<PAGE>

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                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549


                                  FORM 10-K/A



<Table>
<C>          <S>
 (Mark One)
    [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934



             FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001



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



             FOR THE TRANSITION PERIOD FROM           TO
</Table>


                        COMMISSION FILE NUMBER 000-20709

                            D&E COMMUNICATIONS, INC.
             (Exact name of registrant as specified in its charter)

<Table>
<S>                                            <C>
                 PENNSYLVANIA                                    23-2837108
       (State or other jurisdiction of                        (I.R.S. Employer
        incorporation or organization)                      Identification No.)

             124 EAST MAIN STREET                                17522-0458
                 P.O. BOX 458                                    (Zip Code)
                 EPHRATA, PA
   (Address of principal executive offices)
</Table>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (717) 733-4101

       SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                    COMMON STOCK, PAR VALUE $0.16 PER SHARE
                                (TITLE OF CLASS)

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

     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. [X]

     The aggregate market value of the voting stock held by non-affiliates of
the registrant is approximately $73,629,434. Such aggregate market value was
computed by reference to the closing price of the registrant's Common Stock as
reported on the Nasdaq National Market on March 22, 2002. 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 22, 2002 was 7,369,709.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's definitive proxy statement for its 2002 annual
meeting of stockholders are incorporated by reference into Part III of this Form
10-K.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>


                                EXPLANATORY NOTE



     We are filing this Annual Report on Form 10-K/A as Amendment No. 1 to our
Form 10-K, filed on March 27, 2002 for the purposes of amending Item 1 of Part I
and Items 7 and 8 of Part II. For the convenience of the reader, we have
restated the Form 10-K in its entirety. The disclosure contained herein speaks
as of the date of filing of the Form 10-K.


                               TABLE OF CONTENTS


<Table>
<S>       <C>                                                           <C>
                                  PART I
Item 1.   Business....................................................    2
Item 2.   Properties..................................................   20
Item 3.   Legal Proceedings...........................................   20
Item 4.   Submission of Matters to a Vote of Security Holders.........   21
                                  PART II
          Market for Registrant's Common Equity and Related
Item 5.   Stockholder Matters.........................................   21
Item 6.   Selected Financial Data.....................................   21
          Management's Discussion and Analysis of Financial Condition
Item 7.   and Results of Operations...................................   23
          Quantitative and Qualitative Disclosure About Market
Item 7A.  Risks.......................................................   35
Item 8.   Financial Statements and Supplementary Data.................   35
          Changes in and Disagreements with Accountants on Accounting
Item 9.   and Financial Disclosure....................................   35
                                 PART III
Item 10.  Directors and Executive Officers of the Registrant..........   35
Item 11.  Executive Compensation......................................   36
          Security Ownership of Certain Beneficial Owners and
Item 12.  Management..................................................   36
Item 13.  Certain Relationships and Related Transactions..............   36
                                  PART IV
          Exhibits, Financial Statement Schedules, and Reports on Form
Item 14.  8-K.........................................................   36
</Table>


                                        1
<PAGE>

                                     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.
These forward-looking statements involve certain risks and uncertainties. Our
actual performance or achievements may differ materially from those contemplated
by these forward-looking statements.

     You should understand that various factors, in addition to those discussed
in the section titled "Item 1. Business -- Factors Affecting Our Prospects" 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 communications services to residential and business
customers in markets throughout south central Pennsylvania. We operate an
incumbent rural local telephone company, or RLEC, in parts of Berks, Lancaster
and Lebanon counties in Pennsylvania, and a competitive local telephone company,
or CLEC, in the Lancaster and Harrisburg, Pennsylvania metropolitan areas, which
we refer to as our "edge-out" markets. Our goal is to be a leading single-source
provider of voice and data communications services in our markets. To achieve
this goal, we have developed a comprehensive package of communications services
including local and long distance telephone services, high speed data services
and Internet access services. We also provide business customers with integrated
voice and data network solutions. Please see "The Telecommunications Industry"
on page 4 of this report for a further discussion of the terms RLEC and CLEC.



     Our RLEC, founded in 1911, served 61,961 telephone lines (referred to in
the telecommunications industry as access lines) through our 100% digitally
switched network as of December 31, 2001. Currently, our RLEC does not compete
directly with any other wireline company to provide local telephone service. Our
RLEC strategy is to grow the number of access lines that we serve and continue
to sell additional communications services, such as long distance, high speed
data and enhanced telephone services, including voicemail, call waiting, caller
identification and PhoneGuard(TM) (a telemarketer call block service). We
believe that these services represent an additional source of revenue and cash
flow growth for our RLEC operations. As of December 31, 2001, approximately 17%
of our residential customers had two access lines and 27% of our customers
subscribed to at least one of our enhanced telephone services.



     Our CLEC began operations in the fourth quarter of 1999 and served 7,535
business access lines as of December 31, 2001. Our CLEC offers services similar
to our RLEC and targets small and medium-sized business customers within our
edge-out markets. The incumbent local telephone company in these markets is
Verizon Communications, a regional Bell telephone company that was created by
the break-up of AT&T in 1984, and referred to in the telecommunications industry
as an RBOC. Our strategy is to provide CLEC services primarily in secondary
metropolitan areas near our RLEC, where we believe customers historically have
been underserved. In pursuit of this strategy, we plan to continue to leverage
our existing RLEC network and construct new facilities when and where we believe
it is economically prudent to do so.


                                        2
<PAGE>

     As part of our strategy to provide a range of data services to our
customers, we offer dial-up and high speed Internet access services and web
hosting services. We believe that customers in our markets historically have
been underserved by national Internet providers and that we can provide
technologically advanced Internet services with a superior level of customer
service and support due to our local presence. As of December 31, 2001, we
served 10,161 dial-up Internet access subscribers, 2,209 digital subscriber
line, or DSL, subscribers and 447 web-hosting customers.


     To augment our core voice and data communications services and enhance our
position as a communications provider, we offer systems integration services to
businesses. We believe that the complexity of voice communications and data
networks has increased the need for small and medium-sized businesses to seek a
single provider for all of their communications and networking needs. We also
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 2000,
we significantly expanded our systems integration business through the strategic
acquisitions of CompuSpirit, Inc. and Alternate Solutions, Inc., both of which
were based in Harrisburg, Pennsylvania.


     Historically, we also have made investments in foreign telecommunications
service providers. Through our one-third interest in Eurotel, LLC, we presently
maintain one foreign investment in the form of an active, minority interest in
Pilicka Telephone S.A., which operates a telephone network in a region south of
Warsaw, Poland. We currently are exploring strategic alternatives with regard to
our ownership interest in Pilicka.

     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. We are a Pennsylvania
corporation.

RECENT DEVELOPMENTS

 PENDING SALE OF PCS ONE INTEREST


     In connection with our strategy to focus on wireline communications, on
October 17, 2001, we entered into a definitive agreement for the sale of our 50%
ownership interest in PCS ONE, a joint venture with VoiceStream Wireless
Corporation that offers mobile wireless communications service, to VoiceStream
Wireless, our joint venture partner. Under the agreement, we expect to receive
cash consideration of approximately $75.0 million, after working capital and
long-term debt adjustments of approximately $40 million.


     The sale is subject to certain regulatory approvals and other customary
closing conditions and is expected to close in April 2002. During December 2001,
the companies obtained required lender approvals necessary to close the
transaction and also passed compliance of the Hart-Scott-Rodino Act
requirements. In February 2002, the FCC granted its consent to the transfer of
our PCS ONE interest to VoiceStream Wireless, subject to a 40-day
reconsideration period that will expire on April 2, 2002, at which time such FCC
approval will become final and non-appealable. The remaining regulatory
approvals and other customary closing conditions are deemed to be perfunctory.
This sale will result in our exit of the mobile wireless personal communications
service business. Accordingly, we have reflected our wireless business as
discontinued operations in our financial statements. Our loss from discontinued
operations, net of taxes, was $6,652,000, $5,653,000 and $5,985,000 in 1999,
2000 and 2001, respectively.

 PENDING MERGER WITH CONESTOGA ENTERPRISES, INC.

     On November 21, 2001, we entered into an agreement and plan of merger,
which became effective on December 3, 2001 and was subsequently amended on
January 9, 2002, to acquire Conestoga Enterprises, Inc., a neighboring
Pennsylvania RLEC with 84,899 RLEC access lines, 18,807 CLEC access lines and
19,271 wireless subscribers as of December 31, 2001. The merger consideration is
estimated to be approximately $272.0 million, which includes the payment of up
to approximately $150.0 million in cash and the issuance of shares of our common
stock. In addition, we will assume existing Conestoga indebtedness, which
totaled $81.3 million as of December 31, 2001.

                                        3
<PAGE>

     Consistent with our decision to focus on wireline communications, upon
completion of the Conestoga acquisition, we expect to pursue the sale of
Conestoga's wireless operations.

     The completion of the merger is subject to approval by both our and
Conestoga's shareholders, certain regulatory approvals and other customary
closing conditions and is expected to close during the second quarter of 2002.
In January 2002, the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 was terminated. In February 2002, the Borough
of State College, Pennsylvania consented to the transfer of control of
Conestoga's State College, Pennsylvania cable television franchise. In March
2002, the merger received the required approvals of the Pennsylvania Public
Utility Commission with respect to the change of control of Conestoga's
telephone operations and of the New York State Department of Public Service with
respect to Conestoga's interexchange carrier operations. Completion of the
merger should not require any additional public service or utility commission
regulatory approvals. Finally, on March 18, 2002 the FCC granted its consent to
the merger, subject to a 40-day reconsideration period that will expire on April
29, 2002, at which time the FCC approval will become final and non-appealable.
Subsequent to April 29, 2002, we expect that the only material approval still
outstanding will be the shareholder approvals.

     We believe that the acquisition of Conestoga will enable us to capitalize
on growth opportunities throughout the central Pennsylvania market and to
capitalize on the benefits of increased scale in an increasingly competitive
telecommunications industry. Such benefits are expected to include the ability
to sell additional services to a larger customer base, the ability to spread our
fixed costs over a larger revenue base and the opportunity to eliminate
redundant costs. Please see "-- Factors Affecting Our Prospects" on page 17 for
certain risks relating to the merger with Conestoga.

THE TELECOMMUNICATIONS INDUSTRY


     There are two predominant types of telephone companies in the
telecommunications industry: incumbent local telephone companies, or ILECs, and
competitive local telephone companies, or CLECs. Recently, cable television and
wireless service providers also have begun providing local telephone service in
certain markets. Within the ILEC sector, generally there are rural local
telephone companies, or RLECs, who operate in rural areas, and the regional Bell
telephone companies, or RBOCs, which were the telephone companies created from
the break-up of AT&T in 1984.


     Over the past several years, the telecommunications industry has undergone
significant change. The passage of the Telecommunications Act of 1996, 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. This change permitted newly created CLECs to
compete with ILECs. As a result, ILEC and CLEC operators increasingly are
seeking to differentiate themselves by bundling their communications service
offerings and providing better customer service. Despite recent turmoil in the
financial markets for telecommunications companies, CLECs continue to gain
market share from ILECs by primarily focusing on business customers in densely
populated regions.

     Wireless operators, which serve as an alternative service to wireline local
and long-distance services, also pose a competitive threat to ILECs. In
addition, cable companies have begun to offer cable telephone service to
residential customers and to bundle cable services with a package of data and
voice communications services. Despite increasing competition, however, many
large RLECs continue to grow their businesses by capitalizing on their extensive
networks and the increasing demand for communications services. RLECs have grown
their businesses primarily through favorable demographic trends and the
introduction of new service offerings, including high speed data and enhanced
telephone services. Additionally, consolidation among RLECs has created
economies of scale and the ability to cross-sell new products across larger
platforms.

     Nationally, there are a large number of RLECs that operate in sparsely
populated rural areas where competition from CLECs generally has been minimal
due to regulatory factors and unfavorable economics of constructing and
operating competitive systems. According to the United States Telephone
Association as of December 31, 2000, there were over 1,300 ILECs with less than
50,000 access lines and approximately 34 ILECs with more than 50,000 access
lines.
                                        4
<PAGE>

COMPETITIVE ADVANTAGES

     We believe that we are well positioned for future growth in our existing
and surrounding markets by capitalizing on the following competitive advantages:

 LOCAL MARKET PRESENCE

     We have been the only wireline telecommunications provider in our RLEC
territory since 1911. Over that time, we believe that we have established a
strong brand name and reputation. We believe that our intimate knowledge of our
markets' dynamics, demographics and customer needs enables us to better serve
our customers and prepares us for potential competitive threats. We also believe
that there are significant demographic similarities between our RLEC and CLEC
markets due to their geographic proximity. We believe that our understanding of
these similarities, along with our brand name and reputation, provide us with
competitive advantages in our CLEC markets.

 FAVORABLE RURAL DEMOGRAPHICS

     We are the primary provider of telecommunications services in our RLEC
territory. Our service territory is rural and suburban in nature and has an
agricultural and small business base. In contrast to urban markets, the
demographic make-up of our markets is less attractive to competitors due to our
lower access line concentration and our predominantly residential customer base.
In addition, we believe that the lack of large business customer concentration
in our RLEC market is a further deterrent to competitors.

 MODERN NETWORK


     We were one of the first rural local telephone companies 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. We
have designed and installed fiber in our network in a pattern of multiple rings
which provide a high level of backup service in the event of a service failure.
Our network operations center further leverages our network design with remote
network management, maintenance and repair capabilities to pinpoint network
problems, minimize technician deployment and improve our operating efficiency.
We monitor the network 24 hours a day, 365 days a year and continually upgrade
network elements to ensure the uninterrupted delivery of quality services to our
customers.


 SUPERIOR 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. We approach service quality from both a customer and
network perspective. Our commitment to personalized customer service includes
minimizing the use of an automated attendant call routing system and
cross-training all of our customer service personnel in our RLEC, CLEC and
Internet service offerings to provide a single point of contact. We also employ
multiple customer retention measures, including monthly performance and
satisfaction surveys. This focus on service resulted in 98% of survey responses
indicating a good or excellent rating of our overall service in 2001.
Additionally, in areas such as average answer time, customer out-of-service
reports, and service order completions, our performance consistently exceeds
guidelines established by the Pennsylvania Public Utility Commission.

 EXPERIENCED MANAGEMENT TEAM

     Our Chairman and President, Anne B. Sweigart, and our Vice Chairman and
Senior Executive Vice President, Robert M. Lauman, have assembled an executive
management team comprised of individuals with extensive experience and success
in the telecommunications industry. Our executive management team, comprised of
G. William Ruhl, our Chief Executive Officer, Thomas E. Morell, our Vice
President, Chief Financial Officer, and Treasurer, and W. Garth Sprecher, our
Vice President and Secretary, together with our Chairman and Vice Chairman,
average over 39 years of experience in the telecommunications industry.

                                        5
<PAGE>

BUSINESS STRATEGY


     Our primary business objective is to be a leading, regional
wireline-focused communications services provider. To achieve this objective, we
will continue to pursue the following goals:


 INCREASE SALES OF ENHANCED TELEPHONE SERVICES

     We offer a broad array of enhanced telephone services to our RLEC customers
including caller identification, voicemail, PhoneGuard(TM), call-forwarding,
call waiting and three-way calling. We believe that these services represent an
additional source of revenue and cash flow growth for our RLEC operations.
Additionally, we believe our enhanced telephone services improve our general
customer experience, thereby promoting loyalty within our customer base and
helping us to better retain our customers. As of December 31, 2001,
approximately 27% of our residential customers subscribed to at least one
enhanced telephone service product and 18% subscribed to two or more enhanced
telephone service products. We intend to continue to actively market our
enhanced telephone services to our customer base.

 LEVERAGE OUR CORE ASSETS

     In our "edge-out" markets, we seek to increase our market share by offering
competitive service packages to small and medium-sized business customers that
we believe traditionally have been underserved by the incumbent provider. We
intend to continue to leverage our modern network infrastructure, established
brand name, extensive local knowledge and significant operating experience to
gain new customers and increase our market share. We also intend to continue to
actively market our broad array of services to our existing CLEC customers. As
of December 31, 2001, 69% of our CLEC customers had subscribed to our long
distance service and 69% of our CLEC customers had subscribed to our high speed
data services.

 INCREASE SALES OF INTERNET SERVICES

     We believe that we can further expand our market share of the Internet
services business by meeting or exceeding the customer service and technical
requirements of individual and business customers who historically have been
underserved by national providers of Internet services. We support our local
approach to service with a technologically advanced network. We provide Internet
services that we believe are competitive with national providers with a focus on
service excellence, value-added solutions and technical expertise integrated
into our RLEC, CLEC and systems integration businesses. While we intend to grow
our dial-up Internet access customer base, we also plan to focus our sales and
marketing efforts on our high speed data and web hosting services.

 CAPITALIZE ON THE CONVERGENCE OF VOICE AND DATA COMMUNICATIONS TECHNOLOGIES

     We believe that the convergence and complexity of voice communications and
data network technologies has increased the need for small and medium-sized
businesses to seek a single provider for all of their communications and
networking needs. Our systems integration business enhances our service
offerings and positions us as a single source provider of voice and data
communications services to our business customers. We believe our ability to
provide comprehensive solutions to our customers differentiates us from our
competition and allows us to capture a greater portion of our customers' total
communications spending.

 CONTINUE TO FOCUS ON CUSTOMER SERVICE

     We believe that our commitment to customer service has strengthened our
relationships with our customers and enhanced our competitive position. We
intend to maintain this personalized customer service approach through the
continuous pursuit of technological enhancements to our operations, the ongoing
training of our customer service and sales representatives in new service
offerings and the development of brand-oriented community service programs and
sponsorships.

                                        6
<PAGE>

 SELECTIVELY PURSUE STRATEGIC ACQUISITIONS


     We believe that we can increase the scale and scope of our business through
acquisitions of companies that strategically fit with our business strategy.
Increasing critical mass offers opportunities for improved economies of scale,
operating efficiency and profitability. Acquisition targets may include
companies that deepen our industry focus, broaden our service territory and
increase the breadth of our services.


OPERATIONS

 RLEC OPERATIONS

     Our RLEC business offers local telephone, network access, long distance,
data and enhanced telephone services. Our geographic area covers parts of
Lancaster, Berks and Lebanon counties in Pennsylvania, a rural and suburban
territory of 227 square miles, averaging 273 access lines per square mile as of
December 31, 2001. Approximately 71% of these access lines serve residential
customers and approximately 17% of our residential customers have multiple or
second lines.

     We offer our customers a broad array of enhanced telephone services
including:

- call waiting
- call transferring and call
  forwarding
- automatic callback
- video conferencing
- PhoneGuard(TM)
- call trace
- call block
- conference calling
- voicemail
- teleconferencing
- DID (direct inward dial)
- caller name and number
  identification
- distinctive ringing
- simultaneous ringing

     We offer long distance telephone service to our RLEC customers in addition
to our local telephone services. We also offer network access services that
provide other telecommunications carriers, such as local exchange carriers and
wireless companies, with the use of our local network facilities for the
completion of long distance calls. Payment for providing these services comes
either directly from our customers or from settlement pools administered by the
National Exchange Carrier Association, Inc. Finally, we offer directory
advertising to give our customers business service information in addition to
telephone number data.

     Our growth in access lines reflects not only the population growth in our
service area, but also our continued efforts to sell additional access lines to
our existing customer base for dedicated fax and Internet services. The
following table reflects access line growth over the past three years:


<Table>
<Caption>
                                                              AT OR FOR THE YEARS ENDED
                                                                    DECEMBER 31,
                                                             ---------------------------
                                                              1999      2000      2001
                                                             -------   -------   -------
<S>                                                          <C>       <C>       <C>
ACCESS LINES:
  Residential..............................................  42,882    43,917    44,145
  Business.................................................  16,103    17,181    17,816
                                                             ------    ------    ------
     Total RLEC............................................  58,985    61,098    61,961
                                                             ======    ======    ======
PERCENT OF TOTAL:
  Residential..............................................    72.7%     71.9%     71.2%
  Business.................................................    27.3%     28.1%     28.8%
PERCENTAGE GROWTH:
  Residential..............................................     4.2%      2.4%      0.5%
  Business.................................................     4.5%      6.7%      3.7%
     Total RLEC............................................     4.3%      3.6%      1.4%
</Table>


                                        7
<PAGE>

  CLEC OPERATIONS

     Our CLEC business offers competitive local telephone, network access, long
distance, data and enhanced telephone services in our two regional "edge-out"
markets, including the Lancaster and Harrisburg, Pennsylvania metropolitan
areas. We also provide our CLEC customers with IP Centrex services, high speed
data services, local calling, customized extended local calling and account code
billing. We plan to continue to leverage our existing facilities and to
construct new facilities when and where we believe it is economically prudent.

     The number of access lines served by our CLEC in our Lancaster market has
increased from 598 business access lines as of December 31, 1999, three months
after our CLEC launched service, to 7,535 business access lines as of December
31, 2001. We believe that the market demand for an alternative communications
provider and our sales efforts and quality reputation contributed to this
growth. As of December 31, 2001, approximately 25% of our business customers
were served on our own facilities and the remaining 75% were served through a
combination of our facilities and leased facilities. We launched service in our
Harrisburg market in February 2002. The following table reflects our access line
growth over the past three years:

<Table>
<Caption>
                                                                AT DECEMBER 31,
                                                              --------------------
                                                              1999   2000    2001
                                                              ----   -----   -----
<S>                                                           <C>    <C>     <C>
ACCESS LINES
  Business..................................................  598    3,895   7,535
</Table>

     Our CLEC has also been effective in cross-selling our other service
offerings. As of December 31, 2001, 69% of our CLEC customers subscribed to our
long distance services and 69% of our CLEC customers subscribed to our high
speed data services. Our customer service proficiency has allowed us to develop
an efficient approach to activating new access lines. On average, our CLEC
installs new access lines in five days when using our own facilities and 10 days
when using leased facilities, which we believe to be below the national
averages.

  INTERNET SERVICE OPERATIONS

     Our Internet service offerings include dial-up and high speed Internet
access and web hosting services. We offer our Internet services to residential
and business customers in a geographic region that includes and surrounds our
RLEC and CLEC operations, which encompasses seven counties in south central
Pennsylvania covering a population of approximately 1.9 million. As of December
31, 2001, we served 10,161 dial-up Internet access subscribers, 2,209 DSL
subscribers and 447 web-hosting customers.

     We believe that residential and business customers in rural markets
historically have been underserved by national Internet service providers, which
presents us with a significant opportunity for growth. We also believe that our
local presence, focus on customer service and technologically advanced services
provide us with a competitive advantage in our markets.

     We began offering our DSL service in the second half of 1999 and began
bundling DSL and Internet access services to our RLEC and CLEC customers when we
launched our Internet service provider in the fourth quarter of 2000. We offer
this service entirely on our facilities in our RLEC territory and primarily on
our own facilities in our CLEC markets. As of December 31, 2001, over 83% of our
installed DSL lines were in our RLEC territory. While we intend to grow our
dial-up Internet access customer base, we also plan to focus our sales efforts
on our high speed data and web hosting services.

  SYSTEMS INTEGRATION OPERATIONS

     We offer services to support the design, implementation, and maintenance of
local and wide area networks and telecommunications systems. We also sell data
and voice communications equipment and provide custom computer programming
services. We market these products and services primarily in our RLEC and CLEC
service areas.

                                        8
<PAGE>

     Our sales team targets businesses, government agencies and educational
institutions with our comprehensive solutions for their voice and data
communication networking needs. We significantly expanded this business through
the strategic acquisitions of CompuSpirit, Inc. and Alternate Solutions, Inc. in
2000.

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. We use multiple customer retention measures, especially
for our larger RLEC business customers and throughout our CLEC customer base,
which is 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. This focus on service
resulted in 98% of survey responses indicating a good or excellent rating of our
overall service in 2001. Additionally, in areas such as average answer time,
customer out-of-service reports, and service order completion, our performance
consistently exceeds guidelines established by the Pennsylvania Public Utility
Commission.

     Our centralized call center provides convenient access for our customers to
place their orders and make billing inquiries. Our commitment to personalized
customer service includes minimizing the use of automated attendant call routing
systems resulting in calls being answered directly by live representatives, a
service that we believe sets us apart from many of our competitors.

     In addition, our centralized network operations service center personnel
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 network operations
center also provides us with remote network management, maintenance and repair
capabilities, which we believe increase our engineers' productivity and reduces
potential service interruptions for our customers.

SALES AND MARKETING

     We employ a relationship-based sales and marketing approach. We believe
this approach and our commitment to customer service builds brand loyalty and
increases the effectiveness of our 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.
With respect to our non-RLEC businesses, we support an aggressive integrated
marketing communications strategy with targeted direct sales efforts. Our
customer service representatives are centrally located and supported by local
sales efforts throughout our service territory.

     We manage our sales organization by our two primary customer types:
residential and business. Customer service representatives proactively market
our complete service portfolio to residential customers through regular calling
programs and consultative analyses of customers' services on incoming calls.
These representatives are cross-trained to more effectively market our service
offerings and must meet monthly sales quotas. Marketing programs and sales
initiatives are coordinated with our calling efforts to maximize their
effectiveness.

     Our direct sales force targets 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 our service package. Our sales personnel work closely with
our network engineers and systems integrators to design solutions to satisfy our
customers' needs.

NETWORK ARCHITECTURE AND OPERATIONS SUPPORT SYSTEMS


     We were one of the first local telephone companies in the nation to deploy
a 100% digitally switched network. We continue to utilize a technologically
advanced, fiber-rich network based on digital switching, fiber optic transport
technology, and host/remote call switching architecture. We operate our own
Signaling


                                        9
<PAGE>

System 7 network that provides efficient call routing and allows enhanced
features to travel across the national telephone network. During 2001, we
completed our new network operations center, which monitors network performance
24 hours a day, 365 days a year and allows us to maintain high network
performance standards.


     Our RLEC has digital host switches in Ephrata and Lititz, Pennsylvania and
delivers dial tones to more than 45 remote switches and access nodes that are
connected with fiber optic cable. Connection to our customers, or the "last
mile," is provided over our RLEC's copper or fiber outside plant. Our
host/remote architecture concentrates network intelligence in our two host
offices, enabling our RLEC and CLEC operations to leverage this network and
provide short customer loop lengths in our copper cable plant. Short customer
loop lengths and our Asynchronous Transfer Mode backbone network are critical to
the delivery of advanced high speed services such as DSL. We are capable of
providing DSL service to over 94% of our RLEC customers.


     Our CLEC's network strategy is to leverage the core switching architecture
of our RLEC network and to own the key elements of the local exchange network.
These elements include the remote dial tone units and the facilities connecting
the host switches to the remote dial tone units, including both the fiber optic
cable and the optical transport electronics. In addition, where economically
viable, our CLEC builds copper/fiber distribution facilities between the remote
dial tone units and customers' premises. Our network strategy allows our CLEC to
provide high quality and reliable service and helps to minimize customer
turnover. As of December 31, 2001, our CLEC had all of its access lines
connected to our own RLEC switch and approximately 25% of its access lines
completely on our own network.

     Our 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 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 our plant for high speed data service. We have
a system that stores the inventory of central office and transmission equipment
that is accessed for the automatic provisioning customized services for
customers. These systems also have monitoring and troubleshooting capabilities
to insure the reliability of our network. Finally, we have recently established
the capability to interface with the operations support systems of Verizon and
Sprint to insure fast and accurate provisions for our CLEC customers.

COMPETITIVE ENVIRONMENT


     The Telecommunications Act of 1996 introduced competition among providers
of local telephone services enabling customers to switch to services offered by
local telephone companies 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.


     To date, our RLEC has faced limited competition and has not lost any access
lines to a wireline competitor since the Telecommunications Act was passed in
1996. A primary reason for this insulation from competition is that our RLEC
maintains a rural exemption from the more burdensome interconnection provisions
of the Telecommunications Act of 1996. Further, the Pennsylvania Public Utility
Commission has granted our RLEC a temporary suspension of many of the
interconnection requirements under the Telecommunications Act of 1996.
Consequently, at the present time, the only means by which competitors can
provide local, wireline telephone services within our RLEC's market is to build
and maintain their own facilities. To date, two providers have been granted
approval by the Pennsylvania Public Utility Commission to compete with us using
their own facilities; however, to our knowledge, neither company has begun to do
so. Our suspension expires on July 10, 2002. Although we may request a renewal
of the interconnection suspension, if the Pennsylvania Public Utility Commission
denies our request, we could face more competition from other CLECs. Similarly,
to the extent that other RLECs are denied requests for extensions of their rural
exemptions, our CLEC will have opportunities to compete in those RLEC markets.

                                        10
<PAGE>


     We believe that our RLEC has competitive advantages based on several
factors, including the lack of concentration of any large business customers,
low basic service rates, our customer service record and high level of customer
satisfaction, and our service territory's high cost of facilities-based entry
due to low population density and other regulatory factors. See the section
titled "-- Regulatory Environment" below for a description of those regulatory
factors. Wireless operators, which serve as an alternative service to wireline
local and long-distance services, also pose a competitive threat to our RLEC.



     Our CLEC competes principally with the services offered by the incumbent
local telephone company, Verizon Communications, and other competitive
providers, including other CLECs, long distance companies, cable television
companies, wireless service providers and private networks built by large end
users. The edge-out markets served by our CLEC are served by one or more other
CLECs. In addition, in providing long distance service, our RLEC and CLEC are in
competition with major carriers such as AT&T, MCI and Sprint, and most recently,
Verizon. Some of these competitors have significantly greater market presence,
brand recognition and resources than we do. The existing and new sources of
competition place pressure on the pricing of these services which may cause our
revenues or margins to decline.


     Our systems integration business competes with large, regional and national
companies that provide a wide variety of services to their customers. Many of
these large competitors may accept lower profit margins in an effort to capture
market share. We also compete with numerous smaller service providers that may
have lower overhead costs, enabling them to provide their services at lower
rates than we can. 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 which may cause our revenues or margins to decline.

     The market for Internet services is highly competitive. Most of the
national competitors we face have significantly greater market presence, brand
recognition and resources than we do. Currently, we compete for dial-up
customers with national, regional and local Internet service providers. Our DSL
service faces competition from these national and regional Internet service
providers, cable companies and direct broadcast satellite companies. We also
compete for business customers with long distance and local communications
providers in selling our high speed data services. The existing and new sources
of competition in this market place pressure on the pricing of these services,
which may cause our revenues or margins to decline.

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 Federal Communications Commission, or 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.

     Pursuant to the Telecommunications Act of 1996, or 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 of
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.

                                        11
<PAGE>

     TA-96 brought changes in regulation at both the federal and state levels
that affect virtually every segment of the telecommunications industry. TA-96 is
intended to promote competition in all areas of telecommunications and to reduce
regulation. TA-96 is described further below under "Telecommunications Act of
1996."

     Although TA-96 substantially revised the Communications Act of 1934 and was
intended, among other things, to eliminate certain regulatory burdens, we and
other communications carriers remain subject to ongoing regulatory requirements.
Among other regulatory mandates, the FCC requires common carriers to file
periodic reports. The FCC also has jurisdiction over interstate and
international services.

     The FCC generally must approve in advance transfers of control and
assignments of operating authorizations by FCC-regulated entities. Therefore, if
we seek to acquire companies that hold FCC authorizations, in most instances we
will be required to seek approval from the FCC prior to completing those
acquisitions. The FCC has the authority to condition, modify, cancel, terminate
or revoke operating authority for failure to comply with applicable federal laws
or rules, regulations and policies of the FCC. Fines or other penalties also may
be imposed for such violations.

  PENNSYLVANIA REGULATION

     Our RLEC is subject to regulation by the Pennsylvania Public Utilities
Commission, or Pennsylvania PUC, for intrastate rate-making purposes, which
includes rates for local telephone service, enhanced telephone services,
regional long distance services and network access services. In 2001, we entered
into an alternative method of regulation with the Pennsylvania PUC for our
intrastate operations under which we agreed to meet certain broadband service
delivery parameters in exchange for a price cap formula, rather than rate of
return regulation. As a result of the alternative method of regulation, our
RLEC's profits are not directly limited by the Pennsylvania PUC as they were
under the former rate of return system of regulation. Instead, our RLEC received
the flexibility to increase local rates annually based on inflation less 2
percentage points, so that increased returns arising from improved productivity
and efficiency in excess of 2% per annum accrue to us. Our RLEC can also seek to
rebalance rates periodically within or between various intrastate service
categories, such as local telephone, long distance and network access services.
Additionally, our RLEC has the ability to request relief on a dollar-for-dollar
basis for certain events deemed outside of its control that result in reduced
revenues or increased expenses.

     The Pennsylvania PUC must also approve any issuance of stock, incurrence of
long-term debt, or acquisition or sale of material utility assets by our RLEC.
In addition, the Pennsylvania PUC must approve any change in controlling
interest of either our RLEC or its holding company. The Pennsylvania 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.

     Our CLEC is also subject to regulation by the Pennsylvania PUC as it
relates to intrastate services, including local telephone, regional long
distance and network access services. Under the Pennsylvania PUC's current
practices, our CLEC's rates and services are generally subject to much less
regulatory scrutiny than those of the RLEC in its markets.

     Under TA-96, the Pennsylvania PUC also has authority to arbitrate any
disputes over the terms and conditions of interconnection between our CLEC and
the ILECs in our CLEC markets, including the prices of various unbundled network
elements that our CLEC purchases. The Pennsylvania 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 Pennsylvania PUC may have a material effect on our
CLEC's costs and profitability.

                                        12
<PAGE>

  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.

          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 in good faith agreements that lay out 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. Rural local
exchange carriers, including our RLEC, have a rural exemption from the
interconnection requirements of TA-96. This exemption may only be terminated by
the Pennsylvania PUC following a bona fide request for interconnection to our
RLEC and a finding that such interconnection request is not unduly economically
burdensome, is technically feasible, and is consistent with the universal
service provisions in TA-96.

     As a result of the passage of TA-96, local exchange carriers, including our
RLEC, face the prospect of being subject to competition for the first time 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
USSF. 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. Therefore, TA-96 increases the level of competition
that our RLEC faces. 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 new markets we may seek to serve with
our CLEC, and in our RLEC markets, should they seek to enter these markets.

  PROMOTION OF LOCAL SERVICE COMPETITION

     As discussed above, TA-96 provides generally for the removal of barriers to
entry into the telecommunications industry in order to promote competition for
the provision of local telephone service. Congress, however, has recognized that
states should not be prohibited from taking actions necessary to preserve and
advance universal service and has further recognized that special consideration
should be given to the appropriate conditions for competitive entry in areas
served by ILECs.

     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

                                        13
<PAGE>

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; (ii) unbundle and
provide nondiscriminatory access to network elements, such as local loops,
switches and transport facilities, at nondiscriminatory rates and on
nondiscriminatory terms and conditions; (iii) offer their retail services for
resale at wholesale rates; (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.

     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
initially suspending or modifying the general requirements in areas served by
RLECs. RLEC 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 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 RLEC,
an automatic blanket exemption ("rural exemption") from the 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.

     Under TA-96, ILECs with fewer than 2% of the nation's subscriber lines,
such as our RLEC, may request from state PUCs exemption, suspension or
modification of any or all of the requirements described above. A PUC may grant
such a request if it determines that such exemption, suspension or modification
is consistent with the public interest and necessary to avoid a significant
adverse economic impact on communications users and to avoid imposing a
requirement that is technically unfeasible or unduly economically burdensome.
Pursuant to TA-96, our RLEC received a temporary suspension exempting it from
the additional ILEC requirements. This exemption expires on July 10, 2002. We
are presently contemplating asking the Pennsylvania PUC to further extend the
suspension. If the Pennsylvania PUC denies a renewal of our temporary suspension
and does not allow us adequate compensation for the costs of providing
interconnection, our costs would significantly increase and we could suffer a
significant loss of customers to competitors. In addition, we could incur
additional administrative and regulatory expenses as a result of the
interconnection requirements.

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

     Even if an ILEC in a territory we wished to enter was not entitled to such
protections, we could 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
                                        14
<PAGE>

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 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 USSF revenues received by our RLEC from the federal government are
intended to support the high cost of our operations in rural markets. RLEC
revenues from such USSF support payments were approximately $372,000 in 2001.

     Newly codified universal service principles are being implemented by both
the FCC and the Pennsylvania PUC. One of the implemented principles provides
that USSF funds will be distributed only to carriers that are designated as
eligible telecommunications carriers, or ETCs, by the Pennsylvania PUC. Our RLEC
has been designated an ETC pursuant to TA-96. However, under TA-96, competitors
could obtain the same support payments as we do if the Pennsylvania 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 RLEC might not be able to compete as
effectively or otherwise continue to operate as profitably as they have
historically. RLECs will receive USSF 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 USSF.

  ACCESS CHARGE REFORM

     As of December 31, 2001, approximately 48.9% of our RLEC revenues came from
network access charges, which are paid to us by intrastate and interstate long
distance carriers for originating and terminating calls in the territory served
by our RLEC. 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 Pennsylvania PUC and the FCC have
made and are continuing to consider various reforms to the existing rate
structure for charges assessed on long distance carriers for connection to local
networks. These reforms are designed to move these network access charges, over
time, to lower, cost-based rate levels and structures. These changes will reduce
access charges and will shift charges, which historically have been based on
minutes-of-use, to flat-rate, monthly per line charges on end-user customers
rather than long distance carriers. As a result, the aggregate amount of network
access charges paid by long distance carriers to access providers, such as our
RLEC, will decrease.

     In July 2000, the Pennsylvania PUC created a state universal service fund
accompanied by intrastate regulatory access reform, resulting in revenue shifts
for our RLEC 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.

     In addition to the above modifications, the FCC has also released a Notice
of Proposed Rulemaking under which it will investigate the possibility of
allowing telephone companies such as our RLEC to convert to a form of incentive
regulation similar in some respects to its existing alternative method of
regulation in Pennsylvania. Previously, on May 31, 2000, the FCC adopted an
order intended to significantly reduce access charges paid by long distance
companies to price cap local ILECs, such as RBOCs. The FCC intends that the
changes adopted in its access charge reforms will accelerate competition in the
local and long distance telecommunications markets and set a more appropriate
level of interstate access charges. In addition, to the extent our RLEC becomes
subject to competition in its markets, such access charges could be paid to
CLECs

                                        15
<PAGE>

rather than to us. Such a circumstance could have a material adverse effect on
our financial condition and results of operations.

  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. We cannot predict the nature of these
regulations or their impact on our business.

EMPLOYEES

     We had 725 employees as of December 31, 2001, including approximately 200
employees dedicated to the operation of PCS ONE. None of our employees is
covered by a collective bargaining agreement.

FACTORS AFFECTING OUR PROSPECTS


 The communications industry is increasingly competitive, and this competition
 has resulted in pricing pressure on our service offerings. We may experience
 increased competitive pressures which could have a negative effect on our
 revenues and earnings.



     As a communications provider, we face competition from:


     - competitive local exchange carriers, including Adelphia, Commonwealth
       Telephone Enterprises and XO Communications;

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

     - cable television companies, including Adelphia, Comcast, AT&T and Pencor
       Services;

     - providers of communications services such as long distance services,
       including, as a consequence of its recently received regulatory approval
       to provide long distance services in Pennsylvania, Verizon
       Communications; and

     - systems integration providers, including Morefield, Williams, IntelliMark
       and Weidenhammer Systems Corp.

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


 We must secure unbundled network elements at reasonable rates or our CLEC
 expansion may be delayed and the quality of service may decline.


     In providing our CLEC service, we interconnect with and use other telephone
companies' networks to access certain of their customers. Therefore, we depend,
in certain circumstances, upon the technology and capabilities of these other
telephone companies, the quality and availability of other telephone companies'
copper lines and other telephone companies' maintenance of these lines. We must
also maintain efficient procedures for ordering, provisioning, maintaining and
repairing lines from the incumbent telephone companies. We may not be able to
obtain the copper lines and services of satisfactory quality we require from
other telephone companies, or on other satisfactory terms and conditions, in
which case we may experience delays in the expansion of our competitive local
exchange carrier networks and the degradation of the quality of our service to
customers.

                                        16
<PAGE>

     We also provide digital subscriber line services. To provide unbundled
digital subscriber line-capable lines that connect each end-user to equipment,
we rely on other telephone companies. The Telecommunications Act of 1996
generally requires that charges for these unbundled network elements be
cost-based and nondiscriminatory. Charges for digital subscriber line-capable
lines and other unbundled network elements may vary based on rates proposed by
other telephone companies and approved by state regulatory commissions.
Increases in these rates could harm our CLEC business.


  Successful expansion of our CLEC operations into new markets is dependent on
  interconnection agreements, permits and rights-of-way and the failure to
  obtain these agreements and permits could hamper its expansion.


     The successful expansion of our CLEC operations will depend, in part, on
our ability to implement existing interconnection agreements and to enter into
and implement new interconnection agreements as we seek to expand into new
markets. Our failure to obtain these agreements and permits could hamper this
expansion. Interconnection agreements are subject to negotiation and
interpretation by the parties to the agreements and are subject to state
regulatory commission, FCC and judicial oversight. If the terms of these
interconnection agreements need to be renegotiated, we may not be able to
renegotiate existing or enter into new interconnection agreements in a timely
manner or on favorable terms. We must also maintain existing, and obtain new,
local permits, including rights to utilize underground conduit and pole space
and other rights-of-way. We may not be able to maintain our existing permits and
rights or obtain and maintain other required permits and rights on acceptable
terms. Cancellation or nonrenewal of interconnection agreements, permits,
rights-of-way or other arrangements could significantly harm our business.


  We will be subject to a complex and uncertain regulatory environment that may
  require us to alter our business plans and face increased competition.


     The United States communications industry is subject to federal, state and
other regulations that are continually evolving. As new communications laws and
regulations are issued, we may be required to modify our business plans or
operations. We may not be able to do so in a cost-effective manner. Federal and
state regulatory trends in favor of reduced regulation are likely to have
negative effects on our business and our ability to compete. 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 to our
service area. The introduction of new competitors could have a negative effect
on our revenues and earnings. See "-- Regulatory Environment" on page 12.


  We have received a limited suspension from certain interconnection
  requirements of the Telecommunications Act of 1996. Upon expiration of the
  suspension, we may be subject to additional competition for telecommunications
  services.


     Our RLEC services have received a limited suspension until July 2002 from
certain interconnection requirements of the Telecommunications Act of 1996. The
suspension protects the interconnection services in our RLEC market by excluding
us from requirements to allow competitors access to our customers by relying
upon our services and facilities. If we do not receive additional extensions of
this suspension, competitors will be allowed to seek removal of our rural
exemption for the purposes of entering our territory and using our services and
facilities through interconnection agreements to provide competitive services.
The introduction of new competitors could result in the loss of customers and
have a negative effect on our revenues and earnings.

  IN THE EVENT THAT WE COMPLETE OUR PENDING MERGER TRANSACTION WITH CONESTOGA
  ENTERPRISES, INC., IN ADDITION TO THE PRECEDING RISKS, THE COMBINED COMPANY
  MAY BE SUBJECT TO THE FOLLOWING ADDITIONAL RISKS:


  The combined company may be unable to integrate successfully the business
  operations of D&E and Conestoga and such inability could have an adverse
  impact on its profitability.


     The integration of the systems and operations of Conestoga and D&E will
involve significant risks. D&E and Conestoga have different operating support
systems, including billing, accounting, order management, toll

                                        17
<PAGE>

rating, trouble reporting and customer service systems, which may be difficult
to integrate. In addition, some of Conestoga's employees are members of an
organized labor union and are subject to the terms of a collective bargaining
agreement. Because D&E's employees are not unionized, management of the combined
company may face difficulties in integrating employees with different work
rules. Even if integration of the operating systems and employees is ultimately
successful, the amount of management attention diverted to integration efforts
may limit their ability to work on other business matters. If the combined
company does not realize anticipated operating efficiencies, its profitability
could suffer.


  D&E'S increased indebtedness as a result of the merger could restrict its
operations.


     Increased borrowing by D&E to finance a portion of the cash needed to pay
Conestoga shareholders in the merger could restrict the combined company's
operations after the merger due to the following factors, among others:

     - the combined company will use a substantial portion of its cash flow from
       operations, if any, to pay principal and interest on its indebtedness,
       which would reduce the funds available for working capital, capital
       expenditures, acquisitions and other general corporate purposes;

     - the combined company's indebtedness may limit its ability to obtain
       additional financing on satisfactory terms, if at all;

     - insufficient cash flow from operations may cause the combined company to
       attempt to sell assets, restructure or refinance its debt, or seek
       additional equity capital, which the combined company may be unable to do
       at all or on satisfactory terms;

     - the combined company's level of indebtedness may make it more vulnerable
       to economic or industry downturns;

     - the combined company may encounter increasing difficulty in complying
       with the financial and other covenants applicable to its indebtedness,
       which could increase the possibility of a default;

     - the combined company may not have the ability to pay dividends to its
       shareholders;

     - the combined company's debt service obligations increase its
       vulnerabilities to competitive pressures, as it may be more leveraged
       than many of its competitors; and

     - any new financings may impose restrictions that limit management's
       flexibility in operating or expanding the combined company's revenues.


  The failure to sell the wireless businesses of Conestoga would result in a
  reduction in the combined company's expected resources available for the
  operation of its business, and may adversely affect the continuing operations
  of the business.


     As contemplated by the merger agreement with Conestoga, D&E and Conestoga
intend to dispose of Conestoga's wireless assets and business. Pursuant to
certain non-competition covenants in the agreement between VoiceStream Wireless
Corporation and D&E, for three years following the sale of its interest in PCS
ONE, D&E may be restricted from providing mobile voice wireless communications
services in the Pennsylvania markets of York-Hanover, Lancaster or Reading. As a
result of the restrictions imposed by these non-competition covenants, the
combined company may be required shortly after the merger to dispose of that
portion of Conestoga's wireless business operated in the Reading, Pennsylvania
market, which represents approximately 37% of the population area serviced by
such business. The proceeds to be realized by the combined company from a sale
of Conestoga's wireless assets and business are uncertain. Until the Conestoga
wireless business is sold, the combined company will continue to operate this
business. This continued operation of the wireless business may adversely affect
the combined company's other businesses by requiring additional financing for
its operations, or result in the incurrence of financial losses and other
liabilities.

                                        18
<PAGE>

EXECUTIVE OFFICERS

     The following table sets forth the names, ages, and positions of our
executive officers. All of our executive officers serve for terms of one year
and until re-appointed or until a successor is duly appointed at the annual
organizational meeting of directors, which follows the annual shareholders'
meeting. No executive officers have any arrangements or understandings with any
other person pursuant to which such executive officer was or is to be appointed
as an executive officer.

<Table>
<Caption>
                                                                               POSITION
                                                                                 HELD
NAME                                AGE                POSITION                 SINCE
----                                ---                --------                --------
<S>                                 <C>   <C>                                  <C>
Anne B. Sweigart..................  87    Chairman and President                 1985
Robert M. Lauman..................  76    Vice Chairman and Senior Executive     2001
                                          Vice President
G. William Ruhl...................  62    Chief Executive Officer                2001
Thomas E. Morell..................  41    Vice President, Chief Financial        1995(1)
                                          Officer and Treasurer(1)
W. Garth Sprecher.................  50    Vice President and Secretary(1)        1993(1)
</Table>

---------------

(1) Both Messrs. Morell and Sprecher were elected Vice Presidents in 1996.

     ANNE B. SWEIGART, age 87, has served as our President and Chairman of the
Board since July 1985 and served as our Chief Executive Officer from 1985 until
October of 2001. Mrs. Sweigart became a director in 1952. Her employment began
in 1936, twenty-five years after her father founded the company. From that time
until today, she has always been involved in the management affairs of the
company. Mrs. Sweigart serves on numerous community boards and is currently a
Trustee of Rider University, a Trustee of Elizabethtown College, an Honorary
Trustee of Lebanon Valley College and a Trustee of Linden Hall School for Girls.
She is also a Director of the Pennsylvania Telephone Association and serves on
the Board of Directors of LutherCare. Mrs. Sweigart is a member of the Board of
Directors' Strategic Planning Review Committee and serves as Chairman of the
Executive Committee.

     ROBERT M. LAUMAN, age 76, has served as our Vice Chairman and Senior
Executive Vice President since October 2001. He has been a director of the
Company since 1983. Prior to 2001, Mr. Lauman served as our Executive Vice
President and Chief Operating Officer. Mr Lauman was previously employed by Bell
of Pennsylvania from 1946 to 1983, at which time he retired as Vice President
-Engineering. Mr. Lauman is a registered Professional Engineer, a member of the
Pennsylvania Society of Professional Engineers and a member of the Institute of
Electrical and Electronics Engineers, Inc. Currently, he is a Trustee of
Lancaster Theological Seminary and serves on the Board of Trustees for the
Pennsylvania Academy of Music. Mr. Lauman is a member of the Board of Directors'
Executive, Compensation and Strategic Planning and Review Committees.

     G. WILLIAM RUHL, age 62, has been our Chief Executive Officer since October
2001, served as Chief Executive Officer of D&E Telephone Company, our RLEC
subsidiary, since 1996 and has been a director since 1993. From 1991 to October
2001, Mr. Ruhl served as our Senior Vice President. Prior to joining D&E in
1991, Mr. Ruhl was employed by Bell of Pennsylvania. Mr. Ruhl is a registered
Professional Engineer and a member of the Institute of Electrical and
Electronics Engineers, Inc. He served as Chairman of the Board of Directors of
Monor Telephone Company from 1994 until its sale in 1999. He serves on the Board
of Directors of the United States Telecom Association (USTA) and was appointed
to the President's National Security Telecommunications Advisory Committee,
representing the USTA. Mr. Ruhl serves on the Board of Directors of the
Technology Council of Central Pennsylvania and on the Board of Alliance for
Telecommunications Industry Solutions. He is also President of the Board of
Directors of the Central Pennsylvania Symphony. Mr. Ruhl is a member of the
Board of Directors' Executive Committee.

     THOMAS E. MORELL, age 41, has been our Chief Financial Officer and
Treasurer since 1995 and a Vice President since 1996. Mr. Morell has been
employed by the Company since 1984, serving as Assistant Controller from 1984 to
1990 and Controller from 1990 to 1995. From 1982 to 1984, he was employed by

                                        19
<PAGE>

Coopers & Lybrand L.L.P. as an auditor. Mr. Morell is Managing Director of
PenneCom B.V., a Supervisory Board member of Pilicka Telephone Company, and is a
member of the Campaign Cabinet of the United Way of Lancaster County. Mr. Morell
is a Certified Public Accountant and is a member of the Pennsylvania Institute
of Certified Public Accountants.

     W. GARTH SPRECHER, age 50, has served as a Vice President and our Secretary
since 1996. Mr. Sprecher has held the position of Chief Executive Officer of D&E
Networks, Inc., our Systems Integration subsidiary, since 2000 and has been a
director since 1993. Mr. Sprecher has held various positions with the Company
since 1984. Mr. Sprecher is a member of the Board of Directors of Sterling
Financial Corp and the Bank of Lancaster County and serves on both the Executive
and Compensation Committees of these companies. Mr. Sprecher is a member of the
Board of Directors of WITF, Inc. and is Vice-Chairman of the Lancaster County
Convention Center Authority and is President of the Pennsylvania Dutch Council
of the Boy Scouts of America. He is also past President of the Board of
Directors of the Mid-Atlantic Chapter of the American Society of Corporate
Secretaries. Mr. Sprecher is a member of the Board of Directors' Executive
Committee. Mr. Sprecher is the nephew of Mrs. Sweigart.

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 owned facilities include our
corporate headquarters, an 85,900 square feet in Ephrata, Pennsylvania and an
80,000 square foot building in Brownstown, Pennsylvania that serves a variety of
functions including offices and housing our network operations center. We own
various other telephone facilities located throughout our RLEC and CLEC service
areas. Our primary lease is an office for our systems integration business,
which consists of approximately 28,800 square feet and is located in
Mechanicsburg, Pennsylvania.

     We have transmission facilities referred to as our outside plant consisting
of cables, wires terminals and necessary supporting structures such as poles,
conduits and manholes. Our cables are installed in one of the following methods:
on poles, underground in 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.

ITEM 3.  LEGAL PROCEEDINGS

     In April 1999, PenneCom B.V. (PenneCom), a Netherlands limited liability
company which provides communications services in Central Europe and is
wholly-owned indirectly by EuroTel, L.L.C. (EuroTel), a domestic limited
liability company in which we have a one-third ownership interest, signed an
agreement to sell its shares of Pilicka Telefonia, Sp.zo.o. (Pilicka), a Polish
limited liability company, to Elektrim S.A. (Elektrim), a Polish corporation,
for $140 million in cash and notes. However, a few days before the transaction
was set to close, Elektrim issued written notice that it was repudiating the
purchase agreement, alleging that unspecified actions of representatives of
Pilicka and PenneCom constituted fraudulent inducement, thereby rendering the
purchase agreement void. On August 2, 1999, PenneCom filed an arbitration
request with the International Court of Arbitration at the International Chamber
of Commerce seeking specific performance of the agreement as well as
compensatory and punitive damages.

     On May 9, 2001, a tribunal of three International Chamber of Commerce (ICC)
arbitrators found in favor of PenneCom and awarded payment by Elektrim to
PenneCom of the following sums: (1) $22,987,000 together with interest at an
annual rate of 10% effective from August 1, 1999 to the date of payment; (2)
$368,000 in respect of costs paid by PenneCom to the Arbitration Court; and (3)
$2,000,000 towards PenneCom's legal costs (the Award). The Award was in addition
to the $10,000,000 deposit that Elektrim paid to PenneCom in July 1999 according
to the terms of the share purchase agreement.

     On May 21, 2001, PenneCom submitted to the Arbitration Court a formal
application for correction of a computational error in the Award.

                                        20
<PAGE>

     On August 6, 2001, PenneCom was notified that on July 23, 2001, the
Arbitration Court issued an amended award, correcting the Award to reflect that
the following sums were due to PenneCom from Elektrim: (1) $30,000,000 with
interest at 10% per annum from August 1, 1999 to the date of payment; (2)
$368,000 in respect of the costs of the Arbitration Court; and (3) $2,000,000
towards PenneCom's legal costs.

     On September 4, 2001, Elektrim paid to PenneCom $38,655,000 which was the
amount of the amended award and fees. PenneCom used most of the funds to reduce
outstanding loans under its credit facility with a domestic bank. PenneCom
applied for a second correction to the amended award but was notified in
December 2001 that this correction was denied.

     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 or results of operations.

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 2001.

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

<Table>
<Caption>
                                                               LOW      HIGH
                                                              ------   ------
<S>                                                           <C>      <C>
2000
  First Quarter.............................................  $16.38   $25.00
  Second Quarter............................................  $14.00   $20.69
  Third Quarter.............................................  $18.00   $27.25
  Fourth Quarter............................................  $20.50   $27.94
2001
  First Quarter.............................................  $16.50   $21.94
  Second Quarter............................................  $17.00   $19.75
  Third Quarter.............................................  $18.00   $25.75
  Fourth Quarter............................................  $15.70   $23.75
</Table>

     The bid quotations reflect inter-dealer quotations; do not include retail
markups, markdowns, or commissions; and may not necessarily represent actual
transactions. The bid information stated is, to our knowledge, the best
approximate value at the time indicated.

     The closing price on December 31, 2001, was $18.00. Based on records that
we maintain, the approximate number of holders of our common stock, as of
December 31, 2001, was 2,095.

     During the two most recent fiscal years, cash dividends on our common stock
have been declared quarterly in the annual amount per share of $0.50 in 2001 and
$0.45 in 2000. 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.

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, 2001. This information should be read in

                                        21
<PAGE>

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.

<Table>
<Caption>
                                              AT OR FOR THE YEAR ENDED DECEMBER 31,
                                  -------------------------------------------------------------
                                    1997        1998          1999          2000         2001
                                  --------   -----------   -----------   -----------   --------
                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                               <C>        <C>           <C>           <C>           <C>
STATEMENT OF OPERATIONS DATA
Operating revenues..............  $ 48,115    $ 49,657      $ 57,047      $ 65,092     $ 76,286
Depreciation and amortization...     8,466       9,372         9,771        12,129       15,296
Operating income (loss).........     9,882       7,866         8,764      $  5,134         (503)
Income from continuing
  operations....................    10,722       1,245        15,503        (5,041)       4,042
Discontinued operations, net of
  tax(1)........................    (1,157)     (5,348)       (6,652)       (5,653)      (5,985)
Extraordinary loss, net of
  tax...........................        --      (7,901)           --            --       (2,109)
Cumulative effect of accounting
  change, net of tax............        --        (251)           --          (912)          --
Net income (loss)...............     9,565     (12,255)        8,851       (11,606)      (4,052)
PER-SHARE DATA -- BASIC AND
  DILUTED(2)
Income (loss) from continuing
  operations....................  $   1.78    $   0.17      $   2.10      $  (0.68)    $   0.55
Discontinued operations.........     (0.20)      (0.72)        (0.90)        (0.77)       (0.81)
Extraordinary items.............        --       (1.07)           --            --        (0.29)
Cumulative effect of accounting
  change........................        --       (0.03)           --         (0.12)          --
Net income (loss) per common
  share.........................      1.58       (1.65)         1.20         (1.57)       (0.55)
Cash dividends declared per
  common share..................      0.39        0.39          0.39          0.45         0.50
BALANCE SHEET DATA
Total assets....................  $112,492    $105,490      $115,803      $124,221     $142,878
Long-term debt..................    41,657      22,657        21,582        20,907       58,124
Preferred stock of subsidiary...     1,446       1,446         1,446         1,446        1,446
OTHER DATA
Adjusted EBITDA(3)..............  $ 18,348    $ 17,238      $ 18,535      $ 17,263     $ 14,793
Net cash provided by continuing
  operating activities..........    11,583      13,758        17,776        14,760       12,770
Net cash provided by/used in
  continuing investing
  activities....................     5,383     (21,932)      (12,718)       (5,436)     (35,319)
Net cash provided by/used in
  continuing financing
  activities....................    (3,961)     16,258        (5,287)       (5,372)      26,904
</Table>

---------------

(1) Reflects the results of our wireless services operations including our
    interest in the PCS ONE joint venture as discontinued operations.

(2) The per-share data is based upon the weighted average common shares
    outstanding. Computations of earnings for all years are in accordance with
    Statement of Financial Accounting Standards No. 128, "Earnings per Share."

                                        22
<PAGE>

(3) We compute Adjusted EBITDA by adding depreciation and amortization expense
    to operating income. Adjusted EBITDA is presented because we believe it is
    frequently used by securities analysts, investors and other interested
    parties in the evaluation of companies in our industry. However, other
    companies in our industry may calculate Adjusted EBITDA differently than we
    do. Adjusted EBITDA is not a measurement of financial performance under
    generally accepted accounting principles and should not be considered as a
    substitute for cash flow from operating activities as a measure of liquidity
    or a substitute for net income as an indicator of operating performance or
    any other measure of performance derived in accordance with generally
    accepted accounting principles.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

     The following discussion should be read in conjunction with our
consolidated financial statements, including the notes thereto, included in this
annual report. Monetary amounts presented in the following discussion are in
thousands, except per share amounts.

OVERVIEW


     We are a provider of communications services to residential and business
customers in markets throughout south central Pennsylvania. We operate an
incumbent rural local telephone company, or RLEC, in parts of Berks, Lancaster
and Lebanon counties in Pennsylvania, and a competitive local telephone company,
or CLEC, in the Lancaster and Harrisburg, Pennsylvania metropolitan areas, which
we refer to as our "edge-out" markets. Our goal is to be a leading single-source
provider of voice and data communications services in our markets. To achieve
this goal, we have developed a comprehensive package of communications services
including local and long distance telephone services, high speed data services,
and Internet access services. We also provide business customers with integrated
voice and data network solutions. In addition, we presently hold a one-third
interest in Eurotel, LLC, whose indirect wholly-owned subsidiary, Pilicka
Telephone S.A., operates a telephone network in a region south of Warsaw,
Poland. We currently are exploring strategic alternatives with regard to this
investment.


     At the beginning of 2001, we changed our internal financial reporting to
provide management with financial results for our four business segments. Our
new segments, excluding wireless services which is now reported as a
discontinued segment, are RLEC, CLEC, Internet Services and Systems Integration.
This change was primarily a response to an increase in the portion of our
business operating in non-regulated competitive markets. We also changed the
measure of profitability for these segments from net income to operating income
because our business lines do not follow our corporate structure as closely as
the previous segments had. In the first quarter of 2002, we renamed our ILEC
segment our "RLEC" segment and our Networking Services segment our "Systems
Integration" segment to better define these businesses. All of our 2000 and 1999
segment information has been reclassified to reflect the above changes.

     Our RLEC revenue is derived primarily from network access charges, local
telephone service, enhanced telephone services and regional toll service.
Network access revenue consists primarily of charges paid 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, such as caller ID, call waiting and PhoneGuard(TM), a telemarketer
call-blocking service. Regional long distance revenue is derived from providing
regional long distance services to our RLEC customers.

     Our CLEC revenue is derived primarily from network access charges, local
telephone service, enhanced telephone services and long distance service
revenue. Network access revenue consists primarily of charges paid by long
distance companies and other non-CLEC customers for access to our network in
connection with the completion of long distance telephone and local calls and
the delivery of other services. 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, such as caller ID, call waiting and PhoneGuard(TM). Long
distance revenue consists of charges for both national and regional long
distance service provided on a resale basis.

                                        23
<PAGE>

     Our Internet Services revenue is derived from high speed and dial-up
Internet access services, in addition to web hosting services. We market these
services primarily in our RLEC and CLEC service areas.

     Our Systems Integration revenue is derived from sales of services that
support the design, implementation and maintenance of local and wide area
networks and telecommunications systems.

     In addition, we sell data and voice communications equipment and provide
custom computer programming service. We market these products and services
primarily in our RLEC and CLEC service areas.

     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 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 testing 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 dial-up Internet service and for our DSL service. Our Systems
Integration business incurs expenses primarily related to equipment and
materials used in the course of the installation and provision of service.

     We incur access line-related capital expenditures associated with access
line growth, expenditures for upgrading existing facilities and costs related to
the provision of DSL and dial-up Internet services in our RLEC and CLEC
territories. We believe that our capital expenditures related to CLEC access
line growth are generally associated with additional customers and therefore
tend to result in incremental revenue. We believe that our additional capital
expenditures relating to our investment in software and systems will provide us
with a competitive advantage in the marketplace and generally allow for
corresponding reductions in operating expenses.

PENDING SALE OF PCS ONE INTEREST


     On October 17, 2001, we entered into a definitive agreement to sell our 50%
interest in PCS ONE to VoiceStream Wireless Corporation for approximately
$117,000. We estimate that we will receive approximately $75,000 in cash after
working capital and long-term debt adjustments of approximately $40,000, and
recognize a gain on the sale of approximately $50,000, net of tax. We also
estimate that approximately $34,000 of the cash received will be used to pay
taxes with the remainder used to pay down debt and to finance, in part, our
pending acquisition of Conestoga Enterprises, Inc. This sale, which is expected
to close in April 2002, will result in our exit of the mobile wireless personal
communications service business. Accordingly, we have reflected our wireless
business as discontinued operations in our financial statements. Our losses from
discontinued operations, net of taxes, were $6,652 in 1999, $5,653 in 2000 and
$5,985 in 2001.


PENDING MERGER WITH CONESTOGA ENTERPRISES, INC.

     On November 21, 2001, we entered into an agreement and plan of merger,
which became effective on December 3, 2001 and was subsequently amended on
January 9, 2002, to acquire Conestoga Enterprises, Inc., a neighboring rural
telecommunications provider in Pennsylvania. Total merger consideration is
estimated to be approximately $272,000, which includes the payment of up to
approximately $150,000 in cash and the issuance of shares of our common stock.
In addition, we will assume Conestoga's existing indebtedness, which totaled
$81,339 at December 31, 2001. The completion of the merger is subject to
approval by both our and Conestoga's shareholders, certain regulatory approvals
and other customary closing conditions and is expected to close during the
second quarter of 2002.

     The merger will be accounted for as a purchase in accordance with Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations." For
purposes of preparing our consolidated financial statements, we will establish a
new accounting basis for Conestoga's assets and liabilities based upon their
fair values, the merger consideration, and the costs of the merger. For further
information regarding Conestoga, please refer to Conestoga's annual, quarterly
and special reports, proxy statements and other information that they file with
the Securities and Exchange Commission.

                                        24
<PAGE>

RESULTS OF OPERATIONS

     The following table is a summary of our operating results by segment:

<Table>
<Caption>
                                                                                  CORPORATE,
                                                   INTERNET        SYSTEMS        OTHER AND      TOTAL
                               RLEC     CLEC(1)   SERVICES(2)   INTEGRATION(3)   ELIMINATIONS   COMPANY
                              -------   -------   -----------   --------------   ------------   -------
<S>                           <C>       <C>       <C>           <C>              <C>            <C>
1999
  Revenues -- External......  $38,308   $2,815      $    --        $12,199         $ 3,725      $57,047
 Revenues -- Intercompany...    1,502       56           --             69          (1,627)          --
                              -------   -------     -------        -------         -------      -------
  Total Revenues............   39,810    2,871           --         12,268           2,098       57,047
                              -------   -------     -------        -------         -------      -------
  Depreciation and
     Amortization...........    8,395      189           --            399             788        9,771
  Other Operating
     Expenses...............   20,391    3,717           --         11,955           2,449       38,512
                              -------   -------     -------        -------         -------      -------
  Total Operating
     Expenses...............   28,786    3,906           --         12,354           3,237       48,283
                              -------   -------     -------        -------         -------      -------
  Operating Income (Loss)...   11,024   (1,035)          --            (86)         (1,139)       8,764
                              -------   -------     -------        -------         -------      -------
2000
  Revenues -- External......  $39,374   $4,177      $    90        $17,890         $ 3,561      $65,092
 Revenues -- Intercompany...    2,466       99           --            119          (2,684)          --
                              -------   -------     -------        -------         -------      -------
  Total Revenues............   41,840    4,276           90         18,009             877       65,092
                              -------   -------     -------        -------         -------      -------
  Depreciation and
     Amortization...........    9,380      478           42          1,587             642       12,129
  Other Operating Expense...   21,634    5,990        1,203         17,999           1,003       47,829
                              -------   -------     -------        -------         -------      -------
  Total Operating
     Expenses...............   31,014    6,468        1,245         19,586           1,645       59,958
                              -------   -------     -------        -------         -------      -------
  Operating Income (Loss)...   10,826   (2,192)      (1,155)        (1,577)           (768)       5,134
                              -------   -------     -------        -------         -------      -------
2001
  Revenues -- External......  $41,766   $6,203      $ 1,922        $23,177         $ 3,218      $76,286
 Revenues -- Intercompany...    3,892      296           23             96          (4,307)          --
                              -------   -------     -------        -------         -------      -------
  Total Revenues............   45,568    6,499        1,945         23,273          (1,089)      76,286
                              -------   -------     -------        -------         -------      -------
  Depreciation and
     Amortization...........   11,315      575          259          2,751             396       15,296
  Other Operating
     Expenses...............   25,821    8,899        3,791         24,059          (1,077)      61,493
                              -------   -------     -------        -------         -------      -------
  Total Operating
     Expenses...............   37,136    9,474        4,050         26,810            (681)      76,789
                              -------   -------     -------        -------         -------      -------
  Operating Income (Loss)...    8,522   (2,975)      (2,105)        (3,537)           (408)        (503)
                              -------   -------     -------        -------         -------      -------
</Table>

---------------

(1) We commenced our CLEC operations in 1999.

(2) We commenced our Internet Services operations on October 1, 2000.

(3) We acquired two Systems Integration businesses in 2000.

CONSOLIDATED OPERATIONS

  OVERVIEW OF 2001 COMPARED TO 2000

     Consolidated operating revenues from continuing operations in 2001
increased $11,194, or 17.2%, to $76,286 in 2001 from $65,092 in 2000. This
increase consisted of revenue increases in all of our operating segments, but
primarily was due to increases in our customer bases in our CLEC and Internet
Services segments and the inclusion of a full year of results for two Systems
Integration businesses acquired in 2000.

                                        25
<PAGE>

Before corporate eliminations, CLEC revenues increased $2,223 or 52.0%, Internet
Services revenue increased $1,832, from $90 in 2000, and Systems Integration
revenues increased $5,264, or 29.2%.

     Consolidated operating results from continuing operations for 2001 was a
loss of $503 compared with income of $5,134 in 2000. The loss in 2001 was
primarily attributable to increased operating losses in our Systems Integration,
CLEC, and Internet Services segments, of $1,960, $783 and $950 respectively, as
well as a decrease of $2,304 in operating income from our RLEC. The increased
operating loss was primarily attributable to increases in general and
administrative expenses and incremental costs associated with network operations
and depreciation related to the enhancement of and relocation of certain
operations to our new building space in Brownstown, Pennsylvania, as well as a
full year of expenses for our Systems Integration businesses acquired in 2000.
The expansion of our CLEC and Internet Services operations, which resulted in
the addition of 3,640 access lines, 8,000 dial-up Internet subscribers and 1,732
DSL subscribers in 2001, also increased our operating expenses.

     Income from continuing operations increased $9,083 from a loss of $5,041 in
2000 to income of $4,042 in 2001 primarily due to an increase in equity in
income of affiliates of $5,619 as a result of the arbitration award received by
a subsidiary of our EuroTel affiliate and an increase of $6,414 in realized
gains/losses on the disposition of securities held for sale. These increases
were offset by the $5,637 decrease in operating income discussed above. Income
taxes in 2001 were a benefit of $2,179 primarily as a result of a decrease
during 2001 in our valuation allowance for deferred tax assets.

  OVERVIEW OF 2000 COMPARED TO 1999

     Consolidated operating revenues from continuing operations for 2000
increased $8,045, or 14.1%, to $65,092 in 2000 from $57,047 in 1999. This
increase consisted of growth in all of our operating segments, but was primarily
attributable to $7,135 in revenues from the Systems Integration businesses
acquired in 2000. CLEC and Systems Integration revenues increased $1,405 and
$5,741, or 48.9% and 46.8% respectively, before corporate eliminations. RLEC
revenues increased $2,030, or 5.1%, from $39,810 in 1999.

     Operating income for 2000 was $5,134, which represented a decrease of
$3,630 or 41.4% from $8,764 recorded in 1999. The decrease in operating income
was primarily due to increased expenses from our newly acquired Systems
Integration businesses. Our CLEC and Internet Services operations were
relatively new ventures, and as such, experienced higher expenses and operating
losses in their start up phase, of which fiscal year 2000 was a part.

     Income from continuing operations decreased $20,544 from income of $15,503
in 1999 to a loss of $5,041 in 2000 primarily due to the $3,630 decrease in
operating income discussed above, a decrease in equity in income of affiliates
of $10,815 as EuroTel recognized a significant gain relating to the sale of its
Hungarian telecommunications company in 1999, and a decrease of $12,471 in
realized gains/losses on the disposition of securities held for sale. The income
tax effect from earnings resulted in a decrease of $6,106 in the income tax
provision.

                                        26
<PAGE>

RLEC SEGMENT RESULTS

                   SUMMARY OPERATING RESULTS -- RLEC SEGMENT

<Table>
<Caption>
                                                           1999      2000      2001
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Revenues:
  Local Telephone Service...............................  $11,477   $11,951   $12,219
  Network Access........................................   19,250    20,935    24,826
  Other.................................................    9,083     8,954     8,613
                                                          -------   -------   -------
Total Revenues..........................................   39,810    41,840    45,658
                                                          -------   -------   -------
Depreciation and Amortization...........................    8,395     9,380    11,315
Other Operating Expenses................................   20,391    21,634    25,821
                                                          -------   -------   -------
Total Operating Expenses................................   28,786    31,014    37,136
                                                          -------   -------   -------
Operating Income........................................   11,024    10,826     8,522
                                                          -------   -------   -------
Access Lines at December 31.............................   58,985    61,098    61,961
                                                          -------   -------   -------
</Table>

     RLEC segment revenues increased 9.1%, to $45,658 in 2001 and 5.1% to
$41,840 in 2000. These increases were primarily attributable to increases in
network access revenues of 18.6%, to $24,826 in 2001 and 8.8% to $20,935 in
2000. Network access revenues grew due to several factors including increased
numbers of access lines and higher call volumes, which resulted in increased
minutes of use. Local service revenues increased 2.2% in 2001 and 4.1% in 2000
primarily due to access line additions and increased sales of enhanced services.
Other revenues, which include, regional long distance service, directory
advertising, and billing and collection decreased 3.8% in 2001 and 1.4% in 2000.

     Operating expenses increased 19.7% to $37,136 in 2001 and 7.7% to $31,014
in 2000. The increase in 2001 was primarily attributable to increases in general
and administrative expenses, and incremental costs associated with network
operations and depreciation related to the enhancement of and relocation of
certain operations to our new building space in Brownstown, Pennsylvania. The
increase in 2000 was primarily attributable to increased computer information
services expense and an increase in depreciation expense largely due to an
increase in property, plant and equipment in service. Operating income decreased
$2,304, or 21.2%, in 2001 to $8,522 and $198, or 1.8%, in 2000 to $10,826
primarily due to these increased operating expenses.

CLEC SEGMENT RESULTS

                   SUMMARY OPERATING RESULTS -- CLEC SEGMENT

<Table>
<Caption>
                                                           1999      2000      2001
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Revenues:
  Local Telephone Service...............................  $    42   $   577   $ 1,586
  Network Access........................................       18       613     1,355
  Long Distance.........................................    2,802     2,999     3,355
  Other.................................................        9        87       203
                                                          -------   -------   -------
Total Revenues..........................................    2,871     4,276     6,499
                                                          -------   -------   -------
Depreciation and Amortization...........................      189       478       575
Other Operating Expenses................................    3,717     5,990     8,899
                                                          -------   -------   -------
Total Operating Expenses................................    3,906     6,468     9,474
                                                          -------   -------   -------
Operating Loss..........................................   (1,035)   (2,192)   (2,975)
                                                          -------   -------   -------
Access Lines at December 31.............................      598     3,895     7,535
</Table>

                                        27
<PAGE>

     CLEC segment revenues increased 52.0% to $6,499 in 2001 and 65.6% to $4,276
in 2000. This increase was primarily due to the launch of our competitive local
telephone services in the fourth quarter of 1999, which resulted in a
significant increase in the number of business access lines we served from 598
in 1999 to 3,895 in 2000 and to 7,535 in 2001. Long distance service operations
have been recorded in the CLEC segment since the first quarter of 1999, and
therefore CLEC results included long distance service operations for twelve
months in 1999.

     Operating expenses increased 46.5% to $9,474 in 2001 and 65.6% to $6,468 in
2000. The increase in 2001 was primarily attributable to an increase in network
operations expenses of $2,366, or 125%, as a result of the expansion of our
fiber optic network and the migration of many of our CLEC customers onto our own
facilities. This expansion includes expenses for engineering design and network
administration. The increase in 2000 was primarily due to our expansion of the
CLEC business into the Lancaster market. That expansion effort increased
expenses related to network operations, depreciation and marketing and customer
service. Operating losses increased $783, or 35.7%, to $2,975 in 2001 and
$1,157, or 111.8%, to $2,192 in 2000 primarily due to these increased operating
expenses.

INTERNET SERVICES SEGMENT RESULTS

             SUMMARY OPERATING RESULTS -- INTERNET SERVICES SEGMENT

<Table>
<Caption>
                                                             1999    2000      2001
                                                             ----   -------   -------
<S>                                                          <C>    <C>       <C>
Revenues...................................................  $ 0    $    90   $ 1,945
Depreciation and Amortization..............................   --         42       259
Other Operating Expenses...................................   --      1,203     3,791
                                                             ---    -------   -------
Total Operating Expenses...................................   --      1,245     4,050
                                                             ---    -------   -------
Operating Loss.............................................   --     (1,155)   (2,105)
                                                             ---    -------   -------
Customers at December 31
  DSL......................................................   --        477     2,209
  Dial-up Access...........................................   --      2,161    10,161
  Web-hosting Services.....................................   --         50       447
</Table>

     Our Internet Services operations were launched in October 2000, and
therefore, reflect start-up expenses, such as marketing and customer services
expenses and expenses related to the initial general and administrative planning
process, and results of operations for only three months in 2000. Operating
revenues were $1,945 in 2001 compared to $90 in 2000. Operating expenses were
$4,050 in 2001, resulting in operating losses of $2,105 in 2001, compared to a
loss of $1,155 in 2000.

SYSTEMS INTEGRATION SEGMENT RESULTS

            SUMMARY OPERATING RESULTS -- SYSTEMS INTEGRATION SEGMENT

<Table>
<Caption>
                                                           1999      2000      2001
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Revenues................................................  $12,268   $18,009   $23,273
Depreciation and Amortization...........................      399     1,587     2,751
Other Operating Expenses................................   11,955    17,999    24,059
                                                          -------   -------   -------
Total Operating Expenses................................   12,354    19,586    26,810
                                                          -------   -------   -------
Operating Loss..........................................      (86)   (1,577)   (3,537)
                                                          -------   -------   -------
</Table>

     Systems Integration segment revenues increased 29.2% to $23,273 in 2001 and
46.8% to $18,009 in 2000 from $12,268 in 1999. These increases are primarily due
to the acquisition of two businesses in the year 2000, which added revenues of
$7,135 in 2000. Revenues in 2001 reflected a full twelve months of operations
for the two companies acquired in 2000.

                                        28
<PAGE>

     Operating expenses increased 36.9% to $26,810 in 2001 and 58.5% to $19,586
in 2000 from $12,354 in 1999 primarily due to the inclusion of the acquisitions
completed in 2000. These increases include a higher amortization expense as a
result of additional goodwill recorded from the acquisitions. The increase is
also attributable to integration costs related to the acquisitions. Operating
losses increased $1,960 to $3,537 in 2001 and $1,491 in 2000 to $1,577 primarily
due to these increased operating expenses.

OTHER INCOME (EXPENSE)

     Other income (expense), net for 2001, was $2,431 compared with a loss of
$8,960 in 2000. The primary reasons for this $11,391 increase are as follows:

     - Our equity in net income (loss) of affiliates increased to income of $91
       in 2001 from a loss of $5,528 in 2000. The change was primarily a result
       of the recording of our share of a $40,000 arbitration award received by
       a subsidiary of EuroTel partially offset by our share of a $31,517
       impairment charge recorded by EuroTel on its underlying investments.
       Additionally, in 2001, EuroTel's operating losses decreased $1,136 and
       interest income increased by $6,209.

     - In 2001, we recognized a gain of $3,036 on the disposition of certain
       available for sale securities, while in 2000, we recognized a loss of
       $3,378 on the disposition of certain available for sale securities. These
       two transactions resulted in a net increase to other income of $6,414 in
       2001.

     Other income (expense), net for 2000, was a loss of $8,960, compared with
income of $14,060 in 1999. This decrease is primarily attributable to the
following:


     - Our share in the equity of EuroTel was a loss of $5,528 in 2000 compared
       with income $5,267 in 1999. The decrease was primarily the result of our
       share of a gain in 1999 related to EuroTel's sale of MTT, a
       telecommunications company located in Hungary. This gain was offset by
       reduced EuroTel losses in 2000 due to reduced operating expenses and
       interest expense. As of December 31, 2001, the carry amount for our
       investment and advances to EuroTel and its wholly owned subsidiaries was
       $6,431. Based on current estimates of fair value for EuroTel's operating
       telecommunications company, Pilicka, our share of proceeds on an assumed
       sale, would exceed the carrying value of our investment and advances. As
       such, at this time, we do not need to recognize any impairment on our
       investment in addition to our share of the impairment charge recorded by
       EuroTel on its underlying investments.


     - In 2000, we recorded a loss of $3,378 on the disposition of certain
       available for sale securities, while in 1999 we recognized a gain of
       $9,903 on the disposition of certain available for sale securities.

INCOME TAXES

     Federal and state income taxes on income from continuing operations
decreased $3,329 to a benefit of $2,179 in 2001 from an expense of $1,150 in
2000. The decrease in income tax expense is attributable to a $1,991 reduction
in our deferred tax asset valuation allowance. We reduced our valuation
allowance because the likelihood of using our net operating loss carryforwards
has increased primarily due to the pending sale of our interest in PCS ONE. The
effective tax rates were a negative percentage of 113.0% in 2001 and a positive
rate of 30.1% in 2000.

     Federal and state income taxes decreased $6,106 to $1,150 in 2000 from
$7,256 in 1999. The change was primarily the result of lower pre-tax income due
to gains in 1999 from the sales of D&E SuperNet shares and EuroTel's MTT
investment. The effective tax rates were 30.1% in 2000 and 31.8% in 1999.

DISCONTINUED OPERATIONS, EXTRAORDINARY ITEMS AND ACCOUNTING CHANGES

     In 2001, our discontinued wireless segment operations incurred a loss of
$5,985, net of $2,605 in taxes. The pre-tax loss is primarily comprised of our
equity losses from PCS ONE of $9,914, offset by $1,231 of income for providing
support services to PCS ONE. The loss from discontinued operations in 2001 was
fairly consistent with the 2000 loss. In 2000, our discontinued wireless segment
operations incurred a loss of $5,653, net of $2,766 in taxes. The pre-tax loss
is primarily comprised of our equity losses from PCS ONE of $9,214,

                                        29
<PAGE>

offset by $625 of income for providing support services to PCS ONE. The loss
from discontinued operations in 2000 is $999 lower than the 1999 loss. In 1999,
our discontinued wireless segment operations incurred a loss of $6,652, net of
$3,213 in taxes. The pre-tax loss is primarily comprised of our equity losses
from PCS ONE of $10,243, offset by $363 of income for providing support services
to PCS ONE.

     In 2001, we recorded an extraordinary loss on extinguishment of debt of
$2,216, net of a $1,407 tax benefit, as well as a $107 extraordinary gain for a
tax benefit on the discontinuation of regulatory accounting.

     In the fourth quarter of 2000, we adopted Securities and Exchange
Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101), retroactive to January 1, 2000, as required by the SEC.
SAB 101 provides guidance on recognition of certain non-recurring fees and
associated incremental direct expenses over the expected term of the customer
relationship. As of January 1, 2000, the total cumulative effect of the
adoption, which was recorded as a change in accounting principle, was $391, net
of income taxes of $267. Our share of EuroTel's cumulative effect of the
adoption of SAB 101 was $521.

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 and have been partially
offset by growth in operating and other revenues. Management anticipates that
this trend will continue in 2002.

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 and acquisitions partly
with operating cash and through external sources, such as bank borrowings and
offerings of debt or equity securities.

     Net cash provided by continuing operations was $12,770 in 2001. Cash
provided by continuing operations has declined from $14,760 in 2000 and $17,776
in 1999. Start-up and expansion efforts in 2000 and 2001 have caused these
decreases in cash flows from continuing operations. Increased competition in the
telecommunications industry could affect future cash flows related to continuing
operations. See "BUSINESS -- Factors Affecting Our Prospects" on page 17.

     Net cash used in investing activities was $35,319 in 2001 and consisted
primarily of capital expenditures of $34,068 and an increase in investments in
affiliates to $10,769, primarily related to working capital requirements and the
repayment of bank borrowings for EuroTel, partially offset by net cash of $8,669
received on the sale of temporary investments. Our capital expenditures in 2001
were concentrated in the following areas:

     - digital switching and circuit equipment, computers and software, and
       poles and cable purchases to upgrade our RLEC, CLEC and Internet
       operating systems -- $14,270;

     - additions related to our new building in Brownstown,
       Pennsylvania -- $8,864; and

     - computers and software separate from the telephone network operations
       primarily for an upgrade to our operating system and software for the
       billing system and expanded office locations -- $6,227.

     Net cash used in investing activities was $5,436 in 2000 and $12,718 in
1999. Capital expenditures in those years were significantly less than in 2001
and were $16,812 in 2000 and $13,923 in 1999. The major capital additions in
both years were for digital switching and circuit equipment, computers and
software, and poles and cable purchases to continually upgrade the telephone
operating system. The 2000 capital additions also included the final 10% of the
cost to complete construction of a building addition used by the Lancaster
County 911 emergency control center and the beginning of construction of a new
office building to accommodate employee growth. During 2000, two businesses were
acquired for a combination of stock and

                                        30
<PAGE>

cash. The cash portion of the payments made in 2000 was $5,955. Net cash
provided by temporary investments was $3,056 in 2000 and $3,080 in 1999. In
2000, net cash of $12,202 was provided from affiliates primarily from the
distribution of EuroTel proceeds on the sale of its Hungarian telephone
business. In 1999, transactions with affiliates resulted in net investments and
advances of $4,351.

     From financing activities, net cash of $26,904 was provided in 2001,
consisting primarily of bank borrowings of $58,000 under a new credit facility,
which were then used to refinance $25,378 in long-term debt. In addition, we
paid $2,546 in 2001 in debt issuance costs related to the refinancing. Other
financing activities in 2001 included the payment of $3,433 in common stock
dividends and treasury stock purchases of $1,082, consisting of $482 in
purchases pursuant to our open market purchase program and $600 in a privately
negotiated share purchase. As of December 31, 2001, we have authorization from
the Board of Directors to purchase an additional $320 worth of our common stock
pursuant to the open market purchase program.

     In 2000 and 1999, net cash used by financing activities was $5,372 and
$5,287, respectively. Cash dividends increased in 2000 to $3,094 from $2,690 in
1999. Also, payments of long-term debt increased in 2000 to $1,005 from $854 in
1999. These increases were partially offset by a decrease in treasury stock
purchases from $2,046 in 1999 to $1,574 in 2000.

  External Sources of Capital at December 31, 2001

     During 2001, we refinanced our long-term debt and lines of credit by
drawing down $58,000 on a new $100,000 credit facility. The unsecured credit
facility consists of a $50,000 single draw 10-year senior term loan and a
$50,000 8.5-year senior reducing revolving credit facility. The term loan was
used to refinance existing indebtedness. The revolving credit facility, of which
$42,000 was undrawn as of December 31, 2001, if used, is expected to fund
capital expenditures, acquisitions, general corporate purposes and working
capital needs.

     The term loan requires interest only payments for three years with
increasing quarterly principal payments from the third quarter of 2004 through
the second quarter 2011. The revolving credit facility requires interest only
payments for two years with increasing quarterly principal repayments from the
third quarter of 2003 through the fourth quarter of 2009. Interest on both the
loan and the revolving credit facility is payable at a base rate or at LIBOR
rates plus an applicable margin based on our leverage ratio. A commitment fee
must be paid on the unused portion of the revolving credit facility.

     The credit facility includes a number of significant covenants that impose
restrictions on our business. These covenants include, among others,
restrictions on additional indebtedness, mergers, acquisitions and the
disposition of assets, sale and leaseback transactions and capital lease
payments. In addition, we are required to comply with financial covenants with
respect to the maximum indebtedness to total capitalization ratio and maximum
leverage ratio.

     As of December 31, 2001, we also had unsecured lines of credit totaling
$27,500 with two domestic banks. The total is scheduled to reduce to $20,000 on
March 31, 2002. As of December 31, 2001, a total of $1,757 was outstanding under
one of these agreements. Our borrowings under these two lines of credit are
limited by covenants contained the agreements related to our $100,000 credit
facility.

     The following summarizes our borrowing capacity at December 31, 2001, as
limited by our covenants:

<Table>
<S>                                                           <C>
Long-term loan..............................................  $ 50,000
Revolving credit facility...................................    50,000
Lines of credit.............................................    27,500
                                                              --------
Total capacity..............................................   127,500
Total debt at December 31, 2001.............................  $ 59,933
Maximum leverage ratio limitation...........................    62,143
                                                              --------
Effective availability......................................  $  2,210
</Table>

                                        31
<PAGE>

     For further information regarding our lines of credit and long-term debt,
see note 9 to our consolidated financial statements. Our ratio of total debt to
total debt plus capital increased to 56.9% at December 31, 2001 from 27.8% at
December 31, 2000 due to a decrease in our equity of $11,487 from 2000 to 2001
and an increase in our debt of $38,709 over the same period.

  Commitments, Contingencies and Projected Uses of Capital

     Our most significant commitment for 2002 is our pending merger with
Conestoga, which we expect to complete in the second quarter of 2002. Total
merger consideration is estimated to be approximately $272,000, which includes
the payment of up to approximately $150,000 in cash and the issuance of shares
of our common stock. In addition, we will assume Conestoga's existing
indebtedness, which totaled $81,339 at December 31, 2001.

     We currently intend to fund the cash portion of the merger consideration
with approximately $41,000 of proceeds that we expect from the sale of our
interest in PCS ONE, a new $100,000 term loan from a syndicate of banks, and
borrowings under our existing $50,000 revolving credit facility. On October 15,
2001, we received a commitment letter from CoBank, ACB with respect to a
$100,000, 8.5-year variable-rate senior secured term loan. In the commitment
letter, CoBank agreed to amend certain financial covenants applicable to our
existing revolving credit facility which will result in an increase in the
availability under that facility. In addition, on March 21, 2002, we received
from CoBank, ACB a proposed amendment to its commitment letter that would amend
those same covenants and increase the principal amount of both the senior
secured term loan and revolving credit facility to provide a further increase in
borrowing capacity for operations subsequent to the closing of the merger.

     In addition to the Conestoga merger, we believe that our most significant
commitments, contingencies and projected uses of funds in 2002, other than for
operations, include capital expenditures, the payment of annual common stock
dividends and other contractual obligations and commitments which are presented
at the end of this discussion. Upon completion of the sale of our interest in
PCS ONE and based on the proposed, amended commitment letter from CoBank, we
believe that we will have sufficient resources to meet these commitments,
contingencies and projected uses of funds.

     We hold a 50% interest in PCS ONE, a joint venture with VoiceStream, and a
33% interest in EuroTel, both of which we account for under the equity method of
accounting. Thus, neither the assets nor the liabilities of PCS ONE and EuroTel
are presented on a consolidated basis on our balance sheets. As described above,
we have executed an agreement to sell our interest in PCS ONE that we expect to
complete in April 2002. However, until the sale is complete, we have committed
to loan PCS ONE, on an equal basis with VoiceStream, certain of its operating
cash needs. In 2001, we made advances to PCS ONE of $6,500 pursuant to this
commitment and we have not received any repayments of amounts invested. We do
not expect that we will pay any material amounts under this commitment in 2002.
We have also committed to loan EuroTel, on an equal basis with the other
investors in EuroTel, certain of its operating cash needs. In 2001, we made
advances of $9,920 pursuant to this commitment and expect that our 2002 funding
requirements for EuroTel will be approximately $1,000. We have provided annual
letters of commitment to advance funds to both PCS ONE and EuroTel for 2002.

     On March 14, 2001, PCS ONE amended its May 2000 financing agreement with a
bank to increase its credit facility from $70,000 to $82,000. The joint venture
partners have no guarantee requirement in connection with this agreement. With
our joint venture partner, we must maintain contributed capital at a level of
66.7% of the funds borrowed. On December 31, 2001, VoiceStream and we had
contributed $56,148, making the full $82,000 of the facility available. The
outstanding balance was $78,500, or 58.3% of PCS ONE's total capitalization. At
December 31, 2001, PCS ONE was in default under a financial covenant contained
in the credit facility agreements and received a waiver of this default through
December 31, 2002.

     In December 1999, we became party to a loan agreement between a domestic
bank and PenneCom, a wholly-owned subsidiary of EuroTel. As an inducement to the
bank to lend up to $50,000 to PenneCom, we pledged $8,667 of investments as
security on the loan, along with similar amounts by the other investors in
EuroTel. PenneCom used the loan primarily to refinance higher interest debt. The
loan was repaid in
                                        32
<PAGE>

September 2001 with a part of the proceeds from the arbitration award and from a
portion of the amounts pledged by us and the other investors in EuroTel.

     The following table sets forth our obligations and commitments, including
debt maturities, to make future payments under contracts, as of December 31,
2001:

<Table>
<Caption>
                                                      PAYMENTS DUE BY PERIOD
                                       -----------------------------------------------------
                                                 LESS THAN                            AFTER
OBLIGATION                              TOTAL     1 YEAR     1-3 YEARS   4-5 YEARS   5 YEARS
----------                             -------   ---------   ---------   ---------   -------
<S>                                    <C>       <C>         <C>         <C>         <C>
Line of Credit.......................  $ 1,757    $1,757          --           --         --
Long-term Debt.......................   58,000                 7,500       10,000     40,500
Capital Lease Obligations............      176        52         124           --         --
Operating Leases.....................    1,461       318       1,024          119         --
Systems Integration Acquisitions
  Payments...........................      800       400         400           --         --
                                       -------    ------      ------      -------    -------
Total................................  $61,394    $2,127      $8,648      $10,119    $40,500
</Table>

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 accounting principles generally accepted in the
United States. 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 polices 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

     Revenues for all of our business segments are generally recorded when
services are provided or products are delivered. 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 and CLEC
segments from settlement pools in which we participate with other telephone
companies through the National Exchange Carrier Association, Inc. (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 the settlement pools differ
from the amounts that we have recorded as accounts receivables on our balance
sheets, we would be required to record the amount of such a reduction or
increase as an adjustment to our earnings. Historically, we have not experienced
significant adjustments to our revenues as a result of our participation in
these pools.

                                        33
<PAGE>

  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, we deduct the net book
value of these assets and charge it 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, cost of removal and salvage values 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.

  IMPAIRMENT OF LONG-LIVED ASSETS

     Based upon the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," we review
assets and certain intangibles for impairment whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recoverable. Our assets subject to SFAS No. 121 include our property, plant and
equipment and our goodwill. A determination of impairment is made based on
estimates of future cash flows. While we have never recorded an impairment
charge under SFAS 121, future events or changes in circumstances could result in
a charge to earnings.

     Beginning on January 1, 2002, we are required to adopt SFAS 142, which
modifies certain aspects of SFAS 121. See "Recent Accounting Pronouncements"
below for further discussion.

  INVESTMENT IN UNCONSOLIDATED AFFILIATES

     We have investments and advances to affiliated entities that are accounted
for under the equity method of accounting. We periodically evaluate 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, our 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. Our 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 our intent and ability to hold the investment, including
strategic factors.

  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. We record the costs of
providing retirement benefits 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 periodic benefit costs that we incur.

                                        34
<PAGE>

  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 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, consisting primarily of equity income losses carried
forward before they expire.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June, 2001 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" (SFAS
141) to be used for all business combinations initiated after June 30, 2001, and
SFAS No. 142 "Goodwill and Other Intangible Assets" (SFAS 142), which addresses
the accounting for goodwill and intangible assets subsequent to their
acquisition, effective for fiscal years beginning after December 15, 2001.
Management is currently evaluating the impact these statements will have on our
financial position and results of operations, however annual goodwill
amortization of approximately $1,440 will cease as of January 1, 2002 as a
result of adopting SFAS 142.

     SFAS No. 143, "Accounting for Obligations Associated with the Retirement of
Long-Lived Assets" (SFAS 143) was recently issued to provide accounting guidance
for legal obligations associated with the retirement of long-lived assets. SFAS
143 is effective for fiscal years beginning after June 15, 2002. SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144),
addresses issues relating to the implementation of SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS 144 is effective for fiscal years beginning after December 15, 2001.
Management is currently evaluating the impact these statements will have on our
financial position and results of operations.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

     We do not invest in derivative financial instruments or other market risk
sensitive instruments for the purpose of managing our foreign currency exchange
rate risk or for any other purpose.

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.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required under this item relating to Executive Officers is
provided under Part I of this report. All other information required under this
Item is incorporated by reference from the material captioned "Directors" and
"Section 16(A) Beneficial Ownership Reporting Compliance" in our definitive
proxy

                                        35
<PAGE>

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" 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

     The information required under this Item is incorporated by reference from
the material captioned "Security Ownership of Officers, Directors and Principal
Stockholders" 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 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required under this Item is incorporated by reference from
the material captioned "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.

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (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.

          (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.

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

     (b) Reports on Form 8-K.  The Registrant filed three current reports on
Form 8-K during the last quarter of 2001 as follows: a Form 8-K dated October
17, 2001 reporting that we signed an agreement to sell our partnership interest
in the PCS ONE wireless joint venture; a Form 8-K dated October 25, 2001
reporting changes to titles and positions for several existing officers; and a
Form 8-K dated December 3, 2001 reporting that we signed an agreement to acquire
Conestoga Enterprises, Inc.

     (c) Exhibits.  See Index to Exhibits.

     (d) Financial statement schedules of subsidiaries not consolidated and 50%
or less owned. The information called for by this Item (14) is set forth on
pages F-1 through F-56. See Index to Financial Statements.

                                        36
<PAGE>

                               INDEX TO EXHIBITS

<Table>
<Caption>
EXHIBIT
NO.                     IDENTIFICATION OF EXHIBIT                           REFERENCE
-------                 -------------------------                           ---------
<C>      <S>                                                       <C>
     2.  Plan of acquisition, reorganization, arrangement,
         liquidation or succession:
     2.1 Agreement and Plan of Exchange Between Denver and         Incorporated herein by
         Ephrata Telephone and Telegraph Company (a Pennsylvania   reference from Exhibit 2.1
         corporation) and D&E, Inc. (a Pennsylvania corporation).  to Amendment No. 2 to the
                                                                   Registration Statement on
                                                                   Form S-4 (registration No.
                                                                   333-2960 filed by D&E on
                                                                   April 23, 1996.
     2.2 D&E Shareholder Agreement, dated as of March 21, 1997,    Incorporated herein by
         by and between D&E and various shareholders of D&E.       reference from Exhibit 99.01
                                                                   to the Form 8-K Current
                                                                   Report filed by D&E on April
                                                                   7, 1997.
     2.3 Amended and Restated Agreement and Plan of Merger, by     Incorporated herein by
         and among D&E, Inc., D&E Acquisition Corp. and Conestoga  reference from Exhibit 2.1
         Enterprises, Inc. dated as of January 9, 2002.            to the Current Report on
                                                                   Form 8-K filed by D&E on
                                                                   January 9, 2002.
     3.  Articles of Incorporation and By-laws:
     3.1 Amended and Restated Articles of Incorporation            Incorporated herein by
                                                                   reference from Exhibit A to
                                                                   D&E's definitive proxy
                                                                   statement for its 1997
                                                                   Annual Meeting of
                                                                   Shareholders filed April 2,
                                                                   1997.
     3.2 By-laws                                                   Incorporated herein by
                                                                   reference from Exhibit 3.2
                                                                   to D&E's Registration
                                                                   Statement on Form 10 filed
                                                                   by D&E on April 30, 1993.
     4.  Instruments defining the rights of security holders,
         including debentures:
     9.  Voting Trust Agreement.
     9.1 Voting Trust Agreement Among Shareholders of Denver and   Incorporated herein by
         Ephrata Telephone and Telegraph Company and Kay William   reference from Exhibit 9.1
         Shober, Anne Brossman Sweigart, W. Garth Sprecher,        to D&E's 1995 Report on Form
         Ronald E. Frisbie and John Amos as Voting Trustees,       10-K.
         dated as of November 19, 1992. ("Voting Trust
         Agreement")
     9.2 Amendment to the Voting Trust Agreement dated as of       Incorporated herein by
         December 31, 1995.                                        reference from Exhibit 9.2
                                                                   to D&E's 1995 Annual Report
                                                                   on Form 10-K.
</Table>

                                        37
<PAGE>

<Table>
<Caption>
EXHIBIT
NO.                     IDENTIFICATION OF EXHIBIT                           REFERENCE
-------                 -------------------------                           ---------
<C>      <S>                                                       <C>
    10.  Material Contracts
    10.1 Denver and Ephrata Telephone and Telegraph Company        Incorporated herein by
         Executive Incentive Plan as revised January 1998.*        reference from Exhibit 10.1
                                                                   to D&E's 1997 Annual Report
                                                                   of Form 10-K.
    10.2 AT&T Communications Standard Agreement for the Provision  Incorporated herein by
         of Telecommunications Services and Facilities between     reference from Exhibit 10.2
         AT&T Communications of Pennsylvania, Inc. and Denver and  to D&E's Registration
         Ephrata Telephone and Telegraph Company;                  Statement on Form 10 filed
                                                                   by D&E on April 30, 1993.
           Article 1   General Provisions, effective May 25,
                       1984;
           Article 8-2 Billing and Collection Services effective
         April 1, 1992;
    10.3 Telecommunications Services and Facilities Agreement      Incorporated herein by
         between the Bell Telephone Company of Pennsylvania and    reference from Exhibit 10.3
         Denver and Ephrata Telephone and Telegraph Company,       to D&E's Registration
         effective January 1, 1986; and Amendment to               Statement on Form 10 filed
         Telecommunications Services and Facilities Agreement and  by D&E on April 30, 1993.
         the IntraLATA Compensation Agreement, dated May 7, 1992;
           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.
    10.4 IntraLATA Compensation Agreement between the              Incorporated herein by
         Pennsylvania Non-Bell Telephone Companies and Denver and  reference from Exhibit 10.4
         Ephrata Telephone and Telegraph Company, effective        to D&E's Registration
         January 1, 1986; and Amendment to Telecommunications      Statement on Form 10 filed
         Services and Facilities Agreement and the IntraLATA       by D&E on April 30, 1993.
         Compensation Agreement, dated May 7, 1992.
    10.5 Agreement between Donnelley Directory, a division of The  Incorporated herein by
         Reuben H. Donnelley Corporation Statement and Denver and  reference from Exhibit 10.5
         Ephrata Telephone and Telegraph Company, dated April 19,  to D&E's Registration
         1991. Portions of this exhibit have been omitted          Statement on Form 10 filed
         pursuant to a request for confidential treatment and      by D&E on April 30, 1993.
         have been separately filed with the Commission.
    10.6 Agreement for the Distribution of Interstate Access       Incorporated herein by
         Revenues between the National Exchange Carrier            reference from Exhibit 10.6
         Association, Inc. and Denver and Ephrata Telephone and    to D&E's Registration
         Telegraph Company, effective May 25, 1984.                Statement on Form 10 filed
                                                                   by D&E on April 30, 1993.
</Table>

                                        38
<PAGE>


<Table>
<Caption>
EXHIBIT
NO.                     IDENTIFICATION OF EXHIBIT                           REFERENCE
-------                 -------------------------                           ---------
<C>      <S>                                                       <C>
    10.7 Agreement for the Provision of Enhanced 9-1-1 Services    Incorporated herein by
         between the County of Lancaster and Denver and Ephrata    reference from Exhibit 10.7
         Telephone and Telegraph Company, effective upon approval  to D&E's Annual Report on
         of the Pennsylvania Public Utility Commission which       Form 10-K for the year ended
         occurred May 18, 1994                                     December 31, 1999.
           Attachment #1 Request for Proposal as Amended;
           Attachment #2 Best and Final Offer, April 28, 1994;
           Attachment #3 Clarifications to RFP;
           Attachment #4 Lancaster County
           Resolution #74, September 22, 1993;
           Attachment #5 Lancaster County
           Resolution #32, May 5, 1994;
           Attachment #6 Addenda, Errata, Bulletins to Contract
                         Documents;
           Attachment #7 Facility Lease; and
           Attachment #8 Tariffed Local Exchange Carrier
                         Services.
    10.8 Modification #2 to the Agreement for the Provision of     Incorporated herein by
         Enhanced 9-1-1 Services between the County of Lancaster   reference from Exhibit 10.1
         and D&E Telephone Company, signed July 14, 1999.          to D&E's Quarterly Report on
                                                                   Form 10-Q for the quarter
                                                                   ended September 30, 1999.
    10.9 D&E Shareholder Agreement, Exhibit D to the Agreement     Incorporated herein by
         and Plan of Merger by and between D&E, Inc. and PCS One,  reference from Exhibit B to
         Inc.                                                      Amendment No. 1 to the
                                                                   Registration Statement on
                                                                   Form S-4 (Registration No.
                                                                   333-18659) filed by D&E on
                                                                   January 21, 1997.
    10.10 D&E, Inc. Officer Incentive Plan as revised January      Incorporated herein by
         1998.*                                                    reference from Exhibit 10.16
                                                                   to D&E's Quarterly Report on
                                                                   Form 10-Q for the quarter
                                                                   ended September 30, 1997.
    10.11 Stock Acquisition Agreement between D&E, Inc. and        Incorporated herein by
         Southwestern Investments, Inc., a subsidiary of Citizens  reference from Exhibit 10.1
         Utilities Company, dated November 3, 1997.                to D&E's Quarterly Report on
                                                                   Form 10-Q for the quarter
                                                                   ended September 30, 1997.
    10.12 Limited Partnership Agreement by and among D&E Wireless, Incorporated herein by
         Inc., Omnipoint Venture Partner I, L.L.C. and Omnipoint   reference from Exhibit 20.1
         Holdings, Inc.                                            to the Form 8-K Current
                                                                   Report filed by D&E on
                                                                   December 2, 1997.
    10.13 Partnership Interest Purchase Agreement among D&E        Filed herewith.
         Wireless, Inc., D&E Communications, Inc., VoiceStream PA
         II, LLC, and VoiceStream PA I, LLC dated as of October
         17, 2001
</Table>


                                        39
<PAGE>


<Table>
<Caption>
EXHIBIT
NO.                     IDENTIFICATION OF EXHIBIT                           REFERENCE
-------                 -------------------------                           ---------
<C>      <S>                                                       <C>
    10.14 Credit Agreement Dated as of November 1, 2001 by and     Filed herewith.
         among D&E Communications, Inc. as borrower and COBANK,
         ACB as Administrative Agent and a Lender and the other
         Lenders referred to therein
    21.  Subsidiaries of the Registrant
    21.1 List of all subsidiaries of D&E Communications, Inc.      Filed herewith.
    23   Consents
    23.1 Consent of PricewaterhouseCoopers LLP, Philadelphia, PA   Filed herewith.
    23.2 Consent of PricewaterhouseCoopers SpA, Rome, Italy        Filed herewith.
</Table>


---------------

* Indicates a plan or agreement relating to executive compensation.

                                        40
<PAGE>

                                   SIGNATURES

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

                                          D&E COMMUNICATIONS, INC.


                                          By:     /s/ THOMAS E. MORELL

                                            ------------------------------------

                                                      Thomas E. Morell


                                              Vice President, Chief Financial
                                                    Officer and Treasurer



Date: April 24, 2002


                                        41
<PAGE>

                         INDEX TO FINANCIAL STATEMENTS


<Table>
<Caption>
                                                                             PAGE
                                                                             ----
<S>            <C>                                                           <C>
Item 8.        D&E Communications, Inc. and Subsidiaries.
                 Report of Independent Accountants.........................  F-2
                 Consolidated Statements of Operations for the years ended
                 December 31, 1999, 2000 and 2001..........................  F-3
                 Consolidated Balance Sheets as of December 31, 2000 and
                 2001......................................................  F-4
                 Consolidated Statements of Cash Flows for the years ended
                 December 31, 1999, 2000 and 2001..........................  F-5
                 Consolidated Statements of Stockholders' Equity for the
                 years ended December 31, 1999, 2000 and 2001..............  F-6
                 Notes to Consolidated Financial Statements................  F-7
Item 14(a)(2)  Financial Schedule II -- Valuation and Qualifying
                 Accounts..................................................  F-27
Item 14(d)(1)  D&E/Omnipoint Wireless Joint Venture, L.P.
                 Cover Page................................................  F-28
                 Table of Contents.........................................  F-29
                 Report of Independent Accountants.........................  F-30
                 Balance Sheets as of December 31, 2001 and 2000...........  F-31
                 Statements of Operations For the Years Ended December 31,
                 2001, 2000 and 1999.......................................  F-32
                 Statement of Changes in Partners' Capital (Deficit) For
                 the Years Ended December 31, 2001, 2000 and 1999..........  F-33
                 Statements of Cash Flows For the Years Ended December 31,
                 2001, 2000 and 1999.......................................  F-34
                 Notes to Financial Statements.............................  F-35
Item 14(d)(1)  EuroTel L.L.C.
                 Cover Page................................................  F-42
                 Report of Independent Accountants.........................  F-43
                 Consolidated Balance Sheets as of December 31, 2001 and
                 2000......................................................  F-44
                 Consolidated Statements of Operations For the Years Ended
                 December 31, 2001, 2000 and 1999..........................  F-45
                 Consolidated Statements of Members' Equity (Deficit) and
                 Comprehensive Income (Loss) For the Years Ended December
                 31, 2001, 2000 and 1999...................................  F-46
                 Consolidated Statements of Cash Flows For the Years Ended
                 December 31, 2001, 2000 and 1999..........................  F-47
                 Notes to Consolidated Financial Statements................  F-48
</Table>


                                       F-1
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
of D&E Communications, Inc.:

     In our opinion, the consolidated financial statements listed in the index
appearing under Item 8 on page F-1 of this Form 10-K present fairly, in all
material respects, the financial position of D&E Communications, Inc. and its
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 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 14(a)(2) on page F-1 of this
Form 10-K, 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 financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, 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, the Company changed its method of accounting for
the recognition of certain non-recurring fees and associated incremental direct
expenses in 2000.

/s/ PRICEWATERHOUSECOOPERS LLP


Philadelphia, Pennsylvania

March 15, 2002

                                       F-2
<PAGE>

                   D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                YEAR ENDED DECEMBER 31,
                                                              ----------------------------
                                                               1999       2000      2001
                                                              -------   --------   -------
                                                                 (IN THOUSANDS, EXCEPT
                                                                   PER-SHARE AMOUNTS)
<S>                                                           <C>       <C>        <C>
OPERATING REVENUES
  Communication service revenues............................  $44,094   $ 51,838   $61,904
  Communication products sold...............................   11,668     11,798    12,859
  Other.....................................................    1,285      1,456     1,523
                                                              -------   --------   -------
     Total operating revenues...............................   57,047     65,092    76,286
                                                              -------   --------   -------
OPERATING EXPENSES
  Communication service expenses (exclusive of depreciation
     and amortization below)................................   15,475     20,158    28,146
  Cost of communication products sold.......................    8,445      9,005    10,216
  Depreciation and amortization.............................    9,771     12,129    15,296
  Marketing and customer services...........................    4,850      6,753     8,990
  General and administrative services.......................    9,742     11,913    14,141
                                                              -------   --------   -------
     Total operating expenses...............................   48,283     59,958    76,789
                                                              -------   --------   -------
       Operating income (loss)..............................    8,764      5,134      (503)
OTHER INCOME (EXPENSE)
  Equity in net income (losses) of affiliates...............    5,287     (5,528)       91
  Interest expense..........................................   (1,818)    (1,779)   (2,242)
  Gain (loss) on investments................................    9,093     (3,378)    3,036
  Other, net................................................    1,498      1,725     1,546
                                                              -------   --------   -------
     Total other income (expense)...........................   14,060     (8,960)    2,431
                                                              -------   --------   -------
       Income (loss) from continuing operations before
          income taxes and dividends on utility preferred
          stock.............................................   22,824     (3,826)    1,928
INCOME TAXES AND DIVIDENDS ON UTILITY PREFERRED STOCK
  Income taxes..............................................    7,256      1,150    (2,179)
  Dividends on utility preferred stock......................       65         65        65
                                                              -------   --------   -------
     Total income taxes and dividends on utility preferred
       stock................................................    7,321      1,215    (2,114)
                                                              -------   --------   -------
       Income (loss) from continuing operations.............   15,503     (5,041)    4,042
Discontinued operations:
  Loss from operations of discontinued segment to December
     31, 2001, net of income tax benefit of $3,213, $2,766
     and $2,605.............................................   (6,652)    (5,653)   (5,985)
                                                              -------   --------   -------
     Income (loss) before extraordinary item and cumulative
       effect of change in accounting principle.............    8,851    (10,694)   (1,943)
Extraordinary loss, net of income tax benefit of $1,514.....       --         --    (2,109)
Cumulative effect of change in accounting principle, net of
  income tax benefit of $267................................       --       (912)       --
                                                              -------   --------   -------
NET INCOME (LOSS)...........................................  $ 8,851   $(11,606)  $(4,052)
                                                              =======   ========   =======
  Weighted average common shares outstanding (basic and
     diluted)...............................................    7,385      7,371     7,376
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
  Income (loss) from continuing operations..................  $  2.10   $  (0.68)  $  0.55
  Loss from discontinued operations.........................    (0.90)     (0.77)    (0.81)
  Extraordinary items.......................................       --         --     (0.29)
  Cumulative effect of accounting change....................       --      (0.12)       --
                                                              -------   --------   -------
     Net income (loss) per common share.....................  $  1.20   $  (1.57)  $ (0.55)
                                                              =======   ========   =======
  Dividends per common share................................  $  0.39   $   0.45   $  0.50
                                                              =======   ========   =======
</Table>

                See notes to consolidated financial statements.
                                       F-3
<PAGE>

                   D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       2001
                                                              --------   --------
                                                                (IN THOUSANDS,
                                                                 EXCEPT SHARE
                                                                   AMOUNTS)
<S>                                                           <C>        <C>
                                     ASSETS
CURRENT ASSETS
  Cash and cash equivalents.................................  $  3,527   $    615
  Temporary investments, including $8,667 and $0
    restricted..............................................     8,670         --
  Accounts receivable.......................................    12,290     10,105
  Accounts receivable -- affiliated companies...............     5,714      5,938
  Inventories, lower of cost or market, at average cost.....     2,080      1,781
  Prepaid expenses..........................................     2,661      3,817
  Other.....................................................       575        494
                                                              --------   --------
    TOTAL CURRENT ASSETS....................................    35,517     22,750
                                                              --------   --------
INVESTMENTS
  Investments in and advances to affiliated companies.......        --      6,431
  Investments available-for-sale............................     2,518      4,425
                                                              --------   --------
                                                                 2,518     10,856
                                                              --------   --------
PROPERTY, PLANT AND EQUIPMENT
  In service................................................   147,263    178,274
  Under construction........................................     7,913      5,034
                                                              --------   --------
                                                               155,176    183,308
  Less accumulated depreciation.............................    79,321     88,163
                                                              --------   --------
                                                                75,855     95,145
                                                              --------   --------
OTHER ASSETS
  Goodwill, net of accumulated amortization.................     7,908      5,126
  Deferred income taxes.....................................        --        905
  Other.....................................................     2,423      8,096
                                                              --------   --------
                                                                10,331     14,127
                                                              --------   --------
  TOTAL ASSETS..............................................  $124,221   $142,878
                                                              ========   ========
                      LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Notes payable.............................................  $     --   $  1,757
  Long-term debt maturing within one year...................       917         52
  Accounts payable and accrued liabilities..................    18,975     16,319
  Accrued taxes.............................................       387        352
  Accrued interest and dividends............................       431        333
  Advance billings, customer deposits and other.............     3,672      3,668
                                                              --------   --------
    TOTAL CURRENT LIABILITIES...............................    24,382     22,481
                                                              --------   --------
LONG-TERM DEBT..............................................    20,907     58,124
                                                              --------   --------
OTHER LIABILITIES
  Equity in net losses of affiliates in excess of
    investments and advances................................     2,903         --
  Equity in net losses of discontinued operations in excess
    of investments and advances.............................     8,532     10,388
  Deferred income taxes.....................................     6,696         --
  Other.....................................................     3,993      6,564
                                                              --------   --------
                                                                22,124     16,952
                                                              --------   --------
PREFERRED STOCK OF UTILITY SUBSIDIARY, Series A 4 1/2%, par
  value $100, cumulative, callable at par at the option of
  the Company, authorized 20,000 shares, outstanding 14,456
  shares....................................................     1,446      1,446
                                                              --------   --------
COMMITMENTS
SHAREHOLDERS' EQUITY
  Common stock, par value $.16, authorized shares
    30,000,000..............................................     1,214      1,219
  Outstanding shares: 7,382,054 at December 31, 2000
    7,362,226 at December 31, 2001
  Additional paid-in capital................................    39,374     39,956
  Accumulated other comprehensive income (loss).............       467     (2,833)
  Retained earnings.........................................    18,366     10,637
  Treasury stock at cost, 221,194 shares at December 31,
    2000 and 276,900 shares at December 31, 2001............    (4,059)    (5,104)
                                                              --------   --------
                                                                55,362     43,875
                                                              --------   --------
  TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................  $124,221   $142,878
                                                              ========   ========
</Table>

                See notes to consolidated financial statements.
                                       F-4
<PAGE>

                   D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS


<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1999       2000       2001
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss).........................................  $  8,851   $(11,606)  $ (4,052)
  Add: Loss from discontinued operations....................     6,652      5,653      5,985
      Extraordinary items...................................        --         --      2,109
      Cumulative effect of accounting change................        --        912         --
                                                              --------   --------   --------
  Income (loss) from continuing operations..................    15,503     (5,041)     4,042
  Adjustments to reconcile net income (loss) from continuing
    operations to net cash provided by operating activities:
    Depreciation and amortization...........................     9,771     12,129     15,296
    Deferred income taxes...................................     1,286     (3,821)    (3,112)
    Equity in net (income) losses of affiliates.............    (5,287)     5,528        (91)
    Tax benefits applicable to ESOP.........................         8          3         --
    (Gain) loss on investments..............................    (9,093)     3,378     (3,036)
    Loss on retirement of property, plant and equipment.....        24         12        166
  Changes in operating assets and liabilities net of effects
    of business acquisitions:
    Accounts receivable.....................................      (348)    (1,939)     2,148
    Inventories.............................................      (274)      (599)       299
    Prepaid expenses........................................     6,806      1,747        357
    Accounts payable and accrued liabilities................     1,738      1,862       (775)
    Accrued taxes and accrued interest......................      (177)        44       (132)
    Advance billings, customer deposits and other...........    (2,200)     1,533         (4)
    Other, net..............................................        19        (76)    (2,388)
                                                              --------   --------   --------
      Net Cash Provided by Operating Activities from
         Continuing Operations..............................    17,776     14,760     12,770
                                                              --------   --------   --------
CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures, net of proceeds from sales and
    removal costs...........................................   (13,923)   (16,812)   (34,068)
  Proceeds from sale of temporary investments...............    38,321     54,001     34,671
  Purchase of temporary investments.........................   (35,241)   (50,945)   (26,002)
  Acquisition of businesses, net of cash acquired of $18....        --     (5,955)        --
  Proceeds from sale of investments.........................     2,476      2,073         --
  Investments in and advances to affiliates.................    (5,668)    (3,195)   (10,769)
  Investment returns and repayments from affiliates.........     1,317     15,397        849
                                                              --------   --------   --------
      Net Cash Used in Investing Activities from Continuing
         Operations.........................................   (12,718)    (5,436)   (35,319)
                                                              --------   --------   --------
CASH FLOWS FROM FINANCING ACTIVITIES
  Dividends on common stock.................................    (2,690)    (3,094)    (3,433)
  Proceeds from long term debt financing....................        --         --     58,000
  Payment of debt issuance costs............................        --         --     (2,546)
  Payments on long-term debt................................      (854)    (1,005)   (25,378)
  Payments on notes payable for acquired businesses.........        --         --       (859)
  Net proceeds from revolving lines of credit...............        --         --      1,757
  Proceeds from issuance of common stock....................       303        301        343
  Purchase of treasury stock................................    (2,046)    (1,574)    (1,082)
  Proceeds from sale of treasury stock......................        --         --        102
                                                              --------   --------   --------
      Net Cash Provided By (Used in) Financing Activities
         from Continuing Operations.........................    (5,287)    (5,372)    26,904
                                                              --------   --------   --------
CASH PROVIDED BY CONTINUING OPERATIONS......................      (229)     3,952      4,355
CASH USED IN DISCONTINUED OPERATIONS
  Cash provided by operating activities of discontinued
    operations..............................................       378        795      1,013
  Cash used in investing activities of discontinued
    operations..............................................    (5,667)    (2,894)    (8,280)
      Net Cash Used in Discontinued Operations..............    (5,289)    (2,099)    (7,267)
                                                              --------   --------   --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............    (5,518)     1,853     (2,912)
CASH AND CASH EQUIVALENTS
  BEGINNING OF YEAR.........................................     7,192      1,674      3,527
                                                              --------   --------   --------
  END OF YEAR...............................................  $  1,674   $  3,527   $    615
                                                              ========   ========   ========
</Table>


                See notes to consolidated financial statements.
                                       F-5
<PAGE>

                   D&E COMMUNICATIONS, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<Table>
<Caption>
                                                                        YEAR ENDED DECEMBER 31,
                                                        -------------------------------------------------------
                                                              1999               2000                2001
                                                        ----------------   -----------------   ----------------
                                                        SHARES   AMOUNT    SHARES    AMOUNT    SHARES   AMOUNT
                                                        ------   -------   ------   --------   ------   -------
                                                                            (IN THOUSANDS)
<S>                                                     <C>      <C>       <C>      <C>        <C>      <C>
COMMON STOCK
  Balance at beginning of year........................  7,460    $ 1,190   7,485    $  1,194   7,608    $ 1,214
    Common stock issued for acquisitions..............     --         --      93          15      --         --
    Common stock issued for Employee Stock Purchase,
      Long-Term Incentive and Dividend Reinvestment
      Plans...........................................     25          4      30           5      31          5
                                                        -----    -------   -----    --------   -----    -------
  Balance at end of year..............................  7,485      1,194   7,608       1,214   7,639      1,219
                                                        -----    -------   -----    --------   -----    -------
ADDITIONAL PAID-IN CAPITAL
  Balance at beginning of year........................            36,546              37,026             39,374
  Common stock issued for acquisitions................                --               1,753                 --
  Common stock issued for Employees Stock Purchase,
    Long-Term Incentive and Dividend Reinvestment
    Plans.............................................               480                 595                582
                                                                 -------            --------            -------
  Balance at end of year..............................            37,026              39,374             39,956
                                                                 -------            --------            -------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
  Balance at beginning of year........................                --                (539)               467
  Unrealized gain (loss) on investments...............              (539)             (1,269)             1,189
  Reclassification adjustment for (income) loss
    included in net loss..............................                --               2,275             (1,802)
  Equity adjustment for minimum pension liability, net
    of taxes..........................................                --                  --             (2,010)
  Currency translation adjustment from EuroTel........                --                  --               (677)
                                                                 -------            --------            -------
  Balance at end of year..............................              (539)                467             (2,833)
                                                                 -------            --------            -------
UNEARNED ESOP COMPENSATION
  Balance at beginning of year........................              (429)               (153)                --
  Reduction of ESOP trust loan........................               276                 153                 --
                                                                 -------            --------            -------
  Balance at end of year..............................              (153)                 --                 --
                                                                 -------            --------            -------
RETAINED EARNINGS
  Balance at beginning of year........................            27,294              33,281             18,366
  Net income (loss)...................................             8,851             (11,606)            (4,052)
  Tax benefits from dividends paid to ESOP............                 8                   3                 --
  Dividends on common stock: $.39, $.45, $.50 per
    share.............................................            (2,872)             (3,312)            (3,677)
                                                                 -------            --------            -------
  Balance at end of year..............................            33,281              18,366             10,637
                                                                 -------            --------            -------
TREASURY STOCK
  Balance at beginning of year........................    (38)      (439)   (146)     (2,485)   (226)    (4,059)
  Treasury stock acquired.............................   (108)    (2,046)    (80)     (1,574)    (56)    (1,147)
  Treasury stock sold.................................     --         --      --          --       5        102
                                                        -----    -------   -----    --------   -----    -------
  Balance at end of year..............................   (146)    (2,485)   (226)     (4,059)   (277)    (5,104)
                                                        -----    -------   -----    --------   -----    -------
TOTAL SHAREHOLDERS' EQUITY............................  7,339    $68,324   7,382    $ 55,362   7,362    $43,875
                                                        =====    =======   =====    ========   =====    =======
COMPREHENSIVE INCOME (LOSS)
  Net income (loss)...................................           $ 8,851            $(11,606)           $(4,052)
  Unrealized gain/(loss) on investments, net of income
    taxes of ($184), ($581) and $715..................              (539)             (1,269)             1,189
  Reclassification adjustment for (income) loss
    included in net loss, net of income taxes of
    $1,172 and ($1,232)...............................                --               2,275             (1,802)
  Equity adjustment for minimum pension liability, net
    of income taxes of ($1,368).......................                --                  --             (2,010)
  Currency translation adjustment from EuroTel........                --                  --               (677)
                                                                 -------            --------            -------
  Total comprehensive income (loss)...................           $ 8,312            $(10,600)           $(7,352)
                                                                 =======            ========            =======
</Table>

                See notes to consolidated financial statements.
                                       F-6
<PAGE>

                   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. and its subsidiaries (D&E) provide communications
services and equipment to customers in the south central Pennsylvania market.
D&E's consolidated financial statements include the accounts of Denver and
Ephrata Telephone and Telegraph Company (D&E Telephone); D&E Networks, Inc.
(Networks); D&E Wireless, Inc. (Wireless); D&E Investments, Inc. (Investments)
and D&E Systems, Inc. All significant intercompany balances and transactions are
eliminated in consolidation.

     D&E has a 50% interest in D&E/Omnipoint Wireless Joint Venture, L.P., doing
business as PCS ONE, a partnership that provides Personal Communications
Services (PCS) and related equipment for digital wireless voice and data
communications. D&E also has a 33% interest in EuroTel, L.L.C. (EuroTel), a
domestic joint venture that owns an international investment in Pilicka
Telephone (Pilicka), a telecommunications company located in Poland. These
investments are accounted for on the equity method. 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.

     D&E's business segments are as follows: incumbent rural local exchange
carrier (RLEC), competitive local exchange carrier (CLEC), internet services,
systems integration, wireless services and corporate and other. The RLEC
provides local and long distance telephone services in a franchised territory,
including custom calling features, directory advertising and billing and
collection services. The CLEC provides telecommunication services in markets
adjacent to those served by the RLEC. Internet services include internet access
and web page hosting services. Systems integration provides computer networking
services and programming and the sale and installation of communications
equipment to business customers. Wireless services included contract services
provided to PCS ONE and D&E's share of the earnings or losses of PCS ONE. As a
result of the pending sale of PCS ONE, the wireless segment was reported as
discontinued operations at December 31, 2001 (see Note 6). Corporate and other
includes D&E's share of the earnings or losses of Eurotel as well as corporate
eliminations between the other segments.

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 (the 1996 Act) provided comprehensive changes to
federal and state regulations that govern telecommunications. D&E's RLEC
operation currently qualifies as a rural telephone company and is exempt until
July 2002 from certain interconnection provisions of the 1996 Act which would
allow non-facilities based competitive local exchange carriers to operate in
D&E's franchised territory.

     D&E files its own tariff rates with the PUC for such services as dial tone
and calling features. In compliance with state statutes, commonly known as
Chapter 30, D&E joined in a petition to the PUC in July 1998 for an alternative
form of regulation with a network modernization plan. On July 31, 2001, the PUC
approved D&E's Chapter 30 plan and a new ratemaking process which, instead of a
rate base/rate of return methodology, adjusts prices using the Gross Domestic
Product Price Index with a productivity offset. Upon the adoption of the Chapter
30 plan, D&E was no longer subject to the requirements of Statement of Financial
Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain
Types of Regulation" and, therefore, it removed certain regulatory tax
liabilities from its accounts pursuant to SFAS 101, "Regulated
Enterprises -- Accounting for the Discontinuation of Application of FASB No.
71". As a result, the elimination of the regulatory tax liabilities resulted in
a one-time cumulative income effect for income taxes of $107 in 2001.

                                       F-7
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     D&E expects both to experience an increasing amount of competitive
pressures and to encounter opportunities in new 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 limited due to the large number of residential
and business customers in D&E's customer base.

2.  SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

     The preparation of financial statements under generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts or certain disclosures. Actual results could differ from those
estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2001 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" (SFAS
141), to be used for all business combinations initiated after June 30, 2001,
and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), which
addresses the accounting for goodwill and intangible assets subsequent to their
acquisition, effective for fiscal years beginning after December 15, 2001.
Management is currently evaluating the impact these statements will have on
D&E's financial position and results of operations, however annual goodwill
amortization of approximately $1,440 will cease as of January 1, 2002 as a
result of adopting SFAS 142.

     SFAS No. 143, "Accounting for Obligations Associated with the Retirement of
Long-Lived Assets" (SFAS 143), was recently issued to provide accounting
guidance for legal obligations associated with the retirement of long-lived
assets. SFAS 143 is effective for fiscal years beginning after June 15, 2002.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
(SFAS 144), addresses issues relating to the implementation of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS 144 is effective for fiscal years beginning after December
15, 2001. Management is currently evaluating the impact these statements will
have on D&E's financial position and results of operations.

     D&E adopted Securities and Exchange Commission Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" (SAB 101) in the fourth
quarter of 2000, retroactive to January 1, 2000. SAB 101 provides guidance on
recognition of certain non-recurring fees, such as service activation and
installation fees, and associated incremental direct expenses over the expected
term of the customer relationship. As of January 1, 2000, the total cumulative
effect of noncash deferred net revenues, which was recorded as a cumulative
effect of a change in accounting principle was $391, net of income taxes of
$267. Similarly, D&E's share of EuroTel's deferred net revenue included in the
cumulative change was $521.

REVENUE RECOGNITION

     Revenues for all business segments are generally recognized when services
are rendered or products are delivered to customers. 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 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 the National Exchange Carrier Association, Inc. (NECA). These
pools were established at the direction of the FCC and are funded by access
service charges,

                                       F-8
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

     The systems integration long-term contracts are accounted for using the
percentage-of-completion method, with revenues recognized in the proportion of
costs incurred to total estimated costs at completion.

CASH AND SHORT-TERM INVESTMENTS

     Cash and cash equivalents consist of all highly liquid investments
purchased with a maturity of three months or less. Cash balances may exceed
F.D.I.C. insured limits at times. Short-term investments consist of
high-quality, short-term commercial paper.

INVESTMENTS AVAILABLE-FOR-SALE

     All marketable equity securities are classified as investments
available-for-sale. Marketable securities available-for-sale are recorded at
fair market value, based on market quotes from national exchanges. Any
unrealized holding gains or losses, net of deferred taxes, are reported as a
separate component of shareholders' equity. Any realized gains or losses are
included in the statement of operations.

PREPAID DIRECTORY

     Directory advertising revenues and costs are deferred and amortized over
the 12-month period related to the directory publication. Prepaid costs at
December 31, 2000 and 2001 were $205 and $226, respectively. Deferred directory
revenues at December 31, 2000 and 2001 were $211 and $233, respectively.

PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment is stated at cost and depreciated using the
straight-line method of depreciation over the estimated useful lives of 24 years
for buildings, 5 to 27 years for digital switching equipment, 14 to 48 years for
outside plant facilities and 3 to 26 years for other equipment. Depreciation as
a percentage of average depreciable plant in service amounted to 7.6% in 1999,
8.1% in 2000 and 8.4% in 2001.

     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 service lives of the remaining
assets. When other depreciable property is retired, the gain or loss is
recognized as an element of other income. The costs of maintenance and repairs
are charged to operating expense.

INTANGIBLE ASSETS

     The cost in excess of the fair value of net assets acquired is recorded as
goodwill and included in other long-term assets. Amortization expense for
goodwill is recorded on a straight-line basis over five years. Goodwill at
December 31, 2000 and 2001 was $9,203 and $7,199, respectively. The related
accumulated amortization was $1,295 and $2,073 respectively.

IMPAIRMENT OF LONG-LIVED ASSETS

     Based upon the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," D&E reviews assets and certain intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. A determination of
impairment is made based on estimates of future undiscounted cash flows.
Measurement of any determined impairment is based on future discounted cash
flows. D&E has determined there has been no impairment to the carrying value of
such assets in 1999, 2000 and 2001.

                                       F-9
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ADVERTISING

     D&E expenses advertising costs as incurred. Advertising expenses were $748
for 1999, $1,255 for 2000 and $1,497 for 2001.

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. Capitalized
interest on regulated telephone construction projects prior to January 2001 was
recorded as Allowance for Funds Used During Construction (AFUDC), a noncash
element of other income. Interest costs capitalized on assets were $46 for 1999,
$265 for 2000 and $509 for 2001.

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 realization is not likely.

EARNINGS PER COMMON SHARE

     D&E calculates earnings per share in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings per Share." Basic
earnings per common share is calculated by dividing net income by the weighted
average number of common shares outstanding. The computation of diluted earnings
per share is similar to basic earnings per share except the denominator is
increased to include contingently issuable common shares. D&E has contingently
issuable common shares as a result of outstanding warrants to purchase D&E
common stock and contingently issuable shares under the LTIP Plan. Since the
exercise price for D&E's issued and outstanding warrants is higher than the
average market prices for D&E stock for the periods presented, and the LTIP
shares are contingently issuable, there is no difference between basic and
diluted earnings per share in any of the periods presented.

COMPREHENSIVE INCOME

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

FOREIGN CURRENCY TRANSLATIONS AND TRANSACTIONS

     The functional currency for EuroTel's foreign operations is the local
currency. For these foreign entities, EuroTel translates assets and liabilities
at end-of-period exchange rates. EuroTel records these translation adjustments
in cumulative other comprehensive income (loss), a separate component of equity
in their consolidated balance sheet. For revenues, expenses, gains and losses,
the weighted average exchange rate for the period is used to translate those
elements. Foreign currency transaction gains and losses related to the foreign
operations are reported in EuroTel's earnings. D&E records its share of foreign
currency transaction gains and losses recorded in EuroTel's earnings 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).

                                       F-10
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RECLASSIFICATIONS

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

3.  CASH FLOW INFORMATION

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

<Table>
<Caption>
                                                              1999     2000     2001
                                                             ------   ------   ------
<S>                                                          <C>      <C>      <C>
Interest expense...........................................  $1,815   $1,698   $1,876
Income taxes...............................................   1,441    2,361      994
</Table>

     D&E recorded non-cash transactions in connection with its investing and
financing activities. At December 31, 2001, accounts payable included capital
expenditures of $2,517 and advances to PCS ONE of $1,499. During 2001, D&E
issued common stock of $244 for dividends reinvested and exchanged $2,800 of
accounts receivable from PCS ONE to an investment in PCS ONE. Also during 2001,
D&E recognized a non-cash realized gain on investments of $3,036 as a result of
the exchange of shares of an available for sale investment.

     At December 31, 2000, accounts payable included capital expenditures of
$3,580 and advances to PCS ONE of $1,807. During 2000, D&E issued common stock
for the following: $1,768 for business acquisitions, $80 for incentive
compensation and $217 for dividends reinvested. D&E also recorded long-term
notes payable in 2000 of $1,572 in connection with business acquisitions (see
Note 4).

     During 1999, D&E issued common stock of $182 for dividends reinvested. On
March 25, 1999, D&E exchanged its investment in D&E SuperNet, Inc. for cash and
an investment in OneMain.com, Inc. (OneMain). The value of the OneMain shares
received in the exchange was $6,870.

4.  ACQUISITIONS

     On April 28, 2000, D&E acquired substantially all of the assets and
liabilities of CompuSpirit, Inc., a computer network service provider. On August
1, 2000, D&E acquired all of the outstanding shares of Alternate Solutions,
Inc., a computer network service provider. The acquisitions were financed by
payments of $5,973 cash, 93,388 shares of D&E common stock valued at $1,768 and
future payments to the sellers of $1,800 with a net present value of $1,572. A
payment of $1,000 was made in 2001 and annual payments of $400 are due in 2002
and 2003. The transactions were accounted for under the purchase method of
accounting. Neither of the individual company's results of operations nor their
combined results of operations prior to the acquisitions would have made a
material change in D&E's earnings if such results had been included from the
beginning of the year. Goodwill and non-compete agreements of $8,649 related to
the acquisitions are being amortized over five years using the straight-line
method.

5.  INVESTMENTS AVAILABLE-FOR-SALE

     The following is a summary of the Company's investments in marketable
equity securities:

<Table>
<Caption>
                                                               2000     2001
                                                              ------   ------
<S>                                                           <C>      <C>
At December 31:
Cost basis..................................................  $1,646   $4,679
Unrealized gains (losses)...................................     872     (254)
                                                              ------   ------
Fair value..................................................  $2,518   $4,425
                                                              ======   ======
</Table>

     In December 2001, D&E exchanged its investment in Illuminet Holdings, Inc.
for an investment in VeriSign, Inc. The exchange generated a 2001 gain of
$3,036.

                                       F-11
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6.  DISCONTINUED OPERATIONS

     D&E owns a 50% interest in PCS ONE, a domestic joint venture formed for the
purpose of providing PCS wireless communications services and equipment to
customers in the Lancaster, Harrisburg, York/ Hanover and Reading Basic Trading
Areas. The joint venture was to operate for an initial period of 10 years, with
provisions for subsequent renewals.

     On October 17, 2001, D&E entered into a definitive agreement to sell its
50% interest in PCS ONE to VoiceStream Wireless Corporation for approximately
$117,000. D&E estimates that it will receive approximately $75,000 in cash after
working capital and long-term debt adjustments of approximately $42,000.
Management also estimates that approximately $34,000 of the cash received will
be used to pay taxes with the remainder used to pay down debt or to help finance
the acquisition of Conestoga Enterprises, Inc. (see Note 12).

     The sale is subject to certain regulatory approvals and other customary
closing conditions and is expected to close in April 2002. During December 2001,
the Companies obtained required lender approvals necessary to close the
transaction and also passed compliance of the Hart-Scott-Rodino Act
requirements. The remaining regulatory approvals, which include FCC approvals of
the transfer of the wireless licenses to VoiceStream Wireless, and other
customary closing conditions are deemed to be perfunctory.

     The investment in PCS ONE and the related contract services provided to PCS
ONE, which will also be discontinued subsequent to the sale, constitute a
separate segment of D&E's business. As such, the assets and liabilities and
results of operations of the wireless services segment are reported as
discontinued operations in accordance with APB Opinion No. 30 with a measurement
date of December 31, 2001. The only assets or liabilities held for sale are the
equity in net losses of PCS ONE, which have been classified as equity in net
losses of discontinued operations in excess of investments and advances in the
balance sheets.

     Losses from discontinued operations prior to December 31, 2001 have been
reclassified for one-line presentation in the statements of operations.

     Summarized financial information for discontinued operations is presented
as follows:

<Table>
<Caption>
                                                           1999      2000      2001
                                                         --------   -------   -------
<S>                                                      <C>        <C>       <C>
Years ended December 31:
  Revenue..............................................  $  6,480   $ 8,863   $11,541
  Expenses.............................................     6,117     8,238    10,310
                                                         --------   -------   -------
  Operating income.....................................       363       625     1,231
  Equity in net loss of affiliate......................   (10,243)   (9,214)   (9,914)
  Other income.........................................        15       170        93
  Income taxes.........................................    (3,213)   (2,766)   (2,605)
                                                         --------   -------   -------
  Loss from discontinued operations....................  $ (6,652)  $(5,653)  $(5,985)
                                                         ========   =======   =======
</Table>

     As of December 31, 2001, the estimated gain on the sale of the wireless
segment is approximately $50,000, net of tax. Beginning January 1, 2002, D&E
will defer losses from the wireless segment until the gain on sale is realized.
The overall gain, net of deferred losses, will be reported in the statement of
operations in the period in which realization occurs, which is expected in April
2002.

                                       F-12
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Summarized financial information for PCS ONE is presented as follows:

<Table>
<Caption>
                                                         1999       2000       2001
                                                       --------   --------   --------
<S>                                                    <C>        <C>        <C>
Years ended December 31:
  Net sales..........................................  $ 17,081   $ 30,947   $ 43,357
  Net loss...........................................   (20,404)   (18,475)   (19,777)
At December 31:
  Current assets.....................................             $  6,448   $  8,020
  Noncurrent assets..................................               43,917     58,487
  Current liabilities................................               12,798     10,065
  Noncurrent liabilities.............................               61,429     84,214
  Partners' capital (deficit)........................              (23,862)   (27,772)
</Table>

     A summary of changes for D&E's investments in and advances to PCS ONE is as
follows:

<Table>
<Caption>
                                                          1999      2000       2001
                                                        --------   -------   --------
<S>                                                     <C>        <C>       <C>
Investment in PCS ONE:
  Beginning balance (deficit).........................  $  4,535   $(1,699)  $ (9,863)
  Equity in earnings (losses).........................   (10,243)   (9,214)    (9,914)
  Investments.........................................     4,009     1,050      6,500
                                                        --------   -------   --------
  Ending balance (deficit)............................    (1,699)   (9,863)   (13,277)
                                                        --------   -------   --------
Advances to PCS ONE:
  Beginning balance...................................       123       550      1,331
  Advances............................................       427       781      1,558
                                                        --------   -------   --------
  Ending balance......................................       550     1,331      2,889
                                                        --------   -------   --------
Equity in net losses of discontinued operations in
  excess of investments and advances..................  $ (1,149)  $(8,532)  $(10,388)
                                                        ========   =======   ========
</Table>

     D&E provides support services to PCS ONE. The accounts receivable from PCS
ONE at December 31, 2000 and 2001 for working capital provided and support
services totaled $5,714 and $5,938, respectively. These amounts are reported on
the balances sheets as accounts receivable-affiliated companies and are expected
to be collected as they are not part of the PCS ONE sales agreement. In
addition, D&E provides management services to PCS ONE. Amounts owed to D&E for
these services at December 31, 2000 and 2001 were $1,331 and $2,578,
respectively. These amounts are included in equity in net losses of discontinued
operations in excess of investments and advances.

7.  INVESTMENT IN AFFILIATED COMPANY

     D&E owns a one-third investment in EuroTel, a domestic corporate joint
venture. EuroTel holds a 100% investment in PenneCom, B.V. (PenneCom), an
international telecommunications holding company that holds a 100% investment in
Pilicka, a telecommunications company located in Poland.

     In April 1999, PenneCom entered into an agreement to sell its entire
investment in Pilicka to Elektrim S.A. (Elektrim) for $140,000 in cash and
notes. In July 1999, Elektrim issued written notice to PenneCom that it was
repudiating the purchase agreement. In August 1999, PenneCom filed an
arbitration request with the International Court of Arbitration seeking specific
performance of the agreement as well as compensatory and punitive damages. In
2001, an award of approximately $40,000 plus interest at 10% per annum from
August 1999 and reimbursement of arbitration costs was granted in favor of
PenneCom. PenneCom used a

                                       F-13
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

portion of the proceeds to reduce outstanding loans with a domestic bank (see
Note 11). D&E's share of the gain on the award settlement is included in the
equity in net income or losses of affiliates in the consolidated statements of
operations.

     During 2001, EuroTel also recorded a $31,517 charge for an impairment to
EuroTel's investment in Pilicka. D&E's share of the impairment charge is
included in the equity in net income or losses of affiliates in the consolidated
statements of operations.


     As of December 31, 2001, PenneCom was indebted to EuroTel for $10,656 and
to the investors in EuroTel for $36,751 (including $14,623 to D&E). As the role
of PenneCom as a holding company for European investments has become largely
unnecessary due to the decision to make no new investments in Europe, PenneCom
agreed with EuroTel and the EuroTel investors to satisfy a portion of its
indebtedness to EuroTel and the founders by transferring PenneCom's entire
equity interests in Pilicka to EuroTel and the founders. PenneCom satisfied
$3,384 of its indebtedness to EuroTel by transferring 22.56% of the capital
stock of Pilicka to EuroTel, satisfied $4,650 of its indebtedness to D&E by
transferring 31.00% of the capital stock of Pilicka to D&E, and satisfied $6,966
of its indebtedness to the other EuroTel investors by transferring 46.44% of the
capital stock of Pilicka to the other EuroTel investors. The total amount of
indebtedness satisfied by PenneCom was equal to the total estimated fair value
of Pilicka at December 31, 2001. Subsequent to the transaction, D&E will have a
31.00% direct ownership in Pilicka and an indirect 7.52% ownership in Pilicka,
through its continuing one-third interest in EuroTel. D&E will account for both
its investment in EuroTel and its investment in Pilicka on the equity method of
accounting.


     In December 1999, PenneCom sold its 48% interest in Monor Telephone Company
(MTT). Early in January 2000, D&E received $14,051 in cash related to the sale
of MTT. The funds were placed into temporary investments, including a $8,667
portion which was restricted in accordance with terms of a pledge of collateral
D&E agreed to provide to a bank for a loan made to PenneCom in December 1999
which was repaid in 2001 (see Note 11).

     The equity investment in EuroTel is subject to the risks of foreign
currency transactions, which are included in the results of PenneCom and
Pilicka.

     Summarized financial information for EuroTel is presented as follows:

<Table>
<Caption>
                                                         1999       2000       2001
                                                        -------   --------   --------
<S>                                                     <C>       <C>        <C>
Years ended December 31:
  Net sales...........................................  $ 3,413   $  4,930   $  8,065
  Gain from joint venture.............................    1,524         --         --
  Gain (loss) on foreign currency transactions........     (824)        60        313
  Net income (loss)...................................   13,853    (18,385)       907
At December 31:
  Current assets......................................            $  3,026   $  3,339
  Noncurrent assets...................................              43,832     15,026
  Current liabilities.................................              71,474     41,191
  Noncurrent liabilities..............................               2,123      1,751
  Members' equity (deficit)...........................             (26,739)   (24,577)
</Table>

                                       F-14
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of changes for D&E's investments in and advances to EuroTel is as
follows:

<Table>
<Caption>
                                                          1999       2000      2001
                                                         -------   --------   -------
<S>                                                      <C>       <C>        <C>
Investment in EuroTel:
  Beginning balance (deficit)..........................  $ 3,598   $ 10,353   $(7,606)
  Equity in earnings (losses)..........................    5,267     (5,528)       91
  Equity in currency translation adjustments...........       --         --      (677)
  Equity in cumulative effect of accounting change.....       --       (512)       --
  Investments..........................................    1,488        700        --
  Distributions........................................       --    (12,619)       --
                                                         -------   --------   -------
  Ending balance (deficit).............................   10,353     (7,606)   (8,192)
                                                         -------   --------   -------
Advances to EuroTel and affiliates:
  Beginning balance....................................    2,123      4,986     4,703
  Advances.............................................    4,180      2,495    10,769
  Repayments...........................................   (1,317)    (2,778)     (849)
                                                         -------   --------   -------
  Ending balance.......................................    4,986      4,703    14,623
                                                         -------   --------   -------
Investments in and advances to affiliate (Equity in net
  losses in excess of investments and advances)........  $15,339   $ (2,903)  $ 6,431
                                                         =======   ========   =======
</Table>

     In addition to loans, D&E provides support services to EuroTel and its
affiliates. Amounts owed to D&E for services performed for EuroTel, PenneCom and
Pilicka at December 31, 2000 and 2001 were $3,786 and $4,899, respectively.
These amounts are included in investments in and advances to affiliates or
equity in losses of affiliates in excess of investments and advances on the
balance sheets.

8.  PROPERTY, PLANT AND EQUIPMENT

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

<Table>
<Caption>
                                                                2000       2001
                                                              --------   --------
<S>                                                           <C>        <C>
Land and buildings..........................................  $ 33,513   $ 43,382
Digital switching equipment.................................    48,721     58,873
Outside plant facilities....................................    44,953     48,851
Other equipment.............................................    20,076     27,168
Plant under construction....................................     7,913      5,034
                                                              --------   --------
Total property, plant and equipment.........................   155,176    183,308
  Less accumulated depreciation.............................   (79,321)   (88,163)
                                                              --------   --------
Property, plant and equipment, net..........................  $ 75,855   $ 95,145
                                                              ========   ========
</Table>

9. NOTES PAYABLE AND LONG-TERM DEBT

     D&E had unsecured lines of credit with domestic banks totaling $27,500 at
December 31, 2001. These lines of credit are payable on demand and provide D&E
with the option to borrow at prevailing interest rates. At December 31, 2001,
notes payable outstanding under the lines of credit totaled $1,757 with an
average interest rate of 3.61%. There was no amount outstanding under the lines
of credit at December 31, 2000.

                                       F-15
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                               2000      2001
                                                              -------   -------
<S>                                                           <C>       <C>
Senior Term Note due 2011...................................  $    --   $50,000
Senior Revolving Credit Facility due 2009...................       --     8,000
6.49% Senior Notes due 2004.................................   10,000        --
7.55% Senior Notes due 2007.................................    3,182        --
9.18% Senior Notes due 2021.................................    8,400        --
Other.......................................................      242       176
                                                              -------   -------
                                                               21,824    58,176
Less current maturities.....................................      917        52
                                                              -------   -------
Total long-term debt........................................  $20,907   $58,124
                                                              =======   =======
</Table>

     On November 1, 2001, D&E completed a long-term financing agreement with a
syndicate of financial institutions for $100,000. The unsecured credit facility
consists of a $50,000 single draw 10-year senior term note and a $50,000
8.5-year senior reducing revolving credit facility. The term note requires
interest only payments for three years with increasing quarterly principal
payments from the third quarter of 2004 through the second quarter of 2011. The
revolving credit facility note requires interest only payments for two years
with increasing quarterly principal reductions of the amount available to borrow
from the third quarter of 2003 through the fourth quarter of 2009. Interest on
both notes is payable at a base rate or at one, two, three or six month LIBOR
rates plus an applicable margin based on D&E's leverage ratio. The revolving
credit facility requires a quarterly commitment fee on the unused portion. The
credit agreement contains financial and operational covenants. The most
restrictive covenant requires D&E's indebtedness not to exceed 3.5 times cash
flow as defined in the agreement. D&E was in compliance with the covenants at
December 31, 2001.

     A portion of the proceeds from the Senior Term and Revolving Notes were
used to extinguish outstanding indebtedness including lines of credit and notes
due to an insurance company. D&E recorded an extraordinary loss on the early
extinguishment of indebtedness of $2,216, net of taxes of $1,514.

     On October 15, 2001, D&E entered into a commitment letter with its existing
bank syndicate that provides an additional $100,000 of debt availability in the
form of an 8.5 year variable-rate senior secured term loan. D&E intends to use
the additional $100,000 term loan and borrowings under the existing $50,000
revolving credit facility to fund a portion of the merger with Conestoga
Enterprises, Inc. (see Note 12).

     Other debt consists of equipment capital leases assumed in the business
acquisitions during 2000. Payments are due monthly with interest rates from 9.9%
to 15.5%. Final due dates range from January 2002 to October 2004.

     Based on the borrowing rate currently available to D&E for bank loans, the
book value of long-term debt approximates the fair market value.

     Maturities of long-term debt for each year ending December 31, 2002 through
2006, are as follows:

<Table>
<Caption>
YEAR                                                          AGGREGATE AMOUNT
----                                                          ----------------
<S>                                                           <C>
2002........................................................       $   52
2003........................................................           56
2004........................................................        2,568
2005........................................................        5,000
2006........................................................        5,000
</Table>

                                       F-16
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

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

<Table>
<Caption>
                                                               2000      2001
                                                              -------   -------
<S>                                                           <C>       <C>
Trade payables..............................................  $12,102   $ 9,459
Accrued compensation........................................    2,733     2,151
Accrued pension.............................................    1,520     1,520
Other.......................................................    2,620     3,189
                                                              -------   -------
Total accounts payable and accrued liabilities..............  $18,975   $16,319
                                                              =======   =======
</Table>

11.  COMMITMENTS AND CONTINGENCIES

     The terms of the business acquisition agreements entered into in 2000
require future annual payments to the sellers of $400 in 2002 and 2003. Interest
is imputed at 7.7%.

     Under the terms of the PCS ONE limited partnership agreement, D&E agreed to
provide funding to PCS ONE for up to $1,000 per year, provided that the total
accumulated funding does not exceed $5,000. D&E may be requested to lend amounts
above the $1,000 annually under the terms of the limited partnership agreement.

     In May 2000, PCS ONE entered into a financing agreement with a bank to
provide a $70,000 credit facility. In March 2001, the credit facility was
increased to $82,000. The joint venture partners have no guarantee requirement
in connection with this agreement. D&E and its joint venture partner must
maintain contributed capital plus certain additional allowable deposit and
license acquisition costs at a level of 66.7% of the funds borrowed. On December
31, 2001, the partners had an allowable capital contribution of $56,148, making
the full $82,000 facility available.

     D&E became a party to a $40,000 loan agreement between a domestic bank and
PenneCom in December 1999. The loan amount was increased to $50,000 in August
2000. D&E, along with the other investors in EuroTel, each pledged investments
of $8,667 as collateral for the loan. The loan, which was used primarily to
refinance higher interest debt, was repaid in full in September 2001 with
proceeds of a damage award and a portion of the pledged investments.

     During 2001, D&E entered into a noncancelable operating lease for a
building. Future minimum lease payments are $318 in 2002, $330 in 2003, $341 in
2004, $353 in 2005 and $119 in 2006.

12.  PROPOSED D&E -- CONESTOGA ENTERPRISES, INC. MERGER

     D&E and Conestoga Enterprises, Inc. (Conestoga) have announced a proposed
merger under a conditional merger agreement dated as of November 21, 2001(the
Agreement). The Agreement became definitive on December 3, 2001, when NTELOS,
Inc., agreed to terminate its merger agreement with Conestoga. Under the terms
of the Agreement, structured as a "cash election" merger, each Conestoga
shareholder will have the option to receive cash and/or D&E common stock. As
long as D&E's stock price under the calculation in the Agreement is between
$13.00 and $23.00 per share, the value of the consideration for each Conestoga
share will be $33.00 (for a total transaction value of approximately $272.0
million). D&E shareholders will continue to own their existing shares after the
merger.

     The merger will be accounted for as a purchase in accordance with SFAS No.
141, "Business Combinations." For purposes of preparing D&E's consolidated
financial statements, D&E will establish a new accounting basis for Conestoga's
assets and liabilities based upon their fair values, the merger consideration,
and the costs of the merger.

                                       F-17
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


     After the merger, it is possible that the former Conestoga shareholders
could, in the aggregate, hold the majority of the voting common stock of the
combined company. The identification of D&E as the acquiring entity was made
after careful consideration of all facts and circumstances, as follows:



          Governance Arrangements -- Relating to the Board of Directors.  The
     initial board of the combined company will have twelve members, including
     eleven existing D&E communications' board members and Jean M. Ruhl, who is
     an existing member of the Conestoga board of directors. Mrs. Sweigart will
     remain the chairman of the board of the combined company. Removal of Mrs.
     Sweigart as chairman would require the vote of the majority of the board.
     Of the 11 D&E Communications' board members, three have terms that expire
     at D&E's 2002 annual meeting of shareholders (each has been nominated for
     re-election to another three-year term through 2005), four are serving
     three-year terms that expire in 2003 and four are serving three-year terms
     that expire in 2004. Ms. Ruhl, who will be added as a class A director,
     will have a term expiring in 2005. In general, directors may only be
     removed by shareholders for cause and upon the vote of (i) 80% of the
     outstanding voting shares and (ii) a majority of the outstanding voting
     shares owned by less than 10% shareholders and certain existing
     shareholders, including the voting trust.



          Governance Arrangements -- Relating to Management.  The majority of
     the senior management positions of the combined company will be held by the
     individuals currently holding those positions at D&E. Mrs. Sweigart will
     continue to serve as chairman of the board and president, Mr. Lauman will
     continue to serve as vice chairman and senior executive vice president, and
     Mr. Ruhl will continue to serve as chief executive officer. In addition
     there will be three senior vice presidents that will report to the CEO or
     vice chairman in the combined company, two of which (the chief financial
     officer and corporate secretary) will be the current D&E vice presidents in
     those positions. Mr. Kramer, the current President of Conestoga, will
     become the third senior vice president of D&E. No other Conestoga managers
     are expected to be executive officers of D&E. Mrs. Sweigart, Mr. Lauman and
     Mr. Ruhl's combined powers and responsibilities will include: (i) the
     supervision and management of the combined company's business and
     operations, (ii) all matters related to officers and employees, including
     hiring and termination, (iii) all rights and powers typically exercised by
     the chief executive officer and president of a corporation, and (iv) the
     authority to call special meetings of the combined company board.



          Voting Rights in the Combined Company.  Mrs. Sweigart and certain
     other D&E board members will control the largest voting interest of between
     approximately 16.5% and 21.9% (depending on the D&E stock price before the
     merger and the elections of Conestoga shareholders) in the combined entity
     through their direct ownership of voting stock, as well as the voting
     control that five members of the D&E board, including Mrs. Sweigart, have
     through a voting trust. Based on current ownership interests, the next
     largest minority voting interest will only be between approximately 7.5%
     and 10.0% (depending on the D&E stock price before the merger and the
     elections of Conestoga shareholders), which, as of March 5, 2002, was held
     by an independent shareholder of D&E Communications. To D&E's knowledge,
     there are no other stockholders or organized group of stockholders of
     Conestoga that are expected to have a voting interest in the combined
     company that exceeds 4%.



          A supermajority vote of D&E shareholders is required in connection
     with the removal of directors, business combinations involving interested
     shareholders, amendment of certain sections of D&E bylaws and amendment of
     certain sections D&E's articles of incorporation. Except to the extent
     otherwise provided by law, no other matters require the approval of greater
     than a simple majority of shareholders.



OTHER FACTORS



     - D&E initiated the business combination when it made an unsolicited offer
      to acquire Conestoga while it was under agreement to be acquired from
      NTELOS.


                                       F-18
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)


     - Under the terms of the exchange between D&E and Conestoga, D&E is paying
      a premium over the market value of the Conestoga shares while also paying
      cash for a portion of the Conestoga shares enabling Conestoga shareholders
      to possibly cash out.



     - The headquarters of the combined company will be in Ephrata,
      Pennsylvania, the current headquarters of D&E.



     Notwithstanding that after the merger the former Conestoga shareholders
could, in the aggregate, hold the majority of the voting common stock of the
combined company, D&E believes that this factor is outweighed by the totality of
the other facts and circumstances described above.


     The completion of the merger is subject to a number of conditions,
including shareholder approvals and certain regulatory approvals. The companies
are targeting completion of the merger in the second quarter of 2002.

13.  INCOME TAXES

     The provision for income taxes consists of the following:

<Table>
<Caption>
                                                            1999     2000      2001
                                                           ------   -------   -------
<S>                                                        <C>      <C>       <C>
Current:
  Federal................................................  $  884   $   485   $    --
  State..................................................     981       944       580
                                                           ------   -------   -------
                                                            1,865     1,429       580
                                                           ------   -------   -------
Deferred:
  Federal................................................   2,069    (2,990)   (5,741)
  State..................................................     109       (55)      377
                                                           ------   -------   -------
                                                            2,178    (3,045)   (5,364)
                                                           ------   -------   -------
Total income taxes.......................................   4,043    (1,616)   (4,784)
Tax benefit of discontinued operations...................   3,213     2,766     2,605
                                                           ------   -------   -------
Income taxes from continuing operations..................  $7,256   $ 1,150   $(2,179)
                                                           ======   =======   =======
</Table>

     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:

<Table>
<Caption>
                                                              1999    2000      2001
                                                              ----    -----    ------
<S>                                                           <C>     <C>      <C>
Federal statutory rate......................................  34.0%    34.0%     34.0%
Increase (decrease) resulting from:
  State income taxes, net of federal tax benefits...........   2.4    (13.5)     32.4
  Goodwill..................................................    --     (4.5)     19.0
  Benefit of rate differential applied to temporary
     differences............................................  (0.3)     2.0      (0.7)
  Valuation allowance.......................................  (4.2)   (49.8)   (177.4)
  Prior-period tax..........................................  (0.1)     0.8     (10.4)
  Other, net................................................    --      0.9      (9.9)
                                                              ----    -----    ------
Effective income tax rate...................................  31.8%   (30.1)%  (113.0)%
                                                              ====    =====    ======
</Table>

     Approximately $58,969 of state net operating loss carryforwards remained at
December 31, 2001. These carryforwards are due to the operations of D&E's
subsidiaries and will expire in the years 2007 through 2011. The benefit of
these carryforwards is dependent on the taxable income of these subsidiaries
during the

                                       F-19
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

carryforward period. A valuation allowance has been provided because realization
of tax carryforwards is not likely.

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

<Table>
<Caption>
                                                               2000      2001
                                                              -------   -------
<S>                                                           <C>       <C>
Deferred tax liabilities:
  Depreciation..............................................  $ 4,337   $ 4,169
  Depreciation -- affiliated companies......................    2,722     2,822
  Investments...............................................      407     1,139
                                                              -------   -------
                                                                7,466     8,130
Deferred tax assets:
  Employee benefits.........................................      401     1,240
  Net operating loss carryforwards..........................    2,590    11,481
     Equity in net loss of affiliates.......................    3,662       373
     Other, net.............................................      369       202
                                                              -------   -------
                                                                7,022    13,296
Valuation allowance.........................................   (6,252)   (4,261)
                                                              -------   -------
Net deferred tax assets (liabilities).......................  $(6,696)  $   905
                                                              =======   =======
</Table>


     D&E maintains a 100% valuation allowance on the deferred tax assets related
to the book/tax differences of its international affiliate investments due to
the uncertainty of realization. As a result of incurring realized tax losses in
2001 on its international affiliates in excess of book losses recognized in
2001, D&E's deferred tax assets related to book/tax differences of its
international affiliates have decreased. As a result, D&E has also
correspondingly decreased its valuation allowance on these deferred tax assets.
The amount of the deferred tax asset could change if estimates of future taxable
income during the carryforward period are revised.


14.  SHAREHOLDERS' EQUITY

     In October 1998 and 2000, D&E's Board of Directors authorized the
repurchase of up to $2,000 and $1,000, respectively, of D&E common stock. The
shares reacquired may be used for D&E's incentive compensation programs,
Employee Stock Purchase Plan, Dividend Reinvestment Plan and for other corporate
purposes. As of December 31, 2001, D&E had purchased 126,100 shares of treasury
stock for a total cost of $2,630. Separately, the Board of Directors may
authorize acquisition of shares outside of the open market repurchase plan when
the market price warrants it. D&E purchased $863, $612 and $662 of treasury
stock during 1999, 2000 and 2001, respectively, from related parties at fair
market value.

     In January 1998, D&E issued 1.3 million shares of D&E common stock to a
subsidiary of Citizens Communications Company (Citizens) in consideration for
$27,015. All such shares are unregistered but have certain registration rights.
Under the terms of the agreement, Citizens has certain restrictions relating to
future purchases or sales of D&E common stock. Additionally, in connection with
this agreement, D&E issued warrants to acquire 65,000 shares of common stock at
$20.78 per share. These warrants expire on January 7, 2003. None of these
warrants has been exercised.

     D&E has an Employee Stock Purchase Plan (ESPP), which provides eligible D&E
employees the opportunity to purchase shares of D&E common stock through payroll
deductions. There are 538,030 shares of common stock reserved for issuance
pursuant to the ESPP. The total number of shares purchased pursuant to the ESPP
during 2000 and 2001 was 9,404 and 12,971, respectively.

     D&E offers a Dividend Reinvestment and Stock Purchase Plan (DRP) to its
shareholders. The DRP provides all shareholders of D&E common stock the
opportunity to purchase additional shares of common

                                       F-20
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. There are 172,394
shares of common stock reserved for issuance pursuant to the DRP. The total
number of shares purchased through the DRP during 2000 and 2001 was 15,980 and
16,868, 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 National Market on the day of the purchase. Shares for
the ESPP may be purchased at a 10% discount from fair market value as approved
by the shareholders on April 27, 2000. 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 has a Stock Compensation Plan and Policy for Non-Employee Directors as
approved by the shareholders on April 26, 2001. Certain non-employee directors
receive common stock in payment for their services as a director of the company.
There are 13,960 shares of common stock reserved for issuance pursuant to the
plan. The total number of shares issued in the first year of this plan during
2001 was 1,040.

     At December 31, 2000 and 2001, D&E common stock of 2,875,324 and 2,846,922
shares, respectively, was held in a voting trust. Certain trustees of the voting
trust are officers of D&E.

15.  EMPLOYEE BENEFIT PLANS

EMPLOYEES' RETIREMENT PLAN

     D&E's pension plan is a noncontributory defined benefit plan computed on an
actuarial basis covering all eligible employees. Pension benefits are based upon
length of service and the employee's average pensionable compensation as defined
by the plan. Accrued benefits are vested after five years of participation in
the plan. Assets of the pension plan consist primarily of stocks and bonds.

<Table>
<Caption>
                                                              1999   2000   2001
                                                              ----   ----   ----
<S>                                                           <C>    <C>    <C>
Assumptions of the Plan:
Discount rates used to determine projected benefit
  obligation as of December 31..............................  8.0%   7.5%   7.3%
Expected long-term rates of return on assets................  9.8%   9.8%   9.8%
Rates of increase in compensation levels....................  4.5%   4.5%   4.5%
</Table>

     The following schedules reconcile the beginning and ending balances of the
pension benefit obligation and related plan assets.

<Table>
<Caption>
                                                               2000      2001
                                                              -------   -------
<S>                                                           <C>       <C>
Change in Benefit Obligation:
Benefit obligation at beginning of year.....................  $18,678   $23,070
Service cost................................................      754     1,093
Interest cost...............................................    1,591     1,759
Actuarial loss..............................................    3,290     1,946
Benefits paid...............................................   (1,243)   (1,277)
                                                              -------   -------
Benefit obligation at end of year...........................  $23,070   $26,591
                                                              =======   =======
</Table>

                                       F-21
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                               2000      2001
                                                              -------   -------
<S>                                                           <C>       <C>
Change in Plan Assets:
Fair value of assets at beginning of year...................  $19,646   $19,887
Actual return on plan assets................................      (36)   (1,311)
Employer contributions......................................    1,520     2,260
Benefits paid...............................................   (1,243)   (1,277)
                                                              -------   -------
Fair value of assets at end of year.........................  $19,887   $19,559
                                                              =======   =======
</Table>

<Table>
<Caption>
                                                               2000      2001
                                                              -------   -------
<S>                                                           <C>       <C>
Recognition of Funded Status of the Plan:
Funded status at end of year................................  $(3,184)  $(7,032)
Unrecognized net actuarial loss.............................    1,984     6,710
Unrecognized prior service cost.............................      167       138
                                                              -------   -------
Net amount recognized at end of year........................  $(1,033)  $  (184)
                                                              =======   =======
</Table>

<Table>
<Caption>
                                                               2000      2001
                                                              -------   -------
<S>                                                           <C>       <C>
Amounts Recognized in the Financial Statements Consist of:
Accrued benefit liability...................................  $(1,033)  $(3,700)
Other asset.................................................       --       138
Accumulated other comprehensive loss........................       --     3,378
                                                              -------   -------
Net amount recognized at end of year........................  $(1,033)  $  (184)
                                                              =======   =======
</Table>

<Table>
<Caption>
                                                           1999      2000      2001
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Components of Net Periodic Benefit Cost:
Service cost............................................  $   831   $   754   $ 1,093
Interest cost...........................................    1,362     1,591     1,759
Expected return on assets...............................   (1,284)   (1,528)   (1,745)
Amortization of:
  Prior service cost....................................       55        55        29
  Actuarial loss........................................      414       116       275
                                                          -------   -------   -------
Total net periodic benefit cost.........................  $ 1,378   $   988   $ 1,411
                                                          =======   =======   =======
</Table>

EMPLOYEES' 401(K) SAVINGS PLAN

     D&E also has an employee savings plan available to all eligible employees
(Savings Plan). Participating employees may contribute a portion of their
compensation, up to 12%, to the Savings Plan, and D&E makes 100% matching
contributions up to 4% of an employee's contribution. D&E may also make
discretionary profit-sharing contributions. D&E's contributions amounted to $256
in 1999, $536 in 2000 and $941 in 2001.

EMPLOYEE STOCK OWNERSHIP PLAN

     In July 1992, D&E established the Employee Stock Ownership Plan (ESOP),
covering all eligible employees. Unallocated shares were held in a "suspense
account" in the ESOP's trust fund until allocated to participants' accounts. D&E
made quarterly contributions to the ESOP, which, along with the dividends on
unallocated shares, were used to repay the ESOP Note. As principal payments on
the ESOP Note were made, unallocated shares held in the suspense account were
released and allocated among the participants' accounts. The ESOP Note was paid
in full in December 2000. Due to the Board of Directors' decision to discontinue

                                       F-22
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

contributions to the ESOP, all non-vested participants became fully vested in
their accrued benefits effective January 1, 2001. As of December 31, 2000, all
shares were allocated to participants. Dividends on shares allocated to
participants' accounts are reinvested in D&E common stock through the purchase
of treasury shares.

     The shares in the ESOP are considered outstanding for purposes of
calculating earnings per share. D&E's principal and interest payments on the
ESOP Note, offset by unallocated dividends, were reported as compensation and
interest expense. The common shares allocated were measured based on the fair
market value of the shares committed to be released.

     Information related to the ESOP is summarized as follows:

<Table>
<Caption>
                                                              1999   2000   2001
                                                              ----   ----   ----
<S>                                                           <C>    <C>    <C>
Compensation expense........................................  $251   $55     $--
Interest expense............................................    34    12     --
Dividends on unallocated shares.............................   (19)   (8)    --
</Table>

     Allocated D&E shares held by the ESOP at December 31, 2000 and 2001 were
217,622 and 212,646, respectively.

POSTRETIREMENT HEALTH CARE BENEFITS

     D&E provides certain basic health care benefits to eligible individuals who
retired between the period of December 31, 1972, and July 1, 1992. Those
benefits are provided by the Employee Benefit Plan Trust, a self-insured plan,
and by individual policies from an insurance company. Additionally, an insurance
company provides specific and aggregate stop-loss coverage, the costs of which
are based on benefits paid during the year.

     Effective July 1992, retiree health care benefits were discontinued for
active employees in conjunction with the establishment of the ESOP benefit plan.
As a result, the annual accruals represent the estimated cost of health care
benefits for certain eligible retired employees determined on an actuarial
basis. Those costs amounted to $8 in 1999, $12 in 2000 and $9 in 2001.

1999 LONG-TERM INCENTIVE PLAN

     The 1999 Long-Term Incentive Plan (the Plan) was approved by the
shareholders of the Company during 1999. Officers and other key employees of the
Company are eligible for participation in the Plan. Awards under the Plan are
made at the discretion of the Board of Directors and/or the Board's Compensation
Committee. There were 525,000 shares registered for issuance under the Plan.

     Awards granted under the Plan were in the form of Performance Shares of
common stock. A performance-restricted share entitles a participant to receive a
target number of shares of common stock and a cash payment based upon the
Company's attainment of predetermined goals over a specified performance period.
The total number of performance-restricted shares granted to participants were
39,834 in 1999, 46,940 in 2000 and 49,167 in 2001. The cost of the Plan amounted
to $333 in 1999, $720 in 2000 and $364 in 2001. The performance-restricted
shares granted in 1999 were forfeited since the goal for the 1999 grant was not
met in 2001 and resulted in a reversal of $569 of compensation expense
previously recognized in 2000 and 1999.

     If the minimum goals are not met, no performance-restricted shares will be
earned by the participant. If the performance goals are fully achieved, 100% of
the performance-restricted shares will be earned by the participant. During the
performance period, each performance-restricted share will be considered equal
to one share of common stock for dividend (but not voting) purposes and the
participant shall be entitled to dividend equivalents which are reinvested in
additional performance-restricted shares. At the end of the performance period,
any performance-restricted shares that have been earned will be converted to
shares of common stock.

                                       F-23
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16.  SEGMENT REPORTING


     At the beginning of 2001, D&E changed its internal financial reporting to
provide management with financial results for its four business segments. D&E's
new segments, excluding wireless services which is now reported as a
discontinued segment, are its incumbent rural local exchange carrier (RLEC),
competitive local exchange carrier (CLEC), Internet Services and Systems
Integration. For the fourth quarter of 2001, D&E renamed its ILEC segment the
"RLEC" segment and its Networking Services segment the "Systems Integration"
segment to better define these businesses. The segments are more fully described
in Note 1. This change was primarily a response to an increase in the portion of
D&E's business operating in non-regulated competitive markets. D&E also changed
the measure of profitability for these segments from net income to operating
income because its business lines do not follow its corporate structure as
closely as the previous segments. All of D&E's 2000 and 1999 segment information
has been reclassified to reflect the above changes. For more information on
significant noncash items, see Note 3. Intersegment revenues are recorded at the
same rates charged to external customers.


     Financial results for D&E's business segments are as follows:

<Table>
<Caption>
                                                                               CORPORATE,
                                                     INTERNET     SYSTEMS       OTHER &       TOTAL
                                  RLEC      CLEC     SERVICES   INTEGRATION   ELIMINATIONS   COMPANY
                                --------   -------   --------   -----------   ------------   --------
<S>                             <C>        <C>       <C>        <C>           <C>            <C>
             1999
External customer revenues....  $ 38,308   $ 2,815   $    --      $12,199       $  3,725     $ 57,047
Intersegment revenues.........     1,502        56        --           69         (1,627)          --
Depreciation & amortization...     8,395       189        --          399            788        9,771
Operating income (loss).......    11,024    (1,035)       --          (86)        (1,139)       8,764
Equity in net income (loss) of
  affiliates..................        --        --        --           --          5,287        5,287
Gain (loss) on investments....        --        --        --           --          9,093        9,093
Significant noncash items.....       941        --        --           --          5,206        6,147
Segment assets................    97,470     2,075        --        4,817         11,441      115,803
Investments in and advances to
  affiliated companies........        --        --        --           --         15,339       15,339
Capital expenditures..........    11,748     1,069        --          632            449       13,898
             2000
External customer revenues....  $ 39,374   $ 4,177   $    90      $17,890       $  3,561     $ 65,092
Intersegment revenues.........     2,466        99        --          119         (2,684)          --
Depreciation & amortization...     9,380       478        42        1,587            642       12,129
Operating income (loss).......    10,826    (2,192)   (1,155)      (1,577)          (768)       5,134
Equity in net income (loss) of
  affiliates..................        --        --        --           --         (5,528)      (5,528)
Gain (loss) on investments....        --        --        --           --         (3,378)      (3,378)
Significant noncash items.....     3,580        --        --        3,341             --        6,921
Segment assets................   117,939     5,530       967       19,730        (17,945)     124,221
Equity in losses of affiliates
  in excess of investments and
  advances....................        --        --        --           --         (2,903)      (2,903)
Capital expenditures..........    14,616     3,724       993          914            494       20,741
</Table>

                                       F-24
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                                               CORPORATE,
                                                     INTERNET     SYSTEMS       OTHER &       TOTAL
                                  RLEC      CLEC     SERVICES   INTEGRATION   ELIMINATIONS   COMPANY
                                --------   -------   --------   -----------   ------------   --------
<S>                             <C>        <C>       <C>        <C>           <C>            <C>
             2001
External customer revenues....  $ 41,766   $ 6,203   $ 1,922      $23,177       $  3,218     $ 76,286
Intersegment revenues.........     3,892       296        23           96         (4,307)          --
Depreciation & amortization...    11,315       575       259        2,751            396       15,296
Operating income (loss).......     8,522    (2,975)   (2,105)      (3,537)          (408)        (503)
Equity in net income (loss) of
  affiliates..................        --        --        --           --             91           91
Gain (loss) on investments....        --        --        --           --          3,036        3,036
Segment assets................   151,303    12,232     1,775       14,787        (37,219)     142,878
Investments in and advances to
  affiliated companies........        --        --        --           --          6,431        6,431
Capital expenditures..........    21,979     7,805       913        1,849            764       33,310
</Table>


     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:



<Table>
<Caption>
                                                              2001     2000     1999
                                                             ------   ------   ------
<S>                                                          <C>      <C>      <C>
Operating income (loss) from reportable segments...........     (95)   5,902    9,903
Corporate, other and eliminations..........................    (408)    (768)  (1,139)
Equity in net income (losses) of affiliates................      91   (5,528)   5,287
Interest expense...........................................  (2,242)  (1,779)  (1,818)
Gain (loss) on investments.................................   3,036   (3,378)   9,093
Other, net.................................................   1,546    1,725    1,498
Income (loss) from continuing operations before income
  taxes and dividends on utility preferred stock...........   1,928   (3,826)  22,824
</Table>


17.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     The following table summarizes D&E's quarterly financial data for the years
ended December 31, 2000 and December 31, 2001.

<Table>
<Caption>
                                                          FIRST    SECOND     THIRD    FOURTH
YEAR ENDED DECEMBER 31, 2000                             QUARTER   QUARTER   QUARTER   QUARTER
----------------------------                             -------   -------   -------   -------
                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                      <C>       <C>       <C>       <C>
Total operating revenues(1)............................  $14,862   $14,803   $16,800   $18,627
Operating income(1)....................................    1,356     1,638       958     1,182
Loss before extraordinary item and cumulative effect of
  change in accounting principle.......................   (1,324)   (3,770)   (2,406)   (3,194)
Net loss...............................................   (2,236)   (3,770)   (2,406)   (3,194)
Earnings (loss) per common share -- basic and diluted:
  Loss before extraordinary item and cumulative effect
     of change in accounting principle.................  $ (0.18)  $ (0.51)  $ (0.33)  $ (0.43)
  Net loss.............................................    (0.30)    (0.51)    (0.33)    (0.43)
</Table>

                                       F-25
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                          FIRST    SECOND     THIRD    FOURTH
YEAR ENDED DECEMBER 31, 2001                             QUARTER   QUARTER   QUARTER   QUARTER
----------------------------                             -------   -------   -------   -------
                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                      <C>       <C>       <C>       <C>
Total operating revenues(1)............................  $18,155   $18,942   $19,564   $19,625
Operating income (loss)(1).............................       87        21    (1,413)      802
Loss before extraordinary items and cumulative effect
  of change in accounting principle....................   (2,801)      (67)    2,674    (1,749)
Net income (loss)......................................   (2,694)      (67)    2,674    (3,965)
Earnings (loss) per common share -- basic and diluted:
  Loss before extraordinary item and cumulative effect
     of change in accounting principle.................  $ (0.38)  $ (0.01)  $  0.36   $ (0.23)
  Net income (loss)....................................    (0.36)    (0.01)     0.36     (0.54)
</Table>

---------------

(1) As described in Note 6, in December 2001, D&E began to report the results of
    operations of the wireless services segment as discontinued operations.

                                       F-26
<PAGE>

ITEM 14(A)(2).  FINANCIAL STATEMENT SCHEDULES

                            D&E COMMUNICATIONS, INC.

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<Table>
<Caption>
                                                         ADDITIONS    DEDUCTIONS
                                            BALANCE AT   CHARGED TO   CREDITED TO                BALANCE
                                            BEGINNING     COST AND     COSTS AND    BUSINESSES   AT END
                                             OF YEAR      EXPENSES     EXPENSES      ACQUIRED    OF YEAR
                                            ----------   ----------   -----------   ----------   -------
                                                                   (IN THOUSANDS)
<S>                                         <C>          <C>          <C>           <C>          <C>
Allowance for doubtful accounts:
  Year ended December 31, 1999............       --          303           283           --          20
  Year ended December 31, 2000............       20          318           267          766         837
  Year ended December 31, 2001............      837          532           592         (230)        547
Valuation Allowance for Deferred Tax
  Assets:
  Year ended December 31, 1999............    4,182           --           967           --       3,215
  Year ended December 31, 2000............    3,215        3,037            --           --       6,252
  Year ended December 31, 2001............    6,252           --         1,991           --       4,261
</Table>

     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.

                                       F-27
<PAGE>

                   D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.

                              FINANCIAL STATEMENTS

                      AS OF DECEMBER 31, 2001 AND 2000 AND

              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

                                       F-28
<PAGE>

                   D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.

                               TABLE OF CONTENTS


<Table>
<Caption>
                                                              PAGE(S)
                                                              -------
<S>                                                           <C>
Report of Independent Accountants...........................     F-30
Financial Statements:
  Balance Sheets as of December 31, 2001 and 2000...........     F-31
  Statements of Operations for the years ended December 31,
     2001, 2000 and 1999....................................     F-32
  Statements of Changes in Partners' Capital (Deficit) for
     the years ended December 31, 2001, 2000 and 1999.......     F-33
  Statements of Cash Flows for the years ended December 31,
     2001, 2000, and 1999...................................     F-34
  Notes to Financial Statements.............................  F-35-41
</Table>


                                       F-29
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners of
D&E/Omnipoint Wireless Joint Venture, L.P.

     In our opinion, the accompanying balance sheets and the related statements
of operations, changes in partners' capital (deficit) and cash flows present
fairly, in all material respects, the financial position of D&E/ Omnipoint
Wireless Joint Venture, L.P. at December 31, 2001 and 2000, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Partnership's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America which 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,
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.

                                          /s/ PRICEWATERHOUSECOOPERS LLP

Philadelphia, Pennsylvania
March 15, 2002

                                       F-30
<PAGE>

                   D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.

                                 BALANCE SHEETS
                           DECEMBER 31, 2001 AND 2000

<Table>
<Caption>
                                                                  2001           2000
                                                              ------------   ------------
<S>                                                           <C>            <C>
                                         ASSETS
Current assets:
  Cash and cash equivalents.................................  $  2,701,244   $  1,585,977
  Accounts receivable, net of reserve for bad debts of
     $343,090 and $330,339 at December 31, 2001 and 2000,
     respectively...........................................     4,398,072      3,532,844
  Inventories...............................................       792,016      1,284,149
  Prepaid expenses..........................................       128,673         44,712
                                                              ------------   ------------
                                                                 8,020,005      6,447,682
                                                              ------------   ------------
Property and equipment:
  In service................................................    69,305,235     52,796,615
  Under construction........................................     1,319,342      3,845,599
                                                              ------------   ------------
                                                                70,624,577     56,642,214
  Less: Accumulated depreciation............................    25,738,995     16,574,501
                                                              ------------   ------------
                                                                44,885,582     40,067,713
                                                              ------------   ------------
Other assets:
  Unamortized debt issuance expense.........................     1,904,747      1,809,717
  FCC Licenses, net.........................................    11,643,201      1,986,683
  Other long-term assets....................................        53,579         53,579
                                                              ------------   ------------
                                                                13,601,527      3,849,979
                                                              ------------   ------------
     Total assets...........................................  $ 66,507,114   $ 50,365,374
                                                              ============   ============
                       LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities:
  Due to Partners...........................................  $  6,469,113   $  9,338,775
  Current portion of long-term debt.........................       800,000             --
  Accounts payable..........................................       371,996      1,011,238
  Accrued interest..........................................       277,596        737,286
  Other accrued liabilities.................................     1,473,023      1,302,816
  Unearned revenue..........................................       636,309        372,173
  Customer deposits.........................................        37,200         36,066
                                                              ------------   ------------
     Total current liabilities..............................    10,065,237     12,798,354
                                                              ------------   ------------
Long-term liabilities:
  Long-term debt............................................    77,700,000     57,500,000
  Due to Partners...........................................     5,157,656      3,929,464
  Fair value of derivative instruments......................     1,356,346             --
                                                              ------------   ------------
     Total long-term liabilities............................    84,214,002     61,429,464
                                                              ------------   ------------
Commitments and contingencies (Note 8)
Partners' capital (deficit):
  Capital contributions.....................................    49,946,164     32,722,038
  Accumulated net loss......................................   (76,361,943)   (56,584,482)
  Accumulated other comprehensive loss......................    (1,356,346)            --
                                                              ------------   ------------
     Total partners' capital (deficit)......................   (27,772,125)   (23,862,444)
                                                              ------------   ------------
     Total liabilities and partners' capital (deficit)......  $ 66,507,114   $ 50,365,374
                                                              ============   ============
</Table>

   The accompanying notes are an integral part of these financial statements.
                                       F-31
<PAGE>

                   D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.

                            STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<Table>
<Caption>
                                                         2001           2000           1999
                                                     ------------   ------------   ------------
<S>                                                  <C>            <C>            <C>
Operating revenues:
  Communication service revenues and equipment
     sales.........................................  $ 45,893,777   $ 33,742,296   $ 19,000,310
  Less: Allowances for discounts...................    (2,537,203)    (2,795,711)    (1,919,672)
                                                     ------------   ------------   ------------
     Net operating revenues........................    43,356,574     30,946,585     17,080,638
Operating expenses:
  Cost of communications service revenue and
     equipment sales (excluding depreciation and
     amortization below)...........................    21,501,645     17,757,003     15,060,115
  Depreciation and amortization....................     9,377,156      7,219,788      6,112,395
  Selling, general and administrative services.....    25,689,632     18,340,154     12,955,410
                                                     ------------   ------------   ------------
     Total operating expenses......................    56,568,433     43,316,945     34,127,920
                                                     ------------   ------------   ------------
     Loss from operations..........................   (13,211,859)   (12,370,360)   (17,047,282)
                                                     ------------   ------------   ------------
Other income (expense):
  Interest expense.................................    (6,620,193)    (5,617,896)    (3,364,038)
  Interest income..................................        54,591         53,514          6,992
                                                     ------------   ------------   ------------
     Total other income (expense)..................    (6,565,602)    (5,564,382)    (3,357,046)
                                                     ------------   ------------   ------------
Loss before extraordinary item.....................   (19,777,461)   (17,934,742)   (20,404,328)
Extraordinary loss on early extinguishment of
  debt.............................................            --       (540,284)            --
                                                     ------------   ------------   ------------
     Net loss......................................  $(19,777,461)  $(18,475,026)  $(20,404,328)
                                                     ============   ============   ============
</Table>

   The accompanying notes are an integral part of these financial statements.
                                       F-32
<PAGE>

                   D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.

              STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<Table>
<Caption>
                                                         2001           2000           1999
                                                     ------------   ------------   ------------
<S>                                                  <C>            <C>            <C>
Contributed capital:
  Balance at beginning of year.....................  $ 32,722,038   $ 30,922,038   $ 25,201,510
  Capital contributions............................    17,224,126      1,800,000      5,720,528
                                                     ------------   ------------   ------------
     Balance at end of year........................    49,946,164     32,722,038     30,922,038
                                                     ------------   ------------   ------------
Accumulated deficit:
  Balance at beginning of year.....................   (56,584,482)   (38,109,456)   (17,705,128)
  Net loss.........................................   (19,777,461)   (18,475,026)   (20,404,328)
                                                     ------------   ------------   ------------
     Balance at end of year........................   (76,361,943)   (56,584,482)   (38,109,456)
                                                     ------------   ------------   ------------
Accumulated other comprehensive income (loss):
  Balance at beginning of year.....................            --             --             --
  Unrealized loss on derivative instruments........    (1,356,346)            --             --
                                                     ------------   ------------   ------------
     Balance at end of year........................    (1,356,346)            --             --
                                                     ------------   ------------   ------------
     Total partners' capital (deficit).............  $(27,772,125)  $(23,862,444)  $ (7,187,418)
                                                     ============   ============   ============
Comprehensive income (loss):
  Net loss.........................................  $(19,777,461)  $(18,475,026)  $(20,404,328)
  Other comprehensive loss.........................    (1,356,346)            --             --
                                                     ------------   ------------   ------------
     Total comprehensive income (loss).............  $(21,133,807)  $(18,475,026)  $(20,404,328)
                                                     ============   ============   ============
</Table>

   The accompanying notes are an integral part of these financial statements.
                                       F-33
<PAGE>

                   D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.

                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<Table>
<Caption>
                                                         2001           2000           1999
                                                     ------------   ------------   ------------
<S>                                                  <C>            <C>            <C>
Cash flows from operating activities:
  Net loss.........................................  $(19,777,461)  $(18,475,026)  $(20,404,328)
  Adjustments to reconcile net loss to net cash
     (used in) operating activities:
     Depreciation and amortization.................     9,377,156      7,219,788      6,112,395
     Amortization of debt issuance costs...........       306,911        222,315        121,776
     License use fees..............................       156,304        267,192        442,804
     Bad debt expense..............................     1,487,000      1,060,080        876,692
     Extraordinary loss on early extinguishment of
       debt........................................            --        540,284             --
     Changes in operating assets and liabilities:
       Accounts receivable.........................    (2,352,228)    (3,518,479)    (1,404,045)
       Inventories.................................       492,133       (497,471)      (449,402)
       Prepaid expenses............................       (83,961)      (200,468)       298,964
       Accounts payable............................      (697,615)       596,075     (1,914,287)
       Other accrued liabilities...................      (289,484)       884,017        539,017
       Deferred revenue and customer deposits......       265,270        167,703        154,909
       Other.......................................            --         (7,295)       (26,432)
                                                     ------------   ------------   ------------
          Net cash used in operating activities....   (11,115,974)   (11,741,285)   (15,651,937)
                                                     ------------   ------------   ------------
Cash flows from investing activities:
  Purchase of property and equipment...............   (15,911,387)    (7,846,301)    (1,291,254)
  Payment to VoiceStream for wireless license......    (6,763,843)            --             --
                                                     ------------   ------------   ------------
          Net cash used in investing activities....   (22,675,230)    (7,846,301)    (1,291,254)
                                                     ------------   ------------   ------------
Cash flows from financing activities:
  Partners' contributions..........................    13,300,389      1,800,000      5,259,000
  Proceeds from long-term debt.....................    21,000,000     57,500,000      8,557,363
  Repayments of long-term debt.....................            --    (39,989,585)            --
  Debt issuance costs..............................      (401,941)    (1,912,614)      (575,111)
  Due to Partners..................................     1,008,024      3,774,262      2,871,786
                                                     ------------   ------------   ------------
          Net cash provided by financing
            activities.............................    34,906,472     21,172,063     16,113,038
                                                     ------------   ------------   ------------
Increase (decrease) in cash and cash equivalents...     1,115,267      1,584,477       (830,153)
Cash and cash equivalents at beginning of the
  period...........................................     1,585,977          1,500        831,653
                                                     ------------   ------------   ------------
Cash and cash equivalents at the end of the
  period...........................................  $  2,701,244   $  1,585,977   $      1,500
                                                     ============   ============   ============
</Table>

   The accompanying notes are an integral part of these financial statements.
                                       F-34
<PAGE>

                   D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.

                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2001, 2000 AND 1999

1.  BUSINESS

DESCRIPTION

     In November 1997, D&E Wireless, Inc. (D&E), Omnipoint Venture Partners, LLC
(Omnipoint Venture Partner) and Omnipoint Holdings II, LLC (Omnipoint Holdings)
(collectively, the Partners), formed D&E/Omnipoint Wireless Joint Venture, L.P.
(the Partnership) doing business as PCS ONE. The Partnership was to operate for
an initial period of 10 years, with provisions for subsequent renewals. The
Partnership is comprised of general partners and limited partners. D&E Wireless,
Inc. holds a 1% general partnership interest and a 49% limited partnership
interest in the Partnership. Omnipoint Venture Partners, LLC holds a 1% general
partnership interest in the Partnership and Omnipoint Holdings II, LLC holds a
49% limited partnership interest in the Partnership. The Partnership was formed
for the purpose of providing Personal Communications Services (PCS) and related
equipment for digital wireless voice and data communications in the Lancaster,
Harrisburg, York-Hanover and Reading Basic Trading Areas in Pennsylvania.
Therefore, the Partnership has one reportable business segment. Historically,
the Partnership had entered into operating agreements with the Partners or their
affiliates to utilize certain spectrum under licenses initially held by the
Partners, until such licenses could be contributed to the Partnership, but all
spectrum utilized pursuant to such operating agreements was transferred by the
Partners or their affiliates to the Partnership by December 31, 2001.

     On February 25, 2000, Omnipoint Corporation, the ultimate parent company of
Omnipoint Venture Partner and Omnipoint Holdings, merged into a wholly-owned
subsidiary of VoiceStream Wireless Holding Corporation ("VoiceStream"), with
Omnipoint Corporation as the surviving entity, resulting in Omnipoint
Corporation becoming a wholly owned subsidiary of VoiceStream. On October 17,
2001 D&E entered into a definitive agreement with affiliates of VoiceStream to
sell its 1% general partnership interest and its 49% limited partnership
interest in the Partnership to such affiliates of VoiceStream. The sale is
subject to certain regulatory approvals and other customary closing conditions
and is expected to close in the first or second calendar quarter of 2002. During
December 2001, D&E and VoiceStream obtained required lender approvals necessary
to close the transaction and also passed compliance of the Hart-Scott-Rodino Act
requirements. The remaining regulatory approvals, which include FCC approvals of
the transfer of the wireless licenses to VoiceStream, and other customary
closing conditions, are deemed to be perfunctory.

LIQUIDITY

     The Partnership incurred losses of $19,777,461, $18,475,026 and $20,404,328
in 2001, 2000 and 1999, respectively. The Partnership has long-term liabilities
of $84,214,002 and total Partners' deficit of $27,772,125 as of December 31,
2001. As discussed in Note 7, the Partnership was in violation of a certain debt
covenant as of December 31, 2001. The Partnership obtained a waiver for the
covenant violation through and including December 31, 2002. As noted above, the
Partnership is expected to become a fully owned subsidiary of VoiceStream in
early 2002. Furthermore, the Partners have committed in writing that they will
support operations of the Partnership through at least January 1, 2003.

CAPITAL CONTRIBUTIONS

     In accordance with the limited partnership agreement (the Partnership
Agreement), capital contributions by the Partners were made as follows:

     - Initial contributions:  The Partners made initial cash contributions of
       $4,155,000 and in-kind contributions of equipment totaling $9,109,904.

                                       F-35
<PAGE>
                   D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     - Additional cash contributions:  The Partners have contributed an
       aggregate of $30,670,119 in additional cash contributions, including
       $13,300,389 in 2001, $1,800,000 in 2000, $5,259,000 in 1999 and
       $10,310,730 in 1998.

     - Additional property contributions:  Pursuant to approval of the Federal
       Communications Commission, the Partners assigned and contributed seven
       licenses to the Partnership for four Basic Trading Areas: the C-Block and
       D-Block license in Harrisburg, Pa., the C-Block and E-Block license in
       York-Hanover, Pa., the C-Block and E-Block license in Lancaster, Pa., and
       fifty percent of the C-Block license in Reading, Pa. The Partnership
       reimbursed VoiceStream $6,763,843 for FCC debt related to the Reading
       C-Block license in 2001. The debt was repaid to the FCC by VoiceStream as
       a condition of the transfer of the license to the Partnership. The
       Partnership recorded the value of the licenses in accordance with
       provisions in the Partnership Agreement, which was based on the
       contributor's cost of such licenses. Licenses were contributed to the
       Partnership as soon as was practicable. The D-Block license for
       Harrisburg and the E-Block license for York-Hanover were transferred to
       the Partnership in December 1998; the E-Block license for Lancaster was
       transferred to the Partnership in July 1999. The C-Block licenses for
       Harrisburg, York-Hanover, and Lancaster, as well as fifty percent of the
       C-Block license for Reading were transferred to the Partnership by
       affiliates of VoiceStream Wireless Corporation in August of 2001.

DISTRIBUTIONS AND ALLOCATIONS

     Net profits and losses are allocated to the Partners in the proportion of
their respective percentage ownership interests in the Partnership, as defined
by the Partnership Agreement. The amount of annual cash distributions, if any,
is determined by the Management Committee. For purposes of all distributions and
allocations, the respective Partner's percentage ownership interests are
determined as outlined in the Partnership Agreement. No distributions have been
made as of December 31, 2001.

CONCENTRATIONS OF CREDIT RISK

     Financial instruments that subject the Partnership to concentrations of
credit risk consist primarily of trade receivables; however, concentrations of
credit risk are limited due to the large number of relatively low
revenue-generating customers in the Partnership customer base. The Partnership
also maintains reserves for potential credit losses and such losses have been
within management expectations.

2.  NEW ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142), which addresses the accounting for goodwill and intangible
assets subsequent to their acquisition, effective for fiscal years beginning
after December 15, 2001. SFAS No. 143, "Accounting for Obligations Associated
with the Retirement of Long-Lived Assets" (SFAS 143) was recently issued to
provide accounting guidance for legal obligations associated with the retirement
of long-lived assets. SFAS 143 is effective for fiscal years beginning after
June 15, 2002. SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS 144), addresses issues relating to the implementation
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS 144 is effective for fiscal years
beginning after December 15, 2001. Management is currently evaluating the impact
these statements will have on our financial position and results of operations;
however, we expect that annual wireless license amortization will cease as of
January 1, 2002 as a result of adopting SFAS 142.

     The Partnership was required to adopt the provisions of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 137 and SFAS No. 138 ("SFAS No. 133"), beginning in the first quarter
of fiscal 2001. This standard, as amended, requires that all derivative
instruments
                                       F-36
<PAGE>
                   D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

be recorded on the balance sheet at their fair value and changes in the fair
value be recorded each period in earnings or comprehensive income. The adoption
of SFAS No. 133 did not result in recording a cumulative adjustment as of the
beginning of 2001. However, the Partnership entered into an interest rate collar
on long-term debt in 2001 and has recorded the derivative at fair value (see
Note 8).

     The Partnership adopted Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition," in the fourth quarter of 2000. This adoption had no impact on the
Partnership's financial statements.

3.  SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts or
certain disclosures. Actual results could differ from those estimates.

REVENUE RECOGNITION

     Revenues from operations consist of charges to customers for monthly
access, airtime, roaming charges, long-distance charges, and equipment sales.
Usage and access charges are recorded as revenue as services are rendered based
on the amount of usage and normal fees, after deducting an estimate of certain
allowances and discounts. Deferred revenues result from revenues collected in
advance of providing service to its prepaid customers. Unbilled revenues result
from service provided from the billing cycle date to the end of the month and
from other carrier's customers using the Partnership's network. Equipment sales
are recognized upon delivery to the customer and reflect charges to customers
for wireless handset and other accessory equipment purchases.

ADVERTISING COSTS

     The Partnership expenses production costs of print, radio and television
advertisements and other advertising costs as such costs are incurred.
Advertising expenses included in operating expenses were $3,339,868 in 2001,
$3,586,596 in 2000 and $2,874,914 in 1999.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

     The Partnership recognizes 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 are recorded in Accumulated Other Comprehensive Income and
reclassified into earnings as the underlying hedged item affects earnings.
Amounts reclassified into earnings related to cash flow hedges of interest
payments are included in interest expense. Any ineffective portion of the gain
or loss on a derivative is recognized in earnings within other income or
expense.

CASH AND CASH EQUIVALENTS

     The Partnership considers cash on hand, cash in banks, and investments with
a maturity of three months or less when purchased as cash and cash equivalents.

INVENTORY

     Inventory is recorded at the lower of cost or market on the basis of
average cost or replacement value. Inventory consists primarily of handsets and
accessories. Potential losses on sale of handsets and accessories are recognized
in the period in which sales are made as a cost of acquiring subscribers. Due to
the rapid turnover of equipment and accessories, inventory is recorded on a FIFO
accounting basis.

                                       F-37
<PAGE>
                   D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTY AND EQUIPMENT AND DEPRECIATION

     Property and equipment are stated at cost and depreciated using the
straight-line method of depreciation over the estimated useful lives of the
assets, which are 3 to 5 years for equipment and 6 to 12 years for network
infrastructure. Depreciation begins when the fixed asset is placed into service.
Network infrastructure under construction consists of equipment that has not
been placed in service and costs associated with developing information systems;
accordingly no depreciation has been recorded. When the assets are placed in
service, the Partnership transfers the assets to the appropriate property and
equipment category and depreciates these assets over their respective estimated
useful lives. The costs of maintenance and repairs are charged to operating
expense.

LICENSE COSTS

     In accordance with the Partnership Agreement, after obtaining the approval
by the Federal Communications Commission, the following transactions occurred:
(i) on December 30, 1998, D&E contributed its PCS broadband licenses for two
Basic Trading Areas: the D-Block license in Harrisburg and the E-Block license
in York-Hanover, Pennsylvania to the Partnership, (ii) on July 31, 1999,
Omnipoint Venture Partner contributed its PCS broadband license for one Basic
Trading Area: the E-Block license in Lancaster, Pennsylvania to the Partnership,
and (iii) on August 1, 2001, affiliates of VoiceStream Wireless Corporation
contributed PCS broadband licenses for three Basic Trading Areas: the C-Block
licenses in Harrisburg, York-Hanover and Lancaster, as well as a PCS broadband
license for the Basic Trading Area in Reading, Pennsylvania, fifty percent of
the C-Block license in Reading. The Partnership paid $6,763,843 to VoiceStream
Wireless Corporation in connection with the receipt of the Reading C-Block
license.

     License costs are amortized over a period of 40 years, as there is an
observable market and perfunctory renewal giving rise to an indefinite life.
Amortization expense recorded in 2001, 2000 and 1999 totaled $165,206, $53,876
and $46,845, respectively, including PCS license fees.

     PCS ONE managed operations under C-Block licenses in Lancaster, Pa.,
Harrisburg Pa., York-Hanover, Pa. and Reading, Pa. pursuant to operating
agreements with affiliates of VoiceStream Wireless Corporation for the first
half of 2001 and prior years. Such C-Block licenses owned by the affiliates of
VoiceStream Wireless Corporation were transferred to the Partnership in August
of 2001. License use fees and related interest expense recorded in 2001, 2000
and 1999 amounted to $155,862, $740,664 and $916,272, respectively.

DEBT ISSUANCE COSTS

     Deferred financing costs are amortized over the life of the related
financing agreement.

IMPAIRMENT OF LONG-LIVED ASSETS

     Based upon the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Partnership reviews assets and certain
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying value of the asset may not be recoverable. A determination of
impairment is made based on estimates of future undiscounted cash flows.
Measurement of any impairment is based on future discounted cash flows. The
Partnership has determined there were no impairments to the carrying values of
such assets in 2001, 2000 and 1999.

CAPITALIZED INTEREST

     The cost of funds used to finance construction projects is capitalized as
part of the construction costs. Interest costs related to construction projects
are reflected as a cost of the assets and reduction of interest expense.
Interest costs capitalized were $191,104 in 2001, $127,424 in 2000 and $47,692
in 1999.
                                       F-38
<PAGE>
                   D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

INCOME TAX

     Federal and state income taxes are payable by the individual Partners;
therefore, no provision or liability for income taxes is reflected in the
financial statements. For federal income tax purposes, each item of income,
gain, loss deduction or credit entering into the computation of the Partner's
taxable income shall be allocated in the same proportion as profits and losses
are allocated between the Partners.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     Financial instruments subject to fair value disclosure requirements are
carried in the financial statements at amounts that approximate fair value.

4.  SUPPLEMENTAL CASH FLOW INFORMATION

<Table>
<Caption>
                                                      2001         2000         1999
                                                   ----------   ----------   ----------
<S>                                                <C>          <C>          <C>
Cash paid for interest, net of amounts
  capitalized....................................  $6,690,848   $4,891,437   $3,280,210
Non-cash investing and financing activities:
  Fixed assets funded by financing agreement.....          --           --    4,878,202
  Licenses contributed by the Partners...........   3,923,737           --      461,528
  Capital expenditures included in accounts
     payable.....................................      58,373           --      986,159
  Capital expenditures included in due to
     affiliates..................................     484,772    2,424,713           --
</Table>

5.  INVENTORY

     Inventory consists of the following at December 31, 2001 and 2000:

<Table>
<Caption>
                                                                2001        2000
                                                              --------   ----------
<S>                                                           <C>        <C>
Handsets....................................................  $721,261   $1,190,169
Accessories.................................................    70,755       93,980
                                                              --------   ----------
                                                              $792,016   $1,284,149
                                                              ========   ==========
</Table>

6.  PROPERTY AND EQUIPMENT

     Property and equipment, at cost, consist of the following at December 31,
2001 and 2000:

<Table>
<Caption>
                                                                2001          2000
                                                             -----------   -----------
<S>                                                          <C>           <C>
Network infrastructure.....................................  $59,164,079   $50,116,754
Machinery, office and computer equipment...................    8,548,957     1,230,724
Improvement to leased properties...........................    1,324,018     1,246,904
Motor vehicles.............................................      268,181       202,233
Plant under construction...................................    1,319,342     3,654,630
Software under development.................................           --       190,969
                                                             -----------   -----------
                                                              70,624,577    56,642,214
Less accumulated depreciation..............................   25,738,995    16,574,501
                                                             -----------   -----------
Fixed assets, net..........................................  $44,885,582   $40,067,713
                                                             ===========   ===========
</Table>

     Depreciation expense for the years ended December 31, 2001, 2000, and 1999
was $9,211,950, $7,165,912 and $6,065,550, respectively.

                                       F-39
<PAGE>
                   D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

7.  LONG-TERM DEBT

     On May 17, 2000 the Partnership entered into a $70 million credit
agreement, as amended (the "Credit Agreement"), with major financial
institutions to extinguish existing indebtedness and finance purchases and
installations of telecommunications equipment, engineering services, certain
related construction costs, third-party equipment and other expenses. Proceeds
from advances under the Credit Agreement in 2000 were utilized to extinguish
outstanding indebtedness of the Partnership. In connection with the
extinguishment, the Partnership incurred a $540,284 loss on extinguishment
related to the write-off of unamortized debt issuance costs. On March 14, 2001,
the Credit Agreement was amended to increase the revolving credit commitment
amount from $30,000,000 to $42,000,000. When aggregated with the term loan
commitment of $40,000,000, the Partnership has a total credit facility under the
Credit Agreement of $82,000,000. In addition, certain financial covenants were
adjusted by the same March 14, 2001 amendment in a manner that made such
covenants less restrictive. The Partnership incurred costs of $401,941 in
connection with the increase in the revolving credit agreement. Advances
exercised by the Partnership at December 31, 2001 and 2000 amounted to
$78,500,000 and $57,500,000, respectively.

     Principal outstanding under the Credit Agreement is payable in quarterly
installments beginning June 30, 2002. Interest on the unpaid principal balance
is payable quarterly in arrears at varying rates, at a base rate equal to the
greater of (a) the Prime Rate in effect on such day or (b) the Federal Funds
Effective Rate in effect on such day plus 0.5%, or LIBOR plus varying rates, at
the option of the Partnership.

     The Partnership is subject to certain financial and operational covenants
including restrictions on the payment of distributions to the Partners,
restrictions on additional indebtedness and attaining certain financial
performance measurements. The most restrictive of these covenants requires the
Partnership to maintain a certain ratio of indebtedness to total capitalization.
The Partnership was in compliance with this and all other covenants at December
31, 2001 with the exception of the minimum average revenue per user covenant.
The Partnership has received a waiver for the covenant violation through and
including December 31, 2002. As a result of receiving the waiver, the debt
remains classified as long-term debt.

     Maturities of long-term debt for each year ending December 31 are as
follows:

<Table>
<Caption>

<S>                                                            <C>
2002........................................................   $   800,000
2003........................................................     5,980,000
2004........................................................    14,800,000
2005........................................................    17,200,000
2006........................................................    17,840,000
Thereafter..................................................    21,880,000
</Table>

8.  INTEREST RATE COLLAR

     In 2001, the Partnership entered into an interest rate collar agreement
("rate collar agreement") with a major financial institution. The objective of
the rate collar agreement is to manage the Partnership's risk against adverse
cash flow changes caused by changes in interest rates by effectively fixing the
Partnership's interest cost within a certain range.

     The rate collar agreement is being accounted for as a cash flow hedge under
SFAS No. 133, as amended. As such, changes in the fair value of the rate collar
agreement are recorded within other comprehensive income/(loss) on the balance
sheet. As of December 31, 2001, the rate collar agreement had a fair value of
($1,356,346). During 2001, $418,803 was reclassified into earnings as additional
interest expense as a result of actual interest rates falling below the floor.
No hedge ineffectiveness for the year ended December 31, 2001 was recorded based
on calculations in accordance with SFAS No. 133, as amended.

                                       F-40
<PAGE>
                   D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

9.  COMMITMENTS AND CONTINGENCIES

     The Partnership has entered into certain noncancelable operating leases for
its offices and retail locations. Future minimum rentals under these
noncancelable operating leases as of December 31, 2001 are as follows:

<Table>
<Caption>

<S>                                                           <C>
2002........................................................  $ 3,462,278
2003........................................................    3,505,161
2004........................................................    3,447,050
2005........................................................    3,272,167
2006........................................................    3,402,242
Thereafter..................................................       57,409
                                                              -----------
Total minimum rentals.......................................  $17,146,307
</Table>

     Total rental expense for the years ended December 31, 2001, 2000, and 1999
was $3,393,451, $2,897,157 and $2,305,537, respectively.

10.  PARTNERS' EQUITY

     Under the terms of the Partnership Agreement, the Management Committee may
require each general partner to advance up to $1,000,000 per year to the
Partnership in the form of loans, and to contribute additional capital to the
Partnership in proportion to their respective interest in the partnership.

     At December 31, 2001 the Partners had contributed a total of $49,946,164 in
cash, licenses and other property to the Partnership.

11.  RELATED PARTY TRANSACTIONS NOT DISCLOSED ELSEWHERE

     Pursuant to the Partnership Agreement, the Partnership entered into
separate service agreements with the Partners covering services such as
engineering, accounting and financing, human resources, marketing and public
relations, billing, interconnection and telecommunications services. Costs
incurred under such agreements during 2001, 2000 and 1999 amounted to
$2,822,341, $3,401,847 and $2,865,691, respectively.

     Additionally, the Partnership purchases from VoiceStream, handsets and
accessories, at VoiceStream's cost, to be used in the performance of the
Partnership's business. Purchases during 2001, 2000, and 1999 amounted to
$1,482,050, $6,855,744 and $5,290,538, respectively.

                                       F-41
<PAGE>

                                 EUROTEL L.L.C.

                       CONSOLIDATED FINANCIAL STATEMENTS
                      AS OF DECEMBER 31, 2001 AND 2000 AND
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2001

                                       F-42
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Members of
EuroTel L.L.C.

     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, members' equity (deficit) and
comprehensive income (loss) and cash flows present fairly, in all material
respects, the financial position of EuroTel L.L.C. and its subsidiaries at
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America. 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 of these financial
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, 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 described in Note 2, the Company is dependent upon the Founders to meet
its cash flow requirements for the year 2002.

                                          PRICEWATERHOUSECOOPERS SPA
                                          Nicola Di Benedetto
                                          (Partner)

Rome, February 25, 2002

                                       F-43
<PAGE>

                                 EUROTEL L.L.C.

                          CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 2001 AND 2000

<Table>
<Caption>
                                                                  2001           2000
                                                              ------------   ------------
<S>                                                           <C>            <C>
                                         ASSETS
Current assets:
  Cash and cash equivalents.................................  $  1,009,137   $    811,097
  Receivables, net of allowance for doubtful accounts of
     $761,494 and $245,607 respectively.....................     1,732,518      2,215,056
  Loan receivable...........................................       596,849             --
                                                              ------------   ------------
     Total current assets...................................     3,338,504      3,026,153
                                                              ------------   ------------
Property, plant and equipment, net..........................    13,278,029     37,848,775
Other long-term assets......................................       185,415             --
Intangible assets, net......................................     1,563,054      5,459,226
Loan receivable.............................................            --        523,425
                                                              ------------   ------------
                                                              $ 18,365,002   $ 46,857,579
                                                              ============   ============
                             LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
  Due to Founders...........................................  $ 36,750,658   $  8,500,431
  Accounts payable..........................................     3,779,442      5,052,796
  Accrued liabilities.......................................       143,512        795,810
  Deferred revenue..........................................       517,825     10,504,430
  Current portion of long-term debt.........................            --     46,620,447
                                                              ------------   ------------
     Total current liabilities..............................    41,191,437     71,473,914
                                                              ------------   ------------
Deferred revenue............................................       891,625      1,309,141
License obligation..........................................       465,265        451,527
Other liabilities...........................................       394,023        362,417
                                                              ------------   ------------
     Total liabilities......................................    42,942,350     73,596,999
                                                              ------------   ------------
Commitments and contingencies (Note 18)
Members' equity (deficit):
  Members' capital..........................................   (22,543,956)   (23,451,142)
  Cumulative other comprehensive loss.......................    (2,033,392)    (3,288,278)
                                                              ------------   ------------
     Total members' equity (deficit)........................   (24,577,348)   (26,739,420)
                                                              ------------   ------------
                                                              $ 18,365,002   $ 46,857,579
                                                              ============   ============
</Table>

   The accompanying notes are an integral part of these financial statements.
                                       F-44
<PAGE>

                                 EUROTEL L.L.C.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<Table>
<Caption>
                                                          2001           2000          1999
                                                      ------------   ------------   -----------
<S>                                                   <C>            <C>            <C>
Operating revenue:
  Telecommunication revenue.........................  $  7,483,764   $  4,506,642   $ 1,934,149
  Installation and equipment sales..................       581,615        423,597     1,478,445
                                                      ------------   ------------   -----------
     Total operating revenue........................     8,065,379      4,930,239     3,412,594
Operating expenses:
  Wages and benefits................................     3,841,618      4,164,906     3,038,360
  Interconnection charges...........................     1,928,942      1,125,737       553,889
  Depreciation and amortization.....................     4,791,795      3,907,570     2,755,619
  General and administrative........................     5,231,197      4,596,294     3,926,608
  Loss related to assets held for sale..............    31,517,480             --            --
                                                      ------------   ------------   -----------
     Total operating expenses.......................    47,311,032     13,794,507    10,274,476
                                                      ------------   ------------   -----------
     Operating loss.................................   (39,245,653)    (8,864,268)   (6,861,882)
                                                      ------------   ------------   -----------
Other income (expenses):
  Equity in income (loss) of affiliate..............            --             --     1,524,684
  Interest income...................................     6,445,472        236,643       444,632
  Interest expense..................................    (5,512,867)    (4,770,048)   (8,724,828)
  Litigation costs related to sale of subsidiary and
     affiliate......................................    (1,208,688)    (3,403,623)     (951,651)
  Gain on sale of affiliate.........................            --             --    35,410,444
  Gain from arbitration award.......................    40,000,000             --            --
  Foreign exchange gains............................       392,297        685,307       742,989
  Foreign exchange losses...........................       (78,990)      (625,064)   (1,566,602)
  Dutch withholding tax expense.....................            --             --    (2,202,917)
  Fair value gains on embedded derivatives..........       266,456
  Other.............................................       (98,425)       (79,685)     (161,295)
                                                      ------------   ------------   -----------
     Total other income (expenses)..................    40,205,255     (7,956,470)   24,515,456
                                                      ------------   ------------   -----------
     Income (loss) before extraordinary item and
       cumulative effect of change in accounting
       policy.......................................       959,602    (16,820,738)   17,653,574
Extraordinary item -- extinguishment of debt........            --             --    (3,800,368)
Cumulative effect on prior years of a change in
  accounting policy.................................       (52,416)    (1,564,384)           --
                                                      ------------   ------------   -----------
Net income (loss)...................................  $    907,186   $(18,385,122)  $13,853,206
                                                      ============   ============   ===========
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                       F-45
<PAGE>

                                 EUROTEL L.L.C.

            CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY (DEFICIT) AND
                          COMPREHENSIVE INCOME (LOSS)
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<Table>
<Caption>
                                                       CUMULATIVE
                                                          OTHER            TOTAL
                                         MEMBERS'     COMPREHENSIVE       MEMBERS'       COMPREHENSIVE
                                         CAPITAL          LOSS        EQUITY (DEFICIT)   INCOME (LOSS)
                                       ------------   -------------   ----------------   -------------
<S>                                    <C>            <C>             <C>                <C>
Balance, December 31, 1998...........  $ 11,222,818    $(6,213,328)     $  5,009,490     $ (9,907,091)
                                                                                         ============
Capital contributions................     3,930,000             --         3,930,000
Net income...........................    13,853,206             --        13,853,206     $ 13,853,206
Foreign currency translation
  adjustment.........................            --     (3,915,964)       (3,915,964)      (3,915,964)
Reclassification adjustment:
  Foreign currency translation
     related to investment in MTT
     sold in 1999....................            --      6,064,251         6,064,251        6,064,251
                                       ------------    -----------      ------------     ------------
Balance, December 31, 1999...........    29,006,024     (4,065,041)       24,940,983     $ 16,001,493
                                                                                         ============
Capital contributions................     2,100,000             --         2,100,000
Shareholder distributions............   (36,172,044)            --       (36,172,044)
Net loss.............................   (18,385,122)            --       (18,385,122)    $(18,385,122)
Foreign currency translation
  adjustment.........................            --        776,763           776,763          776,763
                                       ------------    -----------      ------------     ------------
Balance, December 31, 2000...........  $(23,451,142)   $(3,288,278)     $(26,739,420)    $(17,608,359)
                                                                                         ============
Net income...........................       907,186                          907,186          907,186
Foreign currency translation
  adjustment.........................                    1,254,886         1,254,886        1,254,886
                                       ------------    -----------      ------------     ------------
Balance, December 31, 2001...........  $(22,543,956)   $(2,033,392)     $(24,577,348)    $  2,162,072
                                       ============    ===========      ============     ============
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                       F-46
<PAGE>

                                 EUROTEL L.L.C.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

<Table>
<Caption>
                                                                  2001           2000           1999
                                                              ------------   ------------   ------------
<S>                                                           <C>            <C>            <C>
Cash flows from operating activities:
  Net income (loss).........................................  $    907,186   $(18,385,122)  $ 13,853,206
  Adjustments to reconcile net income (loss) to net cash
    used by operating activities:
    Extraordinary item-extinguishment of debt...............            --             --      3,800,368
    Gain on sale of affiliate...............................            --             --    (35,410,444)
    Depreciation and amortization...........................     4,791,795      3,907,570      2,755,619
    Amortization of deferred financing costs................        47,500         47,500        916,378
    Unrealized foreign exchange (gains)/losses..............      (576,463)       339,899        740,113
    Loss on sale of fixed assets............................       116,174         66,981         87,075
    Equity in income of affiliate...........................            --             --     (1,524,684)
    Increase in deferred revenue............................      (462,718)            --             --
    Gain from arbitration award.............................   (40,000,000)            --             --
    Loss related to assets held for sale....................    31,517,480             --             --
    Other...................................................       149,390             --             --
    Changes in assets and liabilities:
      Receivables...........................................      (131,620)    (1,249,640)       287,706
      Accounts payable......................................     1,083,522     (1,151,303)     1,855,230
      Accounts payable to Founders..........................     1,848,478      2,454,124      1,806,744
      Accrued liabilities...................................      (837,879)       814,894      2,487,586
      Accrued interest......................................     1,905,773       (656,797)    (1,660,374)
      Other assets..........................................        36,621        127,090             --
                                                              ------------   ------------   ------------
         Total adjustments..................................      (511,947)     4,700,318    (23,858,683)
                                                              ------------   ------------   ------------
         Net cash used in operating activities..............       395,239    (13,684,804)   (10,005,477)
                                                              ------------   ------------   ------------
Cash flows from investing activities:
  Deposit received on sale of Pilicka.......................            --             --     10,000,000
  Proceeds from sale of property, plant and equipment.......        88,921         29,708          7,480
  Proceeds from arbitration award...........................    30,000,000             --             --
  Purchase of property, plant and equipment.................    (8,038,651)   (10,117,734)   (16,400,238)
  Purchase of additional MTT shares.........................            --             --        (50,522)
  Proceeds from sale of MTT, net............................            --             --     43,027,372
  Acquisition of intangible assets..........................       (99,745)      (590,042)      (976,324)
                                                              ------------   ------------   ------------
         Net cash provided by/(used in) investing
           activities.......................................    21,950,525    (10,678,068)    35,607,768
                                                              ------------   ------------   ------------
Cash flows from financing activities:
  Payment of notes payable to Founders......................            --     (3,607,263)            --
  Proceeds from issuance of notes payable to Founders.......    24,495,976             --      3,500,000
  Redemption of convertible bonds...........................            --             --    (23,265,814)
  Distribution to Founders..................................            --    (36,172,044)            --
  Proceeds from short-term borrowings from Founders.........            --      2,100,000             --
  Proceeds from issuance of long-term debt..................     3,100,000     14,225,447     32,300,000
  Payment of long-term debt.................................   (49,720,447)            --             --
  Proceeds from issuance of common stock and member
    contributions...........................................            --             --      3,930,001
                                                              ------------   ------------   ------------
         Net cash (used in)/provided by financing
           activities.......................................   (22,124,471)   (23,453,860)    16,464,187
                                                              ------------   ------------   ------------
Effect of exchange rate changes on cash.....................       (23,253)       101,082       (492,519)
                                                              ------------   ------------   ------------
Net increase in cash and cash equivalents...................       198,040    (47,715,650)    41,573,959
Cash and cash equivalents at beginning of period............       811,097     48,526,747      6,952,788
                                                              ------------   ------------   ------------
Cash and cash equivalents at end of period..................  $  1,009,137   $    811,097   $ 48,526,747
                                                              ============   ============   ============
Cash paid for interest......................................  $  2,947,142   $  7,902,308   $  9,077,260
                                                              ============   ============   ============
Supplemental disclosure of noncash activity:
  Long-term debt of $95,000 was issued for debt financing
    costs in 1999.
  See Note 3, Note 7 and Note 10 for other noncash activity
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                       F-47
<PAGE>

                                 EUROTEL L.L.C.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

1.  ORGANIZATION:

     EuroTel L.L.C. (the Company) was organized in December 1996 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 an indirect wholly owned
subsidiary of the Company. During 1998 and 1999, PenneCom's investments were
comprised of Pilicka and Monor Telefon Tarasasag Rt. (MTT). 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. Results of operations include
the operations of the Company, PenneCom and Pilicka for the entire years ended
December 31, 2001, 2000 and 1999. In August 1998, the Founders (see definition
below) contributed a 48.7% financial interest in Monor Communications Group,
Inc. (MCG) at its book value to PenneCom. MCG held a 92.7% interest in MTT at
the time of contribution. On December 31, 1998, MCG was dissolved and its equity
was distributed. As a result, PenneCom held an interest ranging from 46.4% to
48.3% in MTT during 1998 and 1999, prior to the sale of MTT effective December
14, 1999. PenneCom's results of operations include the equity in the income of
MTT through December 14, 1999.

     MTT provided telecommunication services to the Monor region of Hungary.
Pilicka is involved in the design, construction and operation of a
telecommunications network in the Radom, Piotrkow Trybunalski and Tarnobrzeg
regions in Poland. 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).
During 1999, Pilicka was converted from a Polish S.A. to a Polish Sp. zo.o.

     On December 31, 2001, the Company and the Founders entered into an
agreement with PenneCom whereby PenneCom will transfer 100% of its shares in
Pilicka to the Company and the Founders in exchange for partial satisfaction of
loans and interest payable with an intended economic effect date of December 31,
2001. The agreement is irrevocable and there are no conditions to closing of
this transaction. Final share transfer is anticipated in March 2002. The full
year results of Pilicka are included in the Company's financial statements for
2001. See also Note 4.

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 2002.
The Founders also have historically provided guarantees and collateral for the
Company's long-term debt. See Notes 12 and 14.

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of the Company,
PenneCom and the Company's other direct and indirect wholly owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation. PenneCom's interest in MTT was accounted for by the equity method
prior to its sale in December 1999.

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
                                       F-48
<PAGE>
                                 EUROTEL L.L.C.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. Foreign exchange gains/(losses) in 2001, 2000 and 1999 include
$576,463 and $(339,899) and $(740,113), respectively, of unrealized foreign
exchange gains/(losses) resulting primarily from the translation of foreign
denominated payables at the balance sheet date.

CASH AND CASH EQUIVALENTS

     Cash and cash equivalents include cash and highly liquid debt instruments
with an original maturity of three months or less and are carried at cost which
approximates fair value due to the short maturities.

DERIVATIVE INSTRUMENTS

     Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," and its related amendment,
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" (collectively referred to as "SFAS No. 133"). These standards
require that all derivative instruments be recorded on the balance sheet at
their fair value as either assets or liabilities. 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 components 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,
and designated as either (a) a fair-value, cash flow or foreign-currency hedge
or (b) a trading or non-hedging derivative instrument. Changes in fair value of
derivatives are recorded each period in earnings or comprehensive losses.

FAIR VALUE ESTIMATION

     In assessing the fair value of non-traded derivative and other financial
instruments, the Company uses a variety of methods and makes assumptions that
are based on market conditions existing at each balance sheet date. Other
techniques, such as option pricing models and estimated discounted value of
future cash flows are used to determine fair value of the remaining financial
instruments.

     The face value less any estimated credit adjustments for financial assets
and liabilities with maturity of less than one year are assumed to approximate
their fair value.

PROPERTY, PLANT AND EQUIPMENT

     Property, plant 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 includes 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, is removed from
the accounts with any gain or loss realized upon sale or disposal charged or
credited to operations.

                                       F-49
<PAGE>
                                 EUROTEL L.L.C.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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).

INTANGIBLE ASSETS

     Intangible assets include acquisition costs incurred in connection with the
acquisition of licenses to provide telecommunication services, software and
deferred financing costs. The licenses for the former Radom and Piotrkow
Trybunalski Voivodships were acquired through the Company's purchase of Pilicka.
Intangible assets also include amounts paid and payable to the Ministry of
Communications of Poland for the purchase of the former Tranobrzeg Voivodship
license. Licenses are stated at costs less accumulated amortization. If payment
for the license is deferred beyond normal credit terms, its cost is the net
present value of the obligation. The present value of the obligation is
calculated using the Company's effective borrowing rates at the moment the
license is granted. Any differences between the nominal price of the license and
its net present value are treated as interest costs. Interest costs are
capitalized up until the time when the network in that license territory becomes
operational or are recognized as interest expense over the period of the
obligation. Amortization is recorded on a straight-line basis over the period
for which the license is granted (15 years).

     The deferred financing costs are related to long-term debt and are
amortized over the term of the debt.

     The Company also has acquired the right for Pilicka to use a billing system
software, which is being amortized over the estimated period of use of three
years.

INCOME TAXES

     The differences between the amounts included in these financial statements
for Pilicka and the tax basis of assets and liabilities, prepared in accordance
with the Polish Corporate Income Tax Law, have been recognized as temporary
differences for the purpose of recording deferred income taxes. All net
operating loss carryforwards are recognized as deferred tax assets. Valuation
allowances are recorded for deferred tax assets resulting from tax losses and
temporary timing differences of tax recognition when it is more likely than not
that the benefits will not be realized.

DUTCH TAX EXPENSE

     Dutch tax expense was recognized as a result of the distribution paid from
PenneCom to EuroTel LLC in 1999.

RECOVERABILITY OF LONG-LIVED ASSETS

     Management periodically reviews long-lived assets, property, plant and
equipment and intangible assets to be held and used in the business, for the
purpose of determining and measuring impairment on a recurring basis or when
events or changes in circumstances indicate that the carrying value of an asset
or group of assets may not be recoverable. Assets are grouped and evaluated for
possible impairment, and impairment is measured on the basis of the forecasted
discounted cash flows from operating results of the business over the estimated
remaining lives of the assets.

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 income statement on a
straight-line basis over the period of the lease.

                                       F-50
<PAGE>
                                 EUROTEL L.L.C.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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.

REVENUES

     Telecommunication service revenue from access to and the usage of networks
are recognized when services are provided. Commencing on January 1, 2000, the
Company recognizes revenue from installation fees over the period of the average
life of the customer, which is estimated to be five years for Pilicka. The
Company records revenue from the sale of equipment when the customer accepts
delivery. All revenues included in the consolidated statements of operations are
related to Pilicka's operations in Poland. See also Note 10.

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. 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.

     Included in the consolidated balance sheet at December 31, 2001 and 2000
are the net assets of Pilicka's operations, all of which are located in Poland
and which total approximately $15,000,000 and $42,230,136, respectively,
including the cumulative translation adjustment.

COMPREHENSIVE INCOME (LOSS)

     The Company has elected to present comprehensive income (loss) in the
statement of changes in members' equity. Comprehensive income (loss) consists of
the income (loss) for the period and the change in the foreign currency
translation adjustment.

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.

RECLASSIFICATIONS

     Certain 2000 amounts have been reclassified to conform to the 2001
presentation.

4.  SALE OF PILICKA:

     On December 31, 2001, the Company and the Founders entered into an
agreement with PenneCom whereby PenneCom will transfer 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 has 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

                                       F-51
<PAGE>
                                 EUROTEL L.L.C.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

share transfer is expected in March 2002. The net assets of Pilicka at December
31, 2001 and 2000 are as follows:

<Table>
<Caption>
                                                                2001          2000
                                                             -----------   -----------
<S>                                                          <C>           <C>
Cash.......................................................  $   696,334   $   590,778
Receivables and other current assets.......................    1,729,662     1,880,416
Property, plant and equipment..............................   13,265,980    37,825,364
Intangibles................................................    1,563,054     5,411,726
Other non-current assets...................................      185,415            --
Payables and accrued liabilities...........................   (3,064,387)   (4,952,855)
Deferred revenue...........................................   (1,409,450)   (1,813,571)
Cumulative translation adjustment..........................    2,033,392     3,288,278
                                                             -----------   -----------
Total net assets...........................................  $15,000,000    42,230,136
                                                             ===========   ===========
</Table>

     The Company will retain a 22.56% ownership interest in Pilicka after the
share transfer in March 2002 and will account for this investment under the
equity method.

     All operating revenue of the Company is attributable to Pilicka. Pilicka's
full year results for 2001, 2000 and 1999 are included in the Consolidated
Statements of Operations of the Company and are summarized as follows:

<Table>
<Caption>
                                                  2001           2000          1999
                                              ------------   ------------   -----------
<S>                                           <C>            <C>            <C>
Operating revenue...........................  $  8,065,379   $  4,930,239   $ 3,412,594
Operating expenses..........................   (12,846,871)   (10,639,905)   (7,978,021)
Other income................................       502,108         38,357        67,429
Other expenses..............................       (90,426)       (74,859)     (709,988)
Cumulative effect of change in accounting
  policy....................................       (52,416)    (1,564,384)           --
                                              ------------   ------------   -----------
Net loss....................................  $ (4,422,226)  $ (7,310,552)  $(5,207,986)
                                              ============   ============   ===========
</Table>

5.  RECEIVABLES:

     Receivables consist of the following at December 31, 2001 and 2000:

<Table>
<Caption>
                                                                 2001         2000
                                                              ----------   ----------
<S>                                                           <C>          <C>
Trade receivables, net of allowance for doubtful accounts of
  $761,494 and $245,607, respectively.......................  $1,467,193   $1,191,196
VAT receivables.............................................      48,084      499,411
Due from employee...........................................           1        1,001
Other.......................................................     217,240      523,448
                                                              ----------   ----------
                                                              $1,732,518   $2,215,056
                                                              ==========   ==========
</Table>

     VAT receivables relate to VAT refunds due on the purchase of property,
plant and equipment.

                                       F-52
<PAGE>
                                 EUROTEL L.L.C.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6.  PROPERTY, PLANT AND EQUIPMENT:

     Property, plant and equipment consists of the following at December 31,
2001 and 2000:

<Table>
<Caption>
                                                                2001          2000
                                                            ------------   -----------
<S>                                                         <C>            <C>
Land, buildings and leasehold improvements................  $  8,675,551   $ 6,258,562
Telecommunications equipment..............................    36,686,002    29,928,140
Vehicles and other equipment..............................     1,348,363     1,128,075
Construction-in-progress..................................     5,015,222     5,951,787
                                                            ------------   -----------
                                                              51,725,138    43,266,564
  Accumulated depreciation................................   (10,251,728)   (5,417,789)
  Write down for assets held for sale.....................   (28,195,381)           --
                                                            ------------   -----------
                                                            $ 13,278,029   $37,848,775
                                                            ============   ===========
</Table>

     The write down of $28,195,381 relates to the transaction described in Note
4 and is recorded in the income statement as part of the loss on assets held for
sale.

     The Company recorded a write down of $164,002 and $427,053 during 2001 and
2000, respectively, in relation to certain telecommunication equipment not
expected to be utilized. This loss amount has been presented in general and
administrative expenses. There have been no other events or changes in
circumstances that suggest that the recoverability of the carrying amount of
long-lived assets should be assessed.

     Depreciation expense for the years ended December 31, 2001, 2000 and 1999
was $4,102,723, $3,210,484 and $1,940,646, respectively.

7.  INTANGIBLE ASSETS:

     Intangible assets consist of the following at December 31, 2001 and 2000:

<Table>
<Caption>
                                                                2001          2000
                                                             -----------   -----------
<S>                                                          <C>           <C>
Licenses...................................................  $ 7,861,335   $ 6,973,229
Deferred financing costs...................................           --        95,000
Software and other.........................................      916,254       783,176
                                                             -----------   -----------
Total intangible assets....................................    8,777,589     7,851,405
Less: Accumulated amortization.............................   (3,892,436)   (2,392,179)
      Write down for assets held for sale..................   (3,322,099)           --
                                                             -----------   -----------
                                                             $ 1,563,054   $ 5,459,226
                                                             ===========   ===========
</Table>

     The write down of $3,322,099 relates to the transaction described in Note 4
and is recorded in the income statement as part of the loss on assets held for
sale.

     During the year ended December 31, 2000, Pilicka was notified by the
Ministry of Communications ("MOC") that, effective December 29, 2000, its
telecommunication license obligations originally payable in two equal
installments on March 31, 2001 and March 31, 2002 were deferred until March 31,
2011. As a result of the extension of these payment terms, Pilicka reduced the
amount of its intangible assets and the corresponding license obligations by
$590,403 based on the present value of these non-interest-bearing liabilities as
at December 31, 2000.

                                       F-53
<PAGE>
                                 EUROTEL L.L.C.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Amortization expense for the years ended December 31, 2001, 2000 and 1999
was $736,572, $744,586 and $1,731,351, respectively, of which amortized
financing costs of $47,500, $47,500 and $916,378, respectively, were classified
as interest expense.

8.  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 is due in July 2002. During 2001
and 2000, interest income related to the loan was $73,425 and $23,425,
respectively.

9.  EMBEDDED DERIVATIVE INSTRUMENTS:

     Pilicka has entered into lease agreements in the prior years that require
payments denominated in a currency other than the functional currency of Pilicka
or the lessor. These embedded foreign currency derivatives must be bifurcated
from the lease agreements and separately accounted for under the provisions of
FAS 133. As of January 1, 2001, the adoption of FAS 133 resulted in a cumulative
effect of an accounting change that increased the Company's net loss by $52,416,
net of income tax of $0. As at December 31, 2001, the positive fair value of
this embedded foreign currency derivative was $219,765. The fair value of this
embedded foreign currency derivative has been classified as current assets of
$34,350 and other long-term assets of $185,415.

10.  INSTALLATION AND EQUIPMENT SALES REVENUE RECOGNITION:

     Prior to January 1, 2000, the Company recorded installation revenue when a
customer was connected to the network. On January 1, 2000, the Company adopted
SAB 101 and changed its accounting policy with respect to the recognition of
installation revenue. The Company now recognizes revenue from installation fees
over the period of the average life of the customer, which is estimated to be
five years for Pilicka. In this regard during the year ended December 31, 2000
the Company has recorded an adjustment of $1,564,384 for the cumulative effect
on prior years as a result of this change. The Company recorded deferred revenue
at December 31, 2001 and 2000 of $1,409,450 and $1,813,571, respectively, in
connection with this change in accounting policy.

11.  INVESTMENT IN MTT:

     On December 14, 1999, the Company sold its investment in MTT, headquartered
in Budapest, Hungary, for cash and recorded a gain of $35,410,444. A summary of
MTT's financial information for the year ending December 31, 1999 is as follows:

<Table>
<Caption>

<S>                                                           <C>
Net revenue.................................................  $20,422,083
Operating profit............................................    8,948,231
Loss on foreign currency translation........................   (1,922,227)
Net income (loss)...........................................    3,421,611
Company's equity in income (loss) of MTT....................    1,524,684
</Table>

     The Company's equity in income (loss) is for the period January 1, 1999
through December 14, 1999.

                                       F-54
<PAGE>
                                 EUROTEL L.L.C.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12.  DUE TO FOUNDERS:

     Due to Founders consist of the following at December 31, 2001 and 2000:

<Table>
<Caption>
                                                                 2001          2000
                                                              -----------   ----------
<S>                                                           <C>           <C>
Accounts payable to Founders................................  $ 6,113,534   $5,048,791
Accrued interest on accounts payable to Founders............    1,757,182      973,447
Loans payable to Founders...................................   26,650,286    2,154,310
Accrued interest on loans payable to Founders...............    2,229,656      323,883
                                                              -----------   ----------
  Total payable to Founders.................................  $36,750,658   $8,500,431
                                                              ===========   ==========
</Table>

     Accounts payable to the Founders represent operating costs paid on behalf
of the Company by those entities. These amounts bear interest at a fixed rate of
15% (7% through February 1999). Interest expense incurred by the Company related
to these payables in 2001, 2000 and 1999 was $783,735, $618,089 and $330,825,
respectively. Beginning in 2002, the Company will not accrue interest on these
obligations. Total operating expenses incurred through related party
transactions by the Company were $1,517,632, $2,454,123 and $1,782,594 during
2001, 2000 and 1999, respectively.

     The loans payable bear interest at a fixed rate of 15%. Interest expense
related to these loans recognized during 2001, 2000 and 1999 was $1,905,773,
$328,897 and $788,942, respectively. These loans are subordinate to the
long-term debt discussed in Note 14 and are due on demand. Beginning in 2002,
the Company will not accrue interest on these obligations.

     As mentioned in Notes 1 and 4, upon PenneCom's transfer of 100% of
Pilicka's shares to the Founders and EuroTel per the December 31, 2001
agreement, the total payable to Founders will be reduced by $11,616,414.

     Other related party transactions are described in Note 16.

13.  CONVERTIBLE BONDS PAYABLE:

     During 1999, the Company repaid convertible bonds in their entirety by
paying a premium of $3,222,740 as an incentive to the bondholders to terminate
certain rights under the bonds and the bond subscription agreement. The premium,
unamortized deferred financing costs, and expenses related to the extinguishment
are presented as an extraordinary item. The bonds accrued interest at 30% of
which $6,627,948 was expensed during 1999.

14.  LONG-TERM DEBT:

     In December 1999, the Company entered into a revolving credit agreement
with a bank which provided for borrowings through December 31, 2001 of up to
$40,000,000, and which increased to $50,000,000 in July 2000, with interest at
the Bank's base rate (9.5% at December 31, 2000). The Founders guaranteed the
debt and individually pledged investment securities to the Bank with a total
fair value of $26,000,000. The debt was also collateralized by the Company's
deposits at the Bank. The agreement restricts loans and advances to related
parties, the use of the proceeds from the sale of Pilicka and other transactions
with the parent company's members. Total borrowings under the agreement at
December 31, 2000 of $46,620,447 have been classified as current. In September
2001, the Company repaid the loan with proceeds from the arbitration award
discussed in Note 19 and with loans from the Founders.

                                       F-55
<PAGE>
                                 EUROTEL L.L.C.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15.  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 2001 and 2000. Therefore, no Dutch taxes have been recorded related
to PenneCom.

POLAND

     Pilicka incurred tax losses since June 17, 1997 and, therefore, has not
paid income taxes in Poland.

     Below is the analysis of deferred tax balances related to taxes in Poland:

<Table>
<Caption>
                                                             DECEMBER 31,   DECEMBER 31,
                                                                 2001           2000
                                                             ------------   ------------
<S>                                                          <C>            <C>
TAXABLE DIFFERENCES
Accelerated amortization for license.......................  $    77,808    $   211,887
Future interest charges on license liability...............      524,257        590,043
Unrealized foreign exchange differences....................      133,297        153,933
                                                             -----------    -----------
                                                                 735,362        955,863
DEDUCTIBLE DIFFERENCES
Net operating losses.......................................    3,609,924      4,095,875
Net operating losses carry forwards........................    8,013,043      3,102,662
Provisions.................................................      426,494        244,068
Deferred revenue...........................................    1,409,450      1,813,571
Other accruals.............................................    1,034,475        775,488
                                                             -----------    -----------
                                                              14,493,386     10,031,664
TOTAL TEMPORARY DIFFERENCES, NET...........................   13,758,024      9,075,801
Future enacted tax rates...................................           28%            28%
                                                             -----------    -----------
DEFERRED TAX ASSET.........................................    3,852,247      2,541,224
Valuation allowance........................................   (3,852,247)    (2,541,224)
                                                             -----------    -----------
NET DEFERRED TAX ASSET.....................................  $        --    $        --
                                                             ===========    ===========
</Table>

     Tax losses incurred in 2001, 2000 and 1999 are permitted to be utilized
over five years with 50% utilization restricted per annum. A full valuation
allowance was recorded as the Company does not expect to recover any deferred
tax assets through future tax deductions.

                                       F-56
<PAGE>
                                 EUROTEL L.L.C.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16.  RELATED PARTY TRANSACTIONS:

     The Company paid $1,744,371, $2,426,754 and $594,917 to a law firm for
legal services during the years ended December 31, 2001, 2000 and 1999,
respectively, where one of the lawyers is a managing director of the Company.

     Pilicka paid $195,400, $231,641 and $247,409 to an affiliated entity for
management services and the purchase of rights to use software during the years
ended December 31, 2001, 2000 and 1999, respectively. The amount payable to this
affiliate at December 31, 2001 and 2000 was $24,144 and $50,503, respectively.
Pilicka also made rental payments of $180,444, $193,513 and $173,351 during the
years ended December 31, 2001, 2000 and 1999, respectively, to a company
partially owned by a relative of a member of Pilicka's management board. The
amount payable to this affiliate at December 31, 2001 was $14,726. There was no
amount payable to this affiliate at December 31, 2000.

     Other related party transactions with Founders are included in Note 12.

17.  TELECOMMUNICATION LICENSES:

     Pilicka has three licenses for the provision of telecommunications services
in the former Voivodships of Radom, Piotrkow Trybunalski, and Tarnobrzeg. Under
the license agreements, Pilicka is obliged to provide public telecommunications
services through its network for local traffic and through interconnection with
the regional and international networks of Telekomunikacja Polska S.A. for long
distance traffic. The terms of interconnection in each license area are
negotiated separately subject to guidelines established by the Minister of
Communications of Poland.

     The licenses set forth requirements as to establishing the availability of
services to a specified number of customers. At December 31, 2000, Pilicka has
met the specified requirements in relation to the former Voivodships of Radom
and Piotrkow Trybunalski. However, Pilicka has not met the license requirements
for the former Voivodship of Tarnobrzeg. Pilicka believes that the likelihood
that the failure to meet these build-out milestones will have a material adverse
impact on the financial position of the company is remote. This assessment is
based on Pilicka's progress in this area as well as past governmental practice,
the market conditions in Poland and the uncertain nature of possible sanctions
and the regulatory process.

18.  CONTINGENCIES AND COMMITMENTS:

     Pilicka has certain long-term agreements to purchase telecommunication
equipment with domestic and foreign suppliers. The total amount of equipment
that Pilicka has committed to purchase after December 31, 2001 is $507,186.

     Pilicka is contesting the quality of performance of telecommunications
equipment provided by one of its principal equipment suppliers. In accordance
with the terms of the contract, Pilicka has put the supplier on notice of
alleged performance deficiencies and has suspended its work under the contract.
The supplier previously had contested Pilicka's assertions and had indicated
that Pilicka would be subject to cancellation fees and penalties if the contract
was terminated. Pilicka and the supplier engaged in negotiations during the
second and third quarters of 1999, after which discussions ended. Pilicka
considers this dispute over and does not expect any further action by the
supplier to have a material adverse impact on the financial position or results
of operations of Pilicka.

     Rent expense for the years ended December 31, 2001, 2000 and 1999 was
$551,783, $491,889 and $399,785, respectively.

     On May 26, 2000, PenneCom settled a dispute with an investment banking firm
regarding the sale of Pilicka and MTT by paying $1,250,000 in an effort to avoid
the expense and uncertainties of litigation.

                                       F-57
<PAGE>
                                 EUROTEL L.L.C.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

19.  ARBITRATION AWARD:

     On April 8, 1999, the Company signed an agreement to sell its interest in
Pilicka for consideration of $140,000,000, with an expected close in August
1999. In connection with the agreement, the Company received a $10,000,000
nonrefundable downpayment, which was recorded as deferred revenue. The
counterparty failed to perform under the contract. The Company commenced
arbitration before the International Court of Arbitration of the International
Chamber of Commerce (ICC) against the counterparty, seeking specific performance
by the counterparty, plus damages, interest and costs. During 2001, the Company
received an award, with amendments, which held in favor of PenneCom on the issue
of liability and awarded damages to PenneCom as follows: (1) $30,000,000 with
interest at 10% per annum from 1 August 1999 to the date of payment; (2)
$367,500 in respect of the costs of the ICC; and (3) $2,000,000 for PenneCom's
legal costs. On September 4, 2001, PenneCom received cash of $38,655,171, which
is reflected in the statement of operations as follows:

     - Gain on arbitration award of $40,000,000. The total consists of
       $30,000,000 from the award plus the $10,000,000 of deferred revenue.

     - Interest income of $6,287,671, which represents the interest from August
       1, 1999 until the date payment was received.

     - A reduction of $2,367,500 in litigation costs relating to the sale of a
       subsidiary as a result of the reimbursement of legal costs and ICC costs.

20.  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.

     Loan receivable: The fair value approximates the carrying value due to the
variable interest-rate feature of this instrument.

     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.

     Long-term debt: Based on the variable interest rate, fair value is
estimated to approximate carrying value.

                                       F-58