174           | )
|                                                                                      |  |                  |   |  |                                   |   |  |                  |   |  |                  |  
|Advances from shareholders                                                            |  | 4,234            |   |  |                                  |   |  |                 |   |  |                 |  
|Proceeds from debt financing                                                          |  |                 |   |  |                                  |   |  | 3,964            |   |  | 1,326            |  
|                                                                                      |  |                  |   |  |                                   |   |  |                  |   |  |                  |  
|                                                                                      |  |                  |   | 
|Net cash provided by financing activities                                             |  | 4,234            |   |  |                                  |   |  | 3,964            |   |  | 1,326            |  
|                                                                                      |  |                  |   |  |                                   |   |  |                  |   |  |                  |  
|                                                                                      |  |                  |   | 
|Net (decrease)/ increase in cash and cash equivalents                                 |  | (471             | ) |  | 907                               |   |  | 7,674            |   |  | 2,567            |  
|                                                                                      |  |                  |   |  |                                   |   |  |                  |   |  |                  |  
|                                                                                      |  |                  |   | 
|Cash and cash equivalents at the beginning of period                                  |  | 2,776            |   |  | 2 305                             |   |  | 3,212            |   |  | 1,074            |  
|                                                                                      |  |                  |   |  |                                   |   |  |                  |   |  |                  |  
|                                                                                      |  |                  |   | 
|Cash and cash equivalents at the end of period                                        |  | 2,305            |   |  | 3 212                             |   |  | 10,886           |   |  | 3,641            |  
|                                                                                      |  |                  |   |  |                                   |   |  |                  |   |  |                  |  

The accompanying notes are an integral part of these financial statements.



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##### Table of Contents

Pilicka Telefonia Sp. z o.o.

Statements of Cash Flows

(All amounts in thousands)

Supplementary disclosure of cash flow information:

Non-cash investing and financing activities:



|                                                                                    |  |                  |  |                                   |  |                  |  |                 
|----------------------------------------------------------------------------------- |  | ---------------- |  | --------------------------------- |  | ---------------- |  | ----------------
|                                                                                    |  | Year ended       |  | ConvenienceTranslation $ (Note 2)
|                                                                                    |  | December 31,2002 |  | December 31,2003                  |  | December 31,2004 |  | December 31,2004
|                                                                                    |  | (PLN)            |  | (PLN)                             |  | (PLN)            |  | (Unaudited)     
|Property, equipment and construction in progress costs included in accounts payable |  | 1,806            |  | 2,041                             |  | 1,126            |  | 377             
|Cash paid for interest on debt financing                                            |  |                 |  |                                  |  | 254              |  | 85              







The accompanying notes are an integral part of these financial statements.



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##### Table of Contents

Pilicka Telefonia Sp. z o.o.

Notes to the Financial Statements

(All amounts in thousands)

1. The Company and
Business

Pilicka Telefonia Sp. z o.o. (Pilicka or the Company) was formed in 1997 as a joint stock company
under the laws of Poland and was transformed into a limited liability company in 1999. The Company is incorporated in Poland with its principal executive office located at ul. Podkanowska 54 A, 26-600 Radom, Poland.

Pilicka has obtained three licenses from the Ministry of Communications of Poland to operate local telecommunication networks throughout the former
Radom, Piotrków Trybunalski and Tarnobrzeg Voivodships in Poland for a period of fifteen years. The licenses for the former Radom and Piotrków Trybunalski Voivodships expire in 2010 and the license for the former Tarnobrzeg Voivodship
expires in 2012. In 2002, under the New Telecommunication Law effective as of January 1, 2001, the Company was granted a telecommunication permit to operate telecommunication networks and render telecommunications services throughout the whole
territory of Poland except for the networks, which are operated under the licenses already held by the Company. The new telecommunication permit has been granted for the period of twenty five-years.

The Company is involved in the design, construction and operation of a local telecommunications network, as well as in the installation and sale of
telecommunication equipment. Pilickas telecommunication services include fixed-line voice telephone service, Integrated Services Digital Network (ISDN), dial-up and fixed-access Internet (Wireless IP-Based Local Loop
WIPLL), Voice over Internet Protocol (VoIP) and Internet Protocol Virtual Private Network (IP VPN).

2. Summary of
Significant Accounting Policies

(a) Basis of presentation

The Company maintains its accounting records and prepares statutory financial statements in accordance with Polish accounting and tax regulations. These financial statements have been prepared based upon the
Companys accounting records in order to present the financial position, results of operations and of cash flows in accordance with accounting principles generally accepted in the United States of America (US GAAP), which differ in
certain respects from the accounting principles applied by the Company in its financial statements prepared in accordance with Polish accounting regulations.

(b) US Dollar convenience translation (Unaudited)

The measurement currency is Polish Zloty (PLN) that reflects
the economic substance of the underlying events and circumstances of the Company. The US Dollar (USD) amounts shown in the accompanying financial statements have been translated at December 31, 2004 and for the year ended December 31,
2004 from PLN only as a matter of arithmetic computation at the PLN exchange rate of PLN 2.9904 = USD 1.00, the rate published by the National Bank of Poland and effective on December 31, 2004. These amounts are unaudited and are included for the
convenience of the reader only as supplementary information. Such translation should not be construed as a representation that the PLN amounts have been or could be converted into USD at this or any other rate.

(c) Cash and cash equivalents

The Company considers
all highly liquid instruments purchased with a maturity from purchase date of three months or less to be cash and cash equivalents. Cash equivalents consist of overnight bank accounts.



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Pilicka Telefonia Sp. z o.o.

Notes to the Financial Statements(Continued)

(All amounts in thousands)



(d) Embedded derivatives instruments

When the Company purchases a financial instrument or enters into other agreements in which a derivative instrument is embedded, it assesses
whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate, non-embedded
instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the
economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value with changes in
the fair value of the derivatives recorded each period in statement of operations.

(e) Property, equipment and construction in progress

Property and equipment are stated at cost. Construction-in-progress represents the accumulation of costs associated with the construction of telephone
networks and other tangible fixed assets. The Company continually monitors the progress of these construction projects and tracks each project by location. The Company capitalizes all costs that are directly attributable to the network development
in construction-in-progress. Expenditures for repairs and maintenance, which do not materially extend the useful lives of the related asset, are charged to expense as incurred. The cost of assets retired or otherwise disposed of and the accumulated
depreciation thereon are removed from the accounts with any gain or loss realized upon sale or disposal charged or credited to operations.

Depreciation expense is recorded by applying the straight-line method over the estimated useful life of the assets. The depreciation rates are summarized as follows:



|                                     |  |            
|------------------------------------ |  | -----------
|                                     |  | Useful life
|Leasehold improvements and buildings |  | 1025 years
|Telecommunication equipment          |  | 10 years   
|Vehicles and other equipment         |  | 510 years 

(f) Telecommunication licenses

The intangible assets include the acquisition costs incurred in connection with the acquisition of licenses to provide telecommunication services. The
licenses for the former Radom and Piotrków Trybunalski voivodships were acquired through the EuroTel L.L.C. purchase of the Company in 1997. Intangible assets also represent amounts paid to the Ministry of Communications of Poland for the
purchase of license for the former Tarnobrzeg voivodship. Licenses are stated at cost less accumulated amortization and impairment charges. Amortization is recorded on a straight-line basis over the period for which the license is granted (see Note
1).

(g) Computer software

Costs that
are directly associated with identifiable and unique software controlled by the Company and which have probable economic benefits beyond one year are recognized as intangible assets and amortized using the straight-line method over their useful
lives, not exceeding a period of 5 years.



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##### Table of Contents

Pilicka Telefonia Sp. z o.o.

Notes to the Financial Statements(Continued)

(All amounts in thousands)



(h) Impairment of long-lived assets

The Company reviews its long-lived assets, including intangible assets, for impairment whenever events or changes in business circumstances indicate that
the carrying amount of the assets may not be fully recoverable. The Company performs an undiscounted operating cash flow analyses to determine if impairment exists. If impairment is determined to exist, any related impairment loss is calculated
based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.

(i) Retirement benefits

The Company pays social security taxes on each employee to the Polish Government. The Company has
no other employee retirement plans.

(j) Accounting for leases

Leases of assets where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the statement of
operations on a straight-line basis over the period of the lease.

When an operating lease is terminated before the lease period has
expired, any payment required to be made to the lessor by way of penalty is recognized as an expense in the period in which termination takes place.

(k) Revenues

Telecommunication service revenue from access to and the usage of telecommunication networks are recognized
when the services are provided. Revenue from installation fees is recognized over the period of the average life of the customer, which is estimated to be five years for Pilicka.

(l) Advertising costs

All advertising costs are expensed as incurred. Advertising expenses for the
years ended December 31, 2004, 2003 and 2002 were PLN 770, PLN 808, PLN 845, respectively.

(m) Foreign currency translation

Transactions denominated in foreign currencies have been translated into PLN at actual rates of exchange ruling at the date of transaction. Monetary
assets and liabilities denominated in foreign currencies have been translated at rates ruling at the balance sheet date. Exchange differences have been included in financial income/(expenses).

(n) Comparative financial information

Where
necessary, comparative figures have been adjusted to conform to changes in presentation in the current year. No amendments have resulted in changes to previously presented net results or shareholders equity.



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##### Table of Contents

Pilicka Telefonia Sp. z o.o.

Notes to the Financial Statements(Continued)

(All amounts in thousands)



(o) Financial Instruments

Financial instruments that potentially subject the Company to concentrations of credit risk include cash, cash equivalents and trade receivables. The Company limits its credit risk associated with cash and cash
equivalents by placing its investments with highly rated financial institutions, usually as short-term deposits. With respect to trade receivables, the Company limits its credit risk by disconnecting service for certain customers who are past due
with respect to their payments.

(p) Income taxes

Income taxes are computed using the liability method. Under this method, deferred income tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets
and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established against deferred tax assets where it is more likely than not that some
portion or all of the asset will not be realized.

(q) Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
that affect reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.

3. Other Current Assets



|                                                       |  |                  |  |                 
|------------------------------------------------------ |  | ---------------- |  | ----------------
|                                                       |  | December 31,2003 |  | December 31,2004
|                                                       |  | (PLN)            |  | (PLN)           
|Prepaid expenses                                       |  | 590              |  | 613             
|Embedded derivative financial instruments (see Note 8) |  | 138              |  | 200             
|Other current assets                                   |  | 203              |  | 144             
|                                                       |  |                  |  |                 
|                                                       |  | 931              |  | 957             
|                                                       |  |                  |  |                 

4. Impairment of Long-Lived Assets

The continuing significant changes in current and expected market conditions, which followed the full liberalization of the telecommunications market,
resulted in the revision of the Companys business plans. The new business plan was approved by the Supervisory Board in November 2004. The revised financial projections led the Company to evaluate its long-lived assets for their possible
impairment.

For the purpose of the impairment test, the entire Company was identified as an asset group. In accordance with SFAS 144,
impairment loss of an asset is measured as the amount by which an assets carrying amount exceeds its fair value. When the fair value of the asset cannot be derived from market prices of comparable assets traded in active markets, valuation
techniques based on the estimates of future cash flows can be applied. Future cash flows were derived from the financial projections of the newly approved business plan for 2005-2006 and additional financial forecasts prepared by the Companys
management for the period 2007-2009. After that period, the projections, prepared for the purposes of the impairment test, make use of an EV/EBITDA multiple of



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##### Table of Contents

Pilicka Telefonia Sp. z o.o.

Notes to the Financial Statements(Continued)

(All amounts in thousands)



5.5 to calculate a terminal value, which is compatible with the industry projections for the operations concerned. The discount rate used of 13.3%
represented the estimated risk adjusted cost of capital at the time, when the impairment test was performed.

The test resulted in an
impairment charge of PLN 61,366, which was recognized as a separate item in the statement of operations for the year ended December 31, 2004 and was allocated to the long-lived assets on a pro rata basis. The impact of the impairment charge on the
particular groups of assets is as follows:



|                                           |  |                            
|------------------------------------------ |  | ---------------------------
|                                           |  | Year ended December 31,2004
|                                           |  | (PLN)                      
|Land, buildings and leasehold improvements |  | 12,161                     
|Telecommunication equipment                |  | 40,023                     
|Vehicles and other equipment               |  | 648                        
|Construction-in-progress                   |  | 4,466                      
|                                           |  |                            
|Property and equipment                     |  | 57,298                     
|                                           | 
|Intangible assets                          |  | 4,068                      
|                                           |  |                            
|                                           |  | 61,366                     
|                                           |  |                            

5. Property and Equipment



|                                           |  |                   |  |                                                 |  |        
|------------------------------------------ |  | ----------------- |  | ----------------------------------------------- |  | -------
|                                           |  | December 31, 2004
|                                           |  | Cost              |  | Accumulated amortization and impairment charges |  | Net    
|                                           |  | (PLN)             |  | (PLN)                                           |  | (PLN)  
|Land, buildings and leasehold improvements |  | 37,871            |  | 23,008                                          |  | 14,863 
|Telecommunication equipment                |  | 168,859           |  | 119,942                                         |  | 48,917 
|Vehicles and other equipment               |  | 5,522             |  | 4,729                                           |  | 793    
|Construction-in-progress                   |  | 14,719            |  | 9,260                                           |  | 5,459  
|                                           |  |                   |  |                                                 |  |        
|                                           |  | 226,971           |  | 156,939                                         |  | 70,032 
|                                           |  |                   |  |                                                 |  |        
|                                           | 
|                                           |  | December 31, 2003
|                                           |  | Cost              |  | Accumulated depreciation and impairmentcharges  |  | Net    
|                                           |  | (PLN)             |  | (PLN)                                           |  | (PLN)  
|Land, buildings and leasehold improvements |  | 37,504            |  | 8,799                                           |  | 28,705 
|Telecommunication equipment                |  | 161,095           |  | 63,839                                          |  | 97,256 
|Vehicles and other equipment               |  | 4,810             |  | 3,641                                           |  | 1,169  
|Construction-in-progress                   |  | 17,252            |  | 4,794                                           |  | 12,458 
|                                           |  |                   |  |                                                 |  |        
|                                           |  | 220,661           |  | 81,073                                          |  | 139,588
|                                           |  |                   |  |                                                 |  |        



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##### Table of Contents

Pilicka Telefonia Sp. z o.o.

Notes to the Financial Statements(Continued)

(All amounts in thousands)



The Company has recorded a charge for the impairment of PLN 61,366 during the year ended December 31,
2004 in relation to its long-lived assets held for use of which PLN 57,298 relates to property and equipment (see Note 4), and a charge for the impairment of PLN 977 and PLN 505 during the years ended December 31, 2003 and 2002, respectively, in
relation to certain telecommunication equipment and construction projects, initially held for use, which are not expected to be further utilized.

Depreciation expense for the year ended December 31, 2004, 2003 and 2002 was PLN 19,419, PLN 18,812 and PLN 18,144, respectively.

6.
Intangible Assets



|                           |  |                   |  |                                                 |  |       
|-------------------------- |  | ----------------- |  | ----------------------------------------------- |  | ------
|                           |  | December 31, 2004
|                           |  | Cost              |  | Accumulated amortization and impairment charges |  | Net   
|                           |  | (PLN)             |  | (PLN)                                           |  | (PLN) 
|Telecommunications license |  | 25,124            |  | 20,422                                          |  | 4,702 
|Computer software          |  | 3,751             |  | 3,359                                           |  | 392   
|                           |  |                   |  |                                                 |  |       
|                           |  | 28,875            |  | 23,781                                          |  | 5,094 
|                           |  |                   |  |                                                 |  |       
|                           | 
|                           |  | December 31, 2003
|                           |  | Cost              |  | Accumulated amortization                        |  | Net   
|                           |  | (PLN)             |  | (PLN)                                           |  | (PLN) 
|Telecommunication license  |  | 25,124            |  | 11,949                                          |  | 13,175
|Computer software          |  | 3,875             |  | 3,399                                           |  | 476   
|                           |  |                   |  |                                                 |  |       
|                           |  | 28,999            |  | 15,348                                          |  | 13,651
|                           |  |                   |  |                                                 |  |       

The Company has recorded a charge for the impairment of PLN 61,366 for the year ended December 31,
2004 in relation to its long-lived assets of which PLN 4,068 relates to intangible assets (see Note 4).

Amortization expense for the year
ended December 31, 2004, 2003 and 2002 was PLN 1,753, PLN 2,313 and PLN 2,332, respectively. As of December 31, 2004, the estimated aggregate amortization of intangible assets for the years 2005 to 2009 is as follows: 2005PLN 1,518;
2006PLN 1,437; 2007PLN 1,404 and 2008PLN 1,381 and 2009PLN 1,363.

On the basis of the Act of November 23,
2002 on restructuring of license liabilities of non-mobile public telephone network operators the Company has applied in 2003 to the Polish Regulator, URTiP (Urzad Regulacji Telekomunikacji i Poczty), for the forgiveness of the remaining
obligation for its telecommunication license. The Company received the final decision of forgiveness in March 2004. Following the receipt of this decision, on March 31, 2004 the Company has offset the remaining license liability of PLN 3,004 in
correspondence with the related intangible asset of PLN 3,772. The remaining asset of PLN 768 as at March 31, 2004 is depreciated on a straight-line basis by December 31, 2012, when the license expires.



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##### Table of Contents

Pilicka Telefonia Sp. z o.o.

Notes to the Financial Statements(Continued)

(All amounts in thousands)



7. Accounts Payable



|                       |  |                  |  |                 
|---------------------- |  | ---------------- |  | ----------------
|                       |  | December 31,2003 |  | December 31,2004
|                       |  | (PLN)            |  | (PLN)           
|Trade accounts payable |  | 3,479            |  | 2,673           
|Government payables    |  | 971              |  | 1,257           
|Other accounts payable |  | 243              |  | 187             
|                       |  |                  |  |                 
|                       |  | 4,693            |  | 4,117           
|                       |  |                  |  |                 

8. Embedded Derivative Instruments

The Company has entered into lease agreements in the prior years that require payments denominated in a currency other than the functional currency of the
Company or the lessor. Under the provisions of the Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities and its related amendments these embedded foreign currency derivatives
must be bifurcated from the lease agreements and separately accounted for.

The positive fair value of these embedded foreign currency
derivatives was PLN 1,245 and PLN 656 as at December 31, 2004 and 2003, respectively. The fair value of these embedded foreign currency derivatives has been classified as other current assets (PLN 200 and PLN 138 as at December 31, 2004 and 2003,
respectively) and other long-term assets (PLN 1,045 and PLN 518 as at December 31, 2004 and 2003, respectively).

9. Deferred Revenue

The Company recorded deferred revenue at December 31, 2004 and 2003 of PLN 697 (PLN 435 current and PLN 262 non-current) and PLN 1,827 (PLN 1,266 current
and PLN 561 non-current), respectively, in connection with the revenue recognition policy based on the Staff Accounting Bulletin No. 104, Revenue Recognition.

10. Bank Loan

On December 15, 2003, the Company entered into a loan agreement with its bank. As per
the agreement, a bank loan dedicated for capital expenditures was provided to the company in installments starting on January 20, 2004 to December 31, 2004 and repayable in installments from March 31, 2005 to December 31, 2006. As of December 31,
2004 the amount of PLN 3,964 of the loan was outstanding with PLN 2,000 classified as short-term debt and PLN 1,964 as long-term debt. Interest amounts to 3-month WIBOR + 3 p.p. The net book value of assets pledged as collateral as of December 31,
2004 amounts to PLN 6,399. In addition to assets already pledged, certain assets purchased within the investment project financed by this credit will be pledged as collateral.



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##### Table of Contents

Pilicka Telefonia Sp. z o.o.

Notes to the Financial Statements(Continued)

(All amounts in thousands)



11. Share Capital

The Companys share capital consisted of 226,491 common, issued and outstanding shares as of December 31, 2004 and 2003, respectively. Each common share had one vote at shareholders meetings. The par value of
these shares is 500 PLN. The ownership structure as at December 31, 2004 and 2003 is presented below:



|                             |  |              |  |       
|---------------------------- |  | ------------ |  | ------
|                             |  | No of shares |  | %     
|D&E Investments, Inc.        |  | 65,410       |  | 28.88 
|EuroTel L.L.C.               |  | 63,078       |  | 27.85 
|HunTel Systems, Inc.         |  | 55,468       |  | 24.49 
|Consolidated Companies, Inc. |  | 42,535       |  | 18.78 
|                             |  |              |  |       
|                             |  | 226,491      |  | 100.00
|                             |  |              |  |       

12. Financial Income/(Expenses), net



|                                         |  |                  |   |  |                  |   |  |                  |  
|---------------------------------------- |  | ---------------- | - |  | ---------------- | - |  | ---------------- | -
|                                         |  | Year ended       |  
|                                         |  | December 31,2002 |   |  | December 31,2003 |   |  | December 31,2004 |  
|                                         |  | (PLN)            |   |  | (PLN)            |   |  | (PLN)            |  
|Interest income                          |  | 133              |   |  | 161              |   |  | 405              |  
|Interest expense                         |  | (218             | ) |  | (308             | ) |  | (255             | )
|Fair value gains on embedded derivatives |  | 22               |   |  | (242             | ) |  | 589              |  
|Foreign exchange gains                   |  | 262              |   |  | 93               |   |  | 242              |  
|Foreign exchange losses                  |  | (279             | ) |  | (570             | ) |  | (44              | )
|                                         |  |                  |   |  |                  |   |  |                  |  
|                                         |  | (80              | ) |  | (866             | ) |  | 937              |  
|                                         |  |                  |   |  |                  |   |  |                  |  



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##### Table of Contents

Pilicka Telefonia Sp. z o.o.

Notes to the Financial Statements(Continued)

(All amounts in thousands)



13. Income Taxes

Enacted Corporate Income Tax rate in Poland were 19% in 2004, 27% in 2003 and 28% in 2002. The Company has incurred tax losses since the commencement of its operations and, therefore, it has not paid income taxes.

Below is the analysis of deferred income taxes:



|                                             |  |                  |   |  |                  |  
|-------------------------------------------- |  | ---------------- | - |  | ---------------- | -
|                                             |  | December 31,2003 |   |  | December 31,2004 |  
|                                             |  | (PLN)            |   |  | (PLN)            |  
|Deferred tax assets:                         |  |                  |   |  |                  |  
|Impairment charges                           |  | 911              |   |  | 11,831           |  
|Net operating losses                         |  | 1,796            |   |  | 2,050            |  
|Net operating loss carry forwards            |  | 9,399            |   |  | 8,456            |  
|Allowance for doubtful accounts              |  | 435              |   |  | 541              |  
|Deferred revenue                             |  | 338              |   |  | 132              |  
|Accruals                                     |  | 128              |   |  | 51               |  
|Amortization for license                     |  | 102              |   |  |                 |  
|Unrealized foreign exchange differences      |  | 172              |   |  |                 |  
|                                             |  |                  |   |  |                  |  
|                                             |  | 13,281           |   |  | 23,061           |  
|Valuation allowance                          |  | (12,830          | ) |  | (22,969          | )
|                                             |  |                  |   |  |                  |  
|                                             |  |                 
|Deferred tax assets, net                     |  | 451              |   |  | 92               |  
|Deferred tax liabilities:                    |  |                  |   |  |                  |  
|Amortization for license                     |  |                 |   |  | 75               |  
|Future interest charges on license liability |  | 451              |   |  |                 |  
|Unrealized foreign exchange differences      |  |                 |   |  | 17               |  
|                                             |  |                  |   |  |                  |  
|                                             |  | 451              |   |  | 92               |  
|                                             |  |                  |   |  |                  |  
|                                             |  |                 
|Net deferred tax asset                       |  |                 |   |  |                 |  
|                                             |  |                  |   |  |                  |  

A full valuation allowance was recorded, as the Company does not expect to recover any deferred
tax assets through future tax deductions.



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##### Table of Contents

Pilicka Telefonia Sp. z o.o.

Notes to the Financial Statements(Continued)

(All amounts in thousands)



Below is the analysis of the amounts and expiration dates of net operating losses and net operating
loss carry forwards:



|                                  |  |                  |  |                 
|--------------------------------- |  | ---------------- |  | ----------------
|                                  |  | December 31,2003 |  | December 31,2004
|                                  |  | (PLN)            |  | (PLN)           
|Net operating losses              |  |                  |  |                 
|2007                              |  | 898              |  |                
|2008                              |  | 898              |  | 1,025           
|2009                              |  |                 |  | 1,025           
|                                  |  |                  |  |                 
|                                  |  | 1,796            |  | 2,050           
|                                  |  |                  |  |                 
|Net operating loss carry forwards |  |                  |  |                 
|2004                              |  | 2,740            |  |                
|2005                              |  | 3,180            |  | 3,180           
|2006                              |  | 2,423            |  | 2,423           
|2007                              |  | 1,056            |  | 1,955           
|2008                              |  |                 |  | 898             
|                                  |  |                  |  |                 
|                                  |  | 9,399            |  | 8,456           
|                                  |  |                  |  |                 

14. Contingencies and Commitments

Operating lease commitments were mainly in respect of the lease contracts for office space and telecommunication equipment land. There were non-cancelable
operating leases of PLN 3,642 and PLN 5,525 as at December 31, 2004 and 2003, respectively. Rent expense for the year ended December 31, 2004, 2003 and 2002 was PLN 2,248, PLN 2,196 and PLN 2,177, respectively.

As of December 31, 2004, the minimum lease payments for each of the years from 2005 to 2008 amount to PLN 471, and for the years 2008 and thereafter
amounts to PLN 1,757.

15. Tax contingent liability

Regulations relating to value-added tax, corporate income tax, and payroll (social) taxes have been radically changed in comparison to the tax regulations, which existed prior to the economic and political
transformation in Poland. The lack of reference to well-established regulations and the relatively short period in which these new tax regulations have been in place results in there being a lack of clarity and integrity in the regulations. Frequent
contradictions in legal interpretations both within government bodies and between companies and government bodies create uncertainties and conflicts. Tax settlements, together with other areas of legal compliance areas (e.g. customs or foreign
exchange law) are subject to review and investigation by a number of authorities, which are entitled to impose severe fines, penalties and interest charges. These facts create tax risks in Poland that are substantially more significant than those
typically found in countries with more developed tax system. The tax authorities may at any time inspect the books and records and may impose additional tax assessments with penalty interest and penalties within 5 years from the end of the year when
a tax is due. Management does not believe that these circumstances will have a material adverse effect on the Companys financial condition.



F-73



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##### Table of Contents

Pilicka Telefonia Sp. z o.o.

Notes to the Financial Statements(Continued)

(All amounts in thousands)



16. Related Party Transactions

The Company has paid PLN 486, PLN 562 and PLN 502 to an affiliated entity for management services and the purchase of rights to use software during the year ended December 31, 2004, 2003 and 2002, respectively. There
was no amount payable to this affiliate at December 31, 2004 (PLN 40 at December 31, 2003). The Company has also made rental payments of PLN 562, PLN 698 and PLN 767 to a company partially owned by a relative of a member of the Companys
Management Board during the year ended December 31, 2004, 2003 and 2002, respectively. There was no amount payable to this affiliate at December 31, 2004 and 2003.

17. Non-cash transactions

There were costs of PLN 641, PLN 564 and PLN 593 paid by shareholders in connection with the
Companys affairs during the year ended December 31, 2004, 2003 and 2002, respectively.



F-74