##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



Form 10-K



---



(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, 2004
| | -------------------------------------------



Or



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



| | For the transition period from              to
| | ----------------------------------------------



Commission file number 000-20709



---



D&E Communications, Inc.

(Exact name of registrant as specified in its charter)



---



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



Registrants
telephone number, including area code:

(717) 733-4101



---



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

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.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12B-2).    Yes  x    No ̈



The aggregate market value of the voting stock held by non-affiliates of the registrant is approximately $160,074,856. 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 June 30, 2004. 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 4, 2005 was 14,272,871.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the registrants definitive proxy statement for its 2005 annual meeting of stockholders are incorporated by reference into Part III of
this Form 10-K.



---



---

##### Table of Contents

TABLE OF CONTENTS



|         |  |                                                                                                |  |     
|-------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                |  | Page
|PART I  
|         |  |                                                                                               
|Item 1.  |  | Business                                                                                       |  | 3   
|Item 2.  |  | Properties                                                                                     |  | 26  
|Item 3.  |  | Legal Proceedings                                                                              |  | 26  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  | 26  
|        
|PART II 
|         |  |                                                                                               
|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 27  
|Item 6.  |  | Selected Financial Data                                                                        |  | 28  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 29  
|Item 7A. |  | Quantitative and Qualitative Disclosure About Market Risks                                     |  | 47  
|Item 8.  |  | Financial Statements and Supplementary Data                                                    |  | 48  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 48  
|Item 9A. |  | Controls and Procedures                                                                        |  | 48  
|        
|PART III
|         |  |                                                                                               
|Item 10. |  | Directors and Executive Officers of the Registrant                                             |  | 49  
|Item 11. |  | Executive Compensation                                                                         |  | 49  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 49  
|Item 13. |  | Certain Relationships and Related Transactions                                                 |  | 49  
|Item 14. |  | Principal Accountant Fees and Services                                                         |  | 49  
|        
|PART IV 
|         |  |                                                                                               
|Item 15. |  | Exhibits and Financial Statement Schedules                                                     |  | 50  



2



---

##### Table of Contents

PART I



Forward Looking Information is Subject to Risk and Uncertainty



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



You should understand that various factors, including those discussed in the
section titled Item 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 integrated communications services to residential and business customers in markets throughout the eastern half of Pennsylvania.
Including the operations of Conestoga Enterprises, Inc. (Conestoga) acquired in May 2002, we have operated as a rural local exchange carrier (RLEC) in parts of Lancaster, Berks, Lebanon, Chester, Montgomery, Lehigh, Union and
Northumberland counties in Pennsylvania since the early 1900s and were among the first to deploy a 100% digitally switched network. In 1998, we began operating as a competitive local exchange carrier (CLEC) and currently operate in the
Lancaster, Reading, State College, Pottstown, Williamsport, Altoona and Harrisburg, Pennsylvania areas, which we refer to as our edge-out markets. Today, we offer our customers a comprehensive package of communications services,
including local and long distance telephone services, high-speed data services, Internet access services and integrated voice and data network solutions throughout our territory. Additionally, in the State College and Lewisburg areas, we also
provide video services.



As of December 31, 2004, we served
139,607 RLEC access lines, 38,461 CLEC access lines, 11,535 dial-up internet access subscribers, 11,052 digital subscriber line (DSL) subscribers, and 909 web hosting customers. For the year ended December 31, 2004, we generated revenue
of $176.3 million, operating income of $20.9 million and a net loss of $2.7 million.



Historically, we have derived the majority of our revenues and operating income from the regulated RLEC segments. For the three years ended December 31, 2004, the RLEC segment accounted for approximately 58% of total
revenues and virtually all of our operating income. The following graphs represent fiscal year segment revenues and operating income.



3



---

##### Table of Contents

LOGO



LOGO



To augment our core voice and data
communications services and enhance our position as an integrated 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.



We have investments in foreign telecommunications service providers. We own a 38.16% interest, 9.28% through our one-third interest in EuroTel, LLC, and 28.88% directly, in Pilicka Telefonia Sp. z o.o.
(Pilicka), which operates a telephone network in a region south of Warsaw, Poland. We presently maintain a minority interest in these ventures. We currently are exploring strategic alternatives with regard to our ownership interest in
Pilicka.



Our common stock is listed for quotation on the
National Market System of the National Association of Securities Dealers Automated Quotation System under the symbol DECC. Our internet address is



4



---

##### Table of Contents

www.decommunications.com. Electronic copies of the 2004 Annual Report on Form 10-K are available free of charge by visiting the Investor
Relations section of www.decommunications.com. Electronic copies of quarterly reports on Form 10-Q and current reports on Form 8-K are also available at this internet address. These reports are posted as soon as reasonably practicable after
they are electronically filed with the United States Securities and Exchange Commission (SEC).



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



Recent Developments



PenTeleData Limited
Partnership I



On February 28, 2005, we sold our
interest in PenTeleData Limited Partnership I for $2.9 million resulting in a gain of $2.1 million before taxes. The investment in PenTeleData is reported in other long-term assets on the balance sheet at December 31, 2004 and 2003.



Debt Refinancing



On March 5, 2004, we completed a syndicated senior secured debt financing in
the amount of $260 million jointly arranged by CoBank, ACB and SunTrust Bank. The credit facilities are in the form of a $25 million Revolving Loan, Term Loan A in the amount of $50 million, Term Loan B in the amount of $150 million, and the
assumption of $35 million of term indebtedness of a D&E subsidiary. The debt was assigned a BB- rating by Standard & Poors Rating Services and a Ba3 rating by Moodys Investor Services.



Further, on November 22, 2004, we entered into an amendment with respect to
the Term Loan B portion of this senior financing. The amendment reduced the applicable LIBOR margin of Term Loan B from 2.75% to 2.00% through its stated maturity date of December 31, 2011. Assuming no ongoing increase in market interest rates, we
anticipate the refinancing in March and the amendment in November would provide an annual interest savings of $2.7 million.



Acquisition of Conestoga Enterprises, Inc.



On May 24, 2002, we completed our acquisition of Conestoga Enterprises, Inc., (CEI or Conestoga), an adjacent Pennsylvania RLEC
providing integrated communications services. The merger consideration was approximately $273 million, which included the payment of approximately $149 million of cash and the issuance of approximately 7.9 million shares of our common stock. In
addition, we also assumed existing Conestoga indebtedness totaling approximately $79 million.



The Company and CEI shared complementary footprints that have allowed the Company to realize additional growth opportunities in the eastern half of Pennsylvania as a result of the merger. We have realized increased
cash flow through our ability to cross-sell enhanced telephone products developed using our Advanced Intelligent Network software, Internet services, and systems integration data services to a wider customer base in Conestogas territory. With
minimal incremental expense, we have been able to expand our existing products into the CEI territories. We have realized significant synergies as a result of the merger due to our ability to eliminate redundant expense items over the two operations
and spread fixed costs over a larger customer and revenue base. We originally forecasted approximately $4.6 million in annual cost savings and successfully achieved all projected synergies as scheduled. Management achieved additional synergies in
the area of subscriber billing by completion of the billing conversion during 2004. We saved approximately $0.6 million during the portion of 2004 affected by the billing conversion. In 2005 we expect to achieve an additional approximate $1.0
million in savings over the level of 2004, resulting in a total $1.6 million in savings compared to the 2003 expense level.



5



---

##### Table of Contents

The Telecommunications Industry



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



There are two predominant types of local wireline telephone service providers
in the telecommunications industry: Incumbent Local Exchange Carriers (ILEC) and Competitive Local Exchange Carriers (CLEC). Within the ILEC sector, generally there are Rural Local Exchange Carriers (RLEC), which
operate in rural areas, RLEC aggregators, which operate multiple RLEC properties throughout the United States, and Regional Bell Operating Companies (RBOC), which were the telephone companies created from the break-up of AT&T in
1984.



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



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



Strategic Initiatives



Our primary business objective is to be a leading, regional broadband Integrated Communications Provider (ICP). To achieve this objective, we will continue to pursue the following initiatives:



Pursue Integrated Communications Provider Concept to Grow the Company



The evolution into an ICP is a key element in the
future growth of the Company. With RLEC line counts declining and increasingly threatened, we must realize additional sources of revenue. The more services we provide to a customer, the more effectively we can build a long-term relationship with our
customer, resulting in greater potential for revenue growth. The bundling of services, video, high-speed data and voice is a key part of our strategy to grow revenue and strengthen our customer relationships while providing increased value. Key to
delivering multiple communications services is the continued deployment of an Internet Protocol (IP)-based network with our fiber-to-the-node strategy. By offering a full range of services, we will be in a better position to



6



---

##### Table of Contents

compete with cable companies and other competitors as they begin to encroach on our traditional telephone service areas.



We find that business customers are looking for a single source provider for
their communications services. Any one of the voice or data services that we provide can be an entry point for selling additional services. A converged voice and data network provides our business customers with lower overall infrastructure costs,
lower integration costs and reduced network administration cost while fully leveraging their existing network investments. We believe that our ability to provide comprehensive solutions to our customers differentiates us from our competitors.



Improve Profitability of Every Business Segment



Our focus on providing a high quality of service
level to our customers is key to enabling us to reach our profitability goals. Adding additional services such as broadband, long distance, custom calling features and video services, will help us to increase the revenue per subscriber and help
offset declining access line counts.



Our recent growth in
total line count has come from our edge-out CLEC markets. We will continue to operate under a disciplined strategy to increase our market share in our edge out markets by offering competitive communication service packages
primarily to business customers. We believe there is still potential for new customers and revenue in the CLEC markets. By providing excellent service to customers in these markets, we will seek to expand our positive image throughout central and
eastern Pennsylvania. While our business plan is to increase revenues, we plan to do so in a manner, which also generates net income.



Likewise, we believe that we can further expand our market share of the Internet services market by meeting or exceeding the customer service and
technical requirements of individual and business customers. While we intend to maintain our dial-up Internet access customer base, we also plan to leverage our success and further focus our sales and marketing efforts on selling our high-speed data
services.



Leverage Our Core Assets



We will continue to leverage our modern network infrastructure,
established reputation, extensive local knowledge and significant operating experience to gain new customers and increase our market share in all our business segments. We will also continue to actively market our broad array of services to our
existing CLEC customers. For example, as of December 31, 2004, the company provided long distance service to approximately 69% of our CLEC access lines, and approximately 12% of the CLEC business customers subscribed to our high-speed data services.



Our network infrastructure is one of our key strategic assets.
A significant portion of our capital program is invested in our network infrastructure each year. Over time, we will transition our current circuit based switching platform to a packet-based system, which we anticipate will reduce our network
operations costs. We are also continuing to place more fiber optic cable and next generation digital loop carrier systems throughout our territory, which will allow us to deliver higher amounts of bandwidth to our customers. This greater bandwidth
capability will allow us to deliver video and/or other services requiring a broadband connection such as VoIP.



In addition, our operations are supported by computer systems that permit us to install service rapidly, analyze network problems, and provide customer
billing. Also included are customers databases and the associated fiber, copper cable, switching and other equipment required to provide service. These systems are supported by personnel who have the expertise to provide advanced
communications services to our customers.



Capitalize on
the Convergence of Voice and Data Communications Technologies



We believe that the convergence of voice and high-speed data communications technologies provides us with opportunities to provide more comprehensive communications solutions to our customers and permits us to



7



---

##### Table of Contents

reduce our overall costs. It is this convergence that has increased the need for businesses to seek a single provider for all of their communications and
data networking needs. Our systems integration business enhances our service offerings and positions us to be a single source provider of voice and data communications services to our business customers.



Convergence also makes possible the economic bundling of video, high-speed
data and voice, which is a key part of the strategy to grow revenue and strengthen customer relationships. In addition, by offering a full range of services, we will be in a better position to compete with cable companies and other competitors as
they begin to encroach on our traditional telephone service areas. The additional services and growth of customers made possible by our ability to capitalize on being a leader in adapting converged technologies, provides us with an additional source
of revenue important to growing the company.



Continue to
Focus on Customer Service



We believe that our
commitment to customer service strengthens our relationships with our customers and enhances our competitive position. We will maintain our commitment to customer service 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. Our Network Operations Center (NOC) provides
repair and emergency services 24 hours a day, 7 days a week and 365 days a year. Completing the final integration of systems and procedures with Conestoga is a top priority and will help to ensure that we deliver excellent service. These projects
include integrating and implementing a trouble management support system for the entire company for use in the NOC. Other priorities include initiating common operational support systems across the company, as well as consolidating disaster recovery
procedures, and developing a customer database that will enable better communication with customers for sales, marketing and operational purposes.



Selectively Pursue Strategic Acquisitions



We will consider increasing the scale and scope of our business through acquisitions of companies, including other RLECs that strategically fit with our
integrated communications strategy. Acquisition targets may include companies that deepen our industry focus, broaden service territories and increase the breadth of our services.



Operations



RLEC Operations



Our RLEC segment of the business has provided telecommunications services to the RLEC territories since the early 1900s and was one of the first to deploy
a 100% digitally switched network. Today, we market our RLEC services, including local telephone, network access, long distance, data and enhanced telephone services, as Denver & Ephrata Telephone Company, The Conestoga Telephone and Telegraph
Company and Buffalo Valley Telephone Company, in three distinct service territories. Our RLEC strategy is to grow revenue by selling additional communications services, including high-speed data and enhanced telephone services, and to improve
financial performance through operating efficiencies.



We
operate in rural and suburban territories totaling 802 square miles, averaging 174 access lines per square mile as of December 31, 2004. Access lines represent revenue producing voice grade equivalent lines connected to the public switch providing
dial tone to the customer. As of December 31, 2004, the RLEC served 139,607 access lines. Approximately 73% of these access lines served residential customers.



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



| |  |  | call waiting
| | - |  | ------------



8



---

##### Table of Contents

| |  |  | call transferring and call forwarding
| | - |  | -------------------------------------



| |  |  | automatic callback
| | - |  | ------------------



| |  |  | video conferencing
| | - |  | ------------------



| |  |  | call trace
| | - |  | ----------



| |  |  | call-blocking
| | - |  | -------------



| |  |  | conference calling
| | - |  | ------------------



| |  |  | voice mail
| | - |  | ----------



| |  |  | teleconferencing
| | - |  | ----------------



| |  |  | DID (direct inward dial)
| | - |  | ------------------------



| |  |  | caller name and number identification
| | - |  | -------------------------------------



| |  |  | distinctive ringing
| | - |  | -------------------



| |  |  | simultaneous ringing (in limited areas)
| | - |  | ---------------------------------------



We also offer network access services that provide other telecommunications carriers, such as local exchange carriers, long distance carriers and wireless
companies access to our local network facilities for the completion of their calls. Payment for providing these services comes either directly from our customers or from other telecommunications carriers that utilize our networks. Additional
interstate access revenues are received from settlement pools administered by the National Exchange Carrier Association, Inc. (NECA) which we pay into to participate. In addition, we offer long distance telephone service to our RLEC
customers and directory advertising to give customers business service information in addition to telephone number data.



Historically, we have derived a majority of our revenues from the regulated RLEC segments. The RLEC segment accounts for approximately 58% of total 2004
revenues and substantially all of our operating income. The decrease in RLEC access lines experienced since 2002 is significant, as access lines have traditionally been monitored as an important measure of RLEC performance. Our total RLEC lines
decreased by 1.7% in 2003 and an additional 2.2% in 2004 which decreases reflect industry trends. Despite the decrease in RLEC access lines, our RLEC revenues have decreased at a slower rate as a result of an increase in enhanced services and
dedicated lines and circuits. The access line decreases were primarily due to the fact that, as customers have migrated to broadband services, such as DSL, and wireless services, the demand for second lines has diminished.



Our RLEC revenue is derived primarily from network access charges, local
telephone service, enhanced telephone services and regional toll service. Network access revenue consists of charges paid by long distance and wireless 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 a telemarketer call-blocking service. Regional long distance revenue is derived from providing regional long distance services to our RLEC customers.



During 2002, 2003 and 2004, the access line count declined as a result of various factors that reflect national trends,
including (i) the softening demand for second lines due to customers moving their Internet access to either DSL services provided by us, or to cable modems that are provided by competitors, (ii) the use of wireless service in place of second lines
and in some cases primary lines and (iii) overall economic conditions. The following table reflects access line trends over the past three years on a pro forma basis, including Conestoga access lines before the Conestoga acquisition:



9



---

##### Table of Contents

|                   |  |                                       |    |  |         |    |  |         |   
|------------------ |  | ------------------------------------- | -- |  | ------- | -- |  | ------- | --
|                   |  | At Or For The Years EndedDecember 31, |   
|                   |  | 2004                                  |    |  | 2003    |    |  | 2002    |   
|ACCESS LINES:      |  |                                       |    |  |         |    |  |         |   
|Residential        |  | 101,366                               |    |  | 105,086 |    |  | 107,354 |   
|Business           |  | 38,241                                |    |  | 37,713  |    |  | 37,956  |   
|                   |  |                                       |    |  |         |    |  |         |   
|Total RLEC         |  | 139,607                               |    |  | 142,799 |    |  | 145,310 |   
|PERCENT OF TOTAL:  |  |                                       |    |  |         |    |  |         |   
|Residential        |  | 72.6                                  | %  |  | 73.6    | %  |  | 73.9    | % 
|Business           |  | 27.4                                  | %  |  | 26.4    | %  |  | 26.1    | % 
|PERCENTAGE GROWTH: |  |                                       |    |  |         |    |  |         |   
|Residential        |  | (3.5                                  | )% |  | (2.1    | )% |  | (1.0    | )%
|Business           |  | 1.4                                   | %  |  | (0.6    | )% |  | (2.9    | )%
|Total RLEC         |  | (2.2                                  | )% |  | (1.7    | )% |  | (1.5    | )%



CLEC Operations



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



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



Our CLEC revenue is derived primarily from network access charges, local
telephone service, enhanced telephone services, dedicated data circuits and long distance service revenue. Network access revenue consists of charges paid by long distance companies and other telecommunications carrier customers for access to our
network in connection with the completion of long distance telephone calls. 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 a telemarketer call-blocking service. Long distance revenue consists of charges for both national and regional long distance services, a portion of which is
provided on a resale basis.



The number of access lines served
by our CLECs has increased from 29,072 access lines as of December 31, 2002, to 35,140 access lines as of December 31, 2003, and to 38,461 access lines as of December 31, 2004. We believe that market demand for an alternative
communications provider combined with our sales efforts and quality reputation will contribute to continued growth. As of December 31, 2004, approximately 28% of access lines were On-Net, defined as served entirely on our own facilities.
Approximately 61% were On-Switch, or served through a combination of our facilities and leased facilities and 11% were served completely on lines of another provider. We provide residential service in our markets but we concentrate our
expansion of service to business customers. To help improve profitability, we focus our sales efforts in areas where we can provide service On-Net and capital spending is targeted for places where Resale and
On-Switch customers can be converted to On-Net. The following table reflects our access line growth over the past three years on a pro forma basis, including Conestoga access lines before the Conestoga acquisition:



10



---

##### Table of Contents

|                            |  |                                       |    |  |        |    |  |        |  
|--------------------------- |  | ------------------------------------- | -- |  | ------ | -- |  | ------ | -
|                            |  | At Or For The Years EndedDecember 31, |   
|                            |  | 2004                                  |    |  | 2003   |    |  | 2002   |  
|ACCESS LINES:               |  |                                       |    |  |        |    |  |        |  
|Residential                 |  | 4,298                                 |    |  | 4,942  |    |  | 5,454  |  
|Business                    |  | 34,163                                |    |  | 30,198 |    |  | 23,618 |  
|                            |  |                                       |    |  |        |    |  |        |  
|Total CLEC                  |  | 38,461                                |    |  | 35,140 |    |  | 29,072 |  
|PERCENT OF TOTAL:           |  |                                       |    |  |        |    |  |        |  
|Residential                 |  | 11.2                                  | %  |  | 14.1   | %  |  | 18.8   | %
|Business                    |  | 88.8                                  | %  |  | 85.9   | %  |  | 81.2   | %
|PERCENTAGE GROWTH:          |  |                                       |    |  |        |    |  |        |  
|Residential                 |  | (13.0                                 | )% |  | (9.4   | )% |  | 8.6    | %
|Business                    |  | 13.1                                  | %  |  | 27.9   | %  |  | 38.0   | %
|Total CLEC                  |  | 9.5                                   | %  |  | 20.9   | %  |  | 31.3   | %
|Percent On-Net or On-Switch |  | 89.0                                  | %  |  | 86.0   | %  |  | 78.0   | %



Internet Service
Operations



As part of the strategy to provide a range
of data services to customers, we began offering DSL service in the second half of 1999 and began bundling DSL and Internet access services to RLEC and CLEC customers when we launched our Internet service provider, D&E Jazzd, in the fourth
quarter of 2000. Our Internet services revenue is derived from dial-up and high-speed data access services and web hosting services. Internet services are offered to residential and business customers in a geographic region that includes and
surrounds the RLEC and CLEC operations. This service is offered entirely on our own facilities in our RLEC territories and primarily on our own facilities in our CLEC markets. Our objective has been to migrate our dial-up Internet customers to our
broadband service with DSL. In 2004, 12.7% of our new DSL subscribers upgraded to our high-speed data service from their previous dial-up service. The fact that we have succeeded in adding Internet service customers at a substantial rate over the
past three years demonstrates that our customers are willing to pay more for advanced services. We believe the opportunity to provide such services is an important component of our business plan. The following table reflects subscriber growth over
the past three years:



|                      |  |                                       |    |  |        |   |  |        |  
|--------------------- |  | ------------------------------------- | -- |  | ------ | - |  | ------ | -
|                      |  | At Or For The Years EndedDecember 31, |   
|                      |  | 2004                                  |    |  | 2003   |   |  | 2002   |  
|DSL                   |  | 11,052                                |    |  | 7,303  |   |  | 5,615  |  
|Dial-up               |  | 11,535                                |    |  | 12,859 |   |  | 12,652 |  
|                      |  |                                       |    |  |        |   |  |        |  
|Total Subscribers     |  | 22,587                                |    |  | 20,162 |   |  | 18,267 |  
|Web Hosting Customers |  | 909                                   |    |  | 814    |   |  | 651    |  
|PERCENT OF TOTAL:     |  |                                       |    |  |        |   |  |        |  
|DSL                   |  | 48.9                                  | %  |  | 36.2   | % |  | 30.7   | %
|Dial-up               |  | 51.1                                  | %  |  | 63.8   | % |  | 69.3   | %
|PERCENTAGE GROWTH:    |  |                                       |    |  |        |   |  |        |  
|DSL                   |  | 51.3                                  | %  |  | 30.1   | % |  | 154.2  | %
|Dial-up               |  | (10.3                                 | )% |  | 1.6    | % |  | 24.5   | %
|Total Subscribers     |  | 12.0                                  | %  |  | 10.4   | % |  | 47.7   | %
|Web Hosting Customers |  | 11.7                                  | %  |  | 25.0   | % |  | 45.6   | %



We believe our local
presence, focus on customer service and technologically advanced services provide us with a competitive advantage in our markets. While we plan to maintain our dial-up Internet access customer base, we also plan to focus our sales efforts on selling
our high-speed data services as part of an integrated communications package. DSL subscribers continue to grow at a rapid pace, increasing by 3,749, or 51%, since December 31, 2003.



11



---

##### Table of Contents

Systems Integration Operations



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



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



Wireless Operations



In connection with our strategy to exit the mobile and wireless business, we
completed the sale of an investment in PCS ONE on April 1, 2002.



Remaining consistent with our focus on wireline communications, we completed the sale of Conestoga Wireless on January 14, 2003. The results of operations of Conestoga Wireless are not reported as discontinued operations due to the
continued obligations that we have after the sale related to our guarantees on cell site leases and our responsibility under a Build-to-Suit agreement. Conestoga Wireless reported revenues of $7.6 million from May 24, 2002, the date of acquisition,
through December 31, 2002 and $0.5 million for the 2 weeks before its sale in January 2003. The operating loss for 2002 was $1.8 million and was $0.7 million in 2003.



Upon completion of the sale, D&E received approximately $10 million in cash and a $10 million face value secured
promissory note issued by Keystone Wireless. The promissory note requires monthly principal payments for 48 months beginning in January 2005. The note bears interest at the 60 day LIBOR rate plus 5%. As this note receivable is from a highly
leveraged entity and the business sold had not generated positive cash flows, we record value to the note when cash recoveries are received. The note carries certain rights where we can convert a portion or all of the principal balance of the note
into equity interests of Keystone. The conversion period began on December 31, 2004 and ends May 1, 2005. During 2004 we received the required interest payments of $0.8 million and in December 2004 we received the first monthly principal payment of
$125,000.



Investments



Our company currently owns minority investments in foreign telecommunications
service providers. We own a 38.16% interest, 9.28% through our one-third interest in EuroTel, LLC, and 28.88% directly, in Pilicka, which operates a telephone network in a region south of Warsaw, Poland. We are currently exploring strategic
alternatives with regard to our ownership interest in Pilicka.



We also owned an interest in PenTeleData Limited Partnership I until we sold the interest on February 28, 2005 for $2.9 million.



12



---

##### Table of Contents

Competitive Strengths



Customer Service



We believe there is a high correlation between service quality and the likelihood that our customers will remain with us when presented with a competitive
alternative. Our commitment to personalized customer service includes: (1) locating call centers in the communities that we serve; (2) minimizing the use of automated attendant call routing systems, so that live representatives answer calls
directly, a service not offered by many of our competitors; and (3) providing a single point of contact for service calls by cross-training all customer service personnel in RLEC, CLEC, long distance and Internet service offerings. Call centers
provide convenient access for customers to place their orders and make billing inquiries.



Multiple customer retention measures are employed for larger RLEC business customers and for our CLEC customers who are more likely to be targeted by competitors. These customer retention measures include performance
and satisfaction measures, such as monthly customer surveys to ensure customer satisfaction and loyalty. The focus on customer service was evident in the 2004 survey responses, in which 97% of the respondents said that the overall service was good
or excellent. Additionally, in areas such as call completion, customer-out-of-service reports and service order completion, our performance consistently exceeds guidelines established by the Pennsylvania Public Utility Commission.



In addition, personnel at our network operations centers 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 primary network operations center also provides us with remote network management, maintenance and repair capabilities, which we believe increases our engineers productivity and reduces potential service interruptions
for our customers.



Sales and Marketing



We instituted a strategic branding awareness
campaign, Delivering Excellence, in the second half of 2003. The branding campaign is a key factor to provide name and brand recognition to the Company to support our business success and sustain competitive advantage. The
Delivering Excellence brand recognizes the quality customer service for which we are recognized by our customers. Our employees are immersed in a culture that values and acts upon delivering a positive customer experience which is a
vital part of the D&E brand. The quality of the Companys work and our responsiveness in meeting customer needs are critical for the success of the brand and the Companys efforts in achieving successful financial performance.



The convergence of voice, data, and video provides a key
growth strategy for us as an ICP. We believe that the bundling of services for consumers (e.g., voice, data and video) provides an opportunity to increase revenue growth and strengthen customer relationships by offering an integrated bundle. We
offer video over the Companys cable operations in State College, Pennsylvania, and we have launched video over the RLECs copper system in Union County, Pennsylvania. For businesses, convergence means combining VoIP systems with
professional IT services for integrating high-speed networks and assisting customers migration to data packet based networks.



We employ a relationship-based sales and marketing approach. This approach, and a commitment to customer service, builds brand loyalty and increases the
effectiveness of sales efforts. We also grow our general brand awareness through corporate and product awareness campaigns that utilize local television, billboard and print ads as well as sponsorship of community events. Corporate spokesmen, Dick
Vermeil and Joe Paterno also help promote our Companys products and services. With respect to non-RLEC businesses, we support an aggressive integrated marketing communications strategy with targeted direct sales efforts. Customer service
representatives are located throughout the service territories and are supported by local sales efforts.



13



---

##### Table of Contents

We manage our sales organization by our four primary customer types: residential, business, government
agencies and educational institutions. Customer service representatives proactively market a complete service portfolio to residential customers through regular calling programs and consultative analyses of customers services on incoming
calls. We have developed up-sell and cross-sell programs in our customer service call centers with sales representatives who are cross-trained in all segments of our business to market the service offerings more effectively. Aggressive monthly sales
targets are established for the customer service representatives and their efforts are coordinated with the marketing incentives designed to promote a given service at the same time. Marketing programs and sales initiatives are coordinated with the
calling efforts to maximize their effectiveness.



The 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 the service package. The sales personnel work closely with the network engineers and systems integrators to design solutions to satisfy customers needs.



Network Architecture and Operations Support Systems



We were one of the first local exchange carriers in the nation to deploy a
100% digitally switched network. We continue to utilize a fiber-rich network based on digital switching, fiber optic transport technology and host/remote call switching architecture. We operate our own Signaling System 7 network that provides
efficient call routing and allows enhanced features to travel across the national telephone network. Our NOC monitors network performance 24 hours a day, 365 days a year and allows us to maintain high network performance standards.



The RLEC has digital host switches in Ephrata, Lititz, Birdsboro and
Lewisburg, Pennsylvania and delivers dial tone to an extensive network of remote switches and access nodes that are connected with fiber optic cable. Connection to customers, or the last mile, is provided over the RLECs copper or
fiber outside plant. The host/remote architecture concentrates network intelligence in the four host offices, enabling the RLEC and CLEC operations to leverage this network and provide short customer loop lengths in our copper cable plant. Short
customer loop lengths and the packet information delivery network system facilitate the delivery of advanced high-speed services such as DSL. We are capable of providing DSL service to approximately 98% of our RLEC customers.



The CLECs network strategy is to leverage the core switching
architecture of the RLEC network and to own the key elements of the local exchange network. These elements include remote access nodes and the facilities connecting the host switches to the remote access nodes, including both the fiber optic cable
and the optical transport electronics. In addition, where economically viable, the CLEC builds copper/fiber distribution facilities between the remote access nodes and customers premises. The network strategy allows the CLEC to provide high
quality and reliable service and helps to minimize customer turnover. In addition, we have one host switch and three remote access nodes supporting the broadband fiber network in State College, Pennsylvania. As of December 31, 2004, the CLEC had
most of its access lines connected to the RLEC switch and approximately 28% of its access lines completely on our network.



The network is supported by computer systems called operations support systems that provide the ability to install service for customers on a short
interval basis and to analyze network problems in many instances before the customers are affected. These systems include databases of all RLEC and CLEC customers and the associated facilities such as the fiber and copper cable and the associated
central office switching connections that serve them. We also use geographic information systems to map our outside plant cable and associated structure of poles and underground conduit. These same systems allow us to verify quickly the capability
of the network for 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 of customized services for customers. These systems also have



14



---

##### Table of Contents

monitoring and troubleshooting capabilities to insure the reliability of the network. We are able to interface with the operations support systems of Verizon
and Sprint to assure fast and accurate provisioning of services for the CLEC customers.



At the time of the Conestoga acquisition, D&E was using an in-house billing system and Conestoga was using a third party service bureau. A comprehensive evaluation of both systems was completed and the D&E
platform was selected. A new contract was negotiated with Conestogas provider to support the D&E platform, which will result in substantial savings to D&E. Conversion of Conestoga customers from their billing system to the D&E
billing system was completed in the fourth quarter of 2004. We achieved approximately $0.6 million of savings during the portion of 2004 affected by the billing conversion. In 2005, we expect to achieve an additional approximate $1.0 million in
savings over the level in 2004, resulting in a $1.6 million in savings compared to the 2003 expense level.



Competitive Environment



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



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



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



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



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



15



---

##### Table of Contents

Regulatory Environment



Overview



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



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



Federal Regulation



We must comply with the Communications Act of 1934, as amended, which
requires, among other things, that communications carriers offer services at just and reasonable rates and on non-discriminatory terms and conditions. Our RLECs also must comply with TA-96. TA-96 encourages competition in local telephone service by
requiring ILECs to open their networks and markets to competition. Because unique market characteristics are typically present in the areas served by RLECs, TA-96 granted an exemption to RLECs from certain interconnection requirements applicable to
non-rural ILECs. This exemption remains in place until an RLEC receives a request for interconnection and the state public service commission determines that the request will not have a negative impact on universal service, will not be unduly
economically burdensome, and is technically feasible. State public utility commissions may also grant a suspension of the interconnection requirements under TA-96 to ILECs that have fewer than 2% of the nations subscriber lines, such as our
RLECs. Our RLECs received a temporary suspension of these requirements that expired in January 2003. This temporary suspension has been provided again to our Buffalo Valley RLEC through December 2008 (see Pennsylvania regulation below). Even though
our other two RLECs are no longer protected by the temporary suspension of the exemption under the Act, our RLECs will continue to be protected from competition until the Pennsylvania Public Utility Commission, or PA PUC (PA PUC) also
grants a competitors request to terminate our RLECs rural exemption. Our RLECs are subject to rate of return regulation at the FCC level. Each RLEC participates in the National Exchange Carrier Association access tariffs and are
nationwide average schedule companies for access revenue settlement purposes.



Pennsylvania Regulation



Our RLECs are subject to regulation by the Pennsylvania Public Utility Commission. In 2001, we entered into an alternative regulatory framework, commonly known as Chapter 30, with the PA PUC for our intrastate operations under which we
agreed to meet certain broadband service delivery parameters in exchange for a price cap formula, rather than a rate of return regulation. As a result of the alternative regulatory framework, profits are not directly limited by the PA PUC as they
were under the former rate of return system of regulation. Instead, our RLECs received the flexibility to increase intrastate rates annually based on inflation less two percentage points. In exchange for the indexed price cap on rates, the RLECs get
the benefit of any increase in margin resulting from their ability to reduce operating costs. Our RLECs can also seek to rebalance rates periodically within or between various intrastate service categories, such as local, toll and access.
Additionally, our RLECs have the ability to request relief on a dollar-for-dollar basis for certain events deemed outside of their control that result in reduced revenue or increased expenses. On November 30, 2004, the Governor of Pennsylvania
signed into law new Chapter 30 regulations that will impact our RLECs. The new law provides additional options that will



16



---

##### Table of Contents

promote broadband deployment in the state and encourage faster rollout of broadband capability to all consumers. Some RLECs would be required to make capital
expenditures sooner to have broadband services available to all consumers by December 31, 2008. As an offset to the increased capital expenditure requirements, the new law removes the two percentage points reduction used to calculate intrastate
rates annually. The new law adds other provisions to further the advancement of broadband services to schools in Pennsylvania and provides for a suspension of certain interconnection requirements until December 31, 2008, for companies with less than
50,000 access lines. We have filed our proposed amended Chapter 30 Plan at the PUC for all three of our RLECs. We currently are capable of providing broadband services as defined by the new law to ninety-eight percent of our customers. We feel we
are well positioned to meet the required one hundred percent threshold by December 31, 2008 and are of the opinion that the benefits of the new Chapter 30 regulation outweigh any costs in committing to an earlier 100% threshold. Our RLECs also pay
into and receive intrastate Universal Service Fund (USF) support from the Pennsylvania USF. See Promotion of Universal Service.



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



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



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



Promotion of Local Service Competition  The Telecommunications
Act of 1996



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



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



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



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



17



---

##### Table of Contents

and discounted resale. Non-rural ILECs also must allow competing carriers to co-locate, or place their own equipment in the non-rural ILECs
central offices.



As a result of the passage of TA-96, local
exchange carriers, including our RLECs, are facing competition 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 USF. See  Promotion of Universal Service.



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



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



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



The FCC ruled that local exchange carriers must port their telephone numbers
to requesting wireless carriers, so-called wireline-to-wireless Local Number Portability (LNP). Local exchange carriers operating in the countrys largest urban areas were required to make LNP capability available to wireless
carriers by November 24, 2003. Rural carriers, including our RLECs, outside the 100 largest Metropolitan Statistical Areas had to port their numbers to wireless carriers by May 24, 2004, or within six months of receiving a bona fide request,
whichever was later. As of the date of this filing, we have not received such a request. The FCC still has under consideration a number of technical and cost recovery issues associated with deployment of LNP.



At its February 20, 2003 public meeting, the FCC voted on rules concerning
ILECs obligations to make elements of their networks available on an unbundled basis to new entrants. The Third Report and Order (the TRO) was published on August 21, 2003. According to the TRO, ILECs would not be obligated to give
competitors unbundled access to broadband and fiber lines that the ILECs deploy in the future to provide broadband service. The FCC planned to limit the ILECs obligations to unbundle access to other elements of



18



---

##### Table of Contents

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



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



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



Under TA-96, ILECs with fewer than 2% of the nations subscriber lines, such as our RLECs, may request from state PUCs
suspension or modification of any or all of the requirements described above. A PUC may grant such a request if it determines that such suspension or modification is consistent with the public interest and



19



---

##### Table of Contents

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 RLECs, along with other RLECs in Pennsylvania, received a temporary suspension of specific interconnection requirements. This suspension expired on July 10, 2002; however, we were granted an interim
extension until January 15, 2003, while the PA PUC contemplated our request for another three-year extension. This request was subsequently denied by the PA PUC. The passage of new Chapter 30 legislation now provides a suspension of certain
interconnection requirements until December 31, 2008, for all companies under 50,000 access lines. This includes our Buffalo Valley RLEC. The rural exemption under TA-96 is still in effect for our other two RLECs, so that we are still exempt from
the more onerous interconnection requirements until we receive a bona fide request for interconnection and the PA PUC determines that the request is not unduly economically burdensome, is technically feasible, and is consistent with universal
service principles. In addition, according to the recent Appeals Court decision on the FCCs TRO, our RLECS may not have to unbundle all elements of our system to competitors, including our broadband and DSL deployment and some of our switches.
However, the denial of the renewal of our temporary suspension may put two of our RLECs in a position of having to provide interconnection to other providers without adequate compensation, cause us to incur administrative and regulatory costs as a
result of administrative proceedings to determine whether the provider requesting interconnection has met its burden under the rural exemption of TA-96, cause our operating costs to increase as a result of having to make such interconnections, and
at the same time cause us to suffer a loss of customers to such competitive providers.



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



Even if an ILEC in a territory that
we wished to enter were 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 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 Federal Universal Service Support Fund
(USF) and the Pennsylvania State Universal Service Fund (PA USF) pay our RLECs from their funds to support the high cost of our operations in rural markets. Our three RLECs paid in approximately $308,000 to the PA USF and
received support payments of approximately $2,518,000 in 2004 from this fund. In addition, the three RLECs received $5,833,000 from the Federal USF. The RLECs also contributed to the fund, but this expense is recovered in full through the NECA
pooling process.



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



20



---

##### Table of Contents

The Federal  State Joint Board on Universal Service (Joint Board) recently issued its
recommendations to the FCC. The Joint Board provided recommendations addressing the growth of the USF, eligibility criteria for receipt of funds, and the cost basis for fund payment to Competitive Eligible Telecommunications Carriers. On June 8,
2004, the FCC issued a Notice of Proposed Rulemaking seeking comment on a recommended decision of the Joint Board. The Joint Board recommended that the FCC adopt permissive federal guidelines for states to consider in proceedings to designate
competitive carriers as eligible to receive universal service support, and it further recommended that the FCC limit the scope of high-cost support to a single connection that provides a subscriber access to the public telephone network. On August
16, 2004, the Joint Board issued a notice seeking comments on several issues relating to high-cost universal service mechanisms for rural carriers and the appropriate rural mechanism to succeed the five-year plan that the FCC created in 2001. Issues
under consideration include: the appropriate cost basis for determining support levels for rural carriers, whether to modify the definition of rural carrier and the amount of universal support available for acquired exchanges. We are unable to
predict whether and to what extent we would be eligible to receive any federal high-cost support if the FCC makes some or all of the modifications under consideration in these proceedings. In addition, Congress may address universal service issues
in legislation, but we cannot predict the occurrence, timing or effects of such legislation. However, the federal high-cost support we receive today is only one component of the federal USF support that we receive and constitutes less than one
percent of our total revenues.



Access Charge Reform



For the year ended December 31, 2004, approximately
49% of our RLECs revenues came from network access charges, which are paid to us by end users and intrastate and interstate long distance carriers for originating and terminating calls in the territory served by our RLECs. The amount of
network access revenues that we receive is calculated based on guidelines set by federal and state regulatory bodies, and such guidelines could change at any time. Both the PA PUC and the FCC 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 could shift recovery to 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 RLECs,
will decrease.



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



In February 2004, the FCC took additional steps to provide rate-of-return
carriers with greater flexibility to respond to changing marketplace conditions by resolving certain outstanding issues in the Multi-Association Group proceeding. The FCC modified the all or nothing rule to permit rate-of-return carriers
to acquire price cap exchanges and convert them to rate-of-return regulation without the need for a waiver. The FCC also allowed rate-of-return carriers the ability to geographically de-average access transport and special access charges to respond
to competitive conditions in their marketplaces. Finally, the FCC merged long term support into interstate common line support to replace implicit support in access charges. Our RLECs are not impacted at this time by these changes.



On October 5, 2004, the Intercarrier Compensation Forum (ICF), a
diverse group of telecommunications industry participants representing ILECs, CLECs, long distance companies, rural telephone companies and wireless providers, submitted to the FCC a comprehensive plan for reforming the current system of rates that
telecommunications companies charge each other for network access and fees to ensure universal service in the United States. Shortly afterwards, several other entities filed their versions of proposed intercarrier compensation



21



---

##### Table of Contents

reform plans with the FCC. On February 10, 2005, the FCC released a notice seeking comment on seven comprehensive reform proposals submitted by the industry
and others in the rulemaking. Among the questions the Commission will examine is the effect any change will have on consumers and the universal service fund, which helps provide affordable service for rural and low income Americans. The Commission
said it would be particularly receptive to any plan that offers expanded choices and lower rates to rural consumers. There is no guarantee that a final order addressing potential modifications to the current access charge system will be
issued in 2005, and we are unable to address the potential outcome with any degree of certainty.



Communications Assistance for Law Enforcement Act



Under the Communications Assistance for Law Enforcement Act (CALEA) and related federal statutes, we are required to provide law
enforcement officials with call content and call identifying information under a valid electronic surveillance warrant and to reserve a sufficient number of circuits for use by law enforcement officials in executing court-authorized electronic
surveillance. We believe we are in compliance with current laws and regulations. On August 4, 2004, in response to a joint petition filed by the Department of Justice, Federal Bureau of Investigation, and the Drug Enforcement Administration, the FCC
launched a Notice of Proposed Rulemaking proposing a thorough examination of the appropriate legal and policy framework of CALEA. In this proceeding, the FCC will examine issues relating to the scope of CALEAs applicability to services such as
broadband Internet access, as well as implementation and enforcement issues. We cannot predict the eventual outcome of this proceeding or what compliance with any rules adopted by the FCC may cost.



Voice Over Internet Protocol



The further development of VoIP is changing voice communication to a packet
data transmission process, which may enable cable companies, Internet service providers (ISPs) and new start-up companies who need no facilities whatsoever, to compete with telephone companies for voice transmission services and phone
features like voicemail and unified messaging. Furthermore, there is not consistent regulation of VoIP offerings at this time, placing VoIP at a possible regulatory advantage over telephone services. The FCC has rules that VoIP services such as
those offered by Pulver.com are not telecommunications services and should be subject to minimal regulation. In a related matter, however, the FCC has denied AT&Ts petition claiming that its service is an information service not subject to
access charges. Additionally, the FCC has issued a decision that IP-enabled services such as VoIP that are similar to a service called DigitalVoice offered by Vonage Holdings Corp. is not subject to traditional state public utility regulation. The
decision makes clear that the FCC has the responsibility and obligation to decide whether certain regulations apply to IP-enabled services. The FCC has yet to decide what compensation these services must pay to originate calls to or terminate calls
from the traditional public switched telephone network.



Cable Modem Service



In April 2004, the
9thCircuit Court of Appeals refused to review its previous decision that cable modem service was in part a
telecommunications service. In its previous decision, the 9thCircuit determined that the FCC was wrong when it
classified cable modem service as an information service. The 9thCircuit granted a stay of its decision pending
Supreme Court review. As telecommunications service providers, cable operators may have to make their networks available to other ISPs and also may have to contribute to the Universal Service Fund. This development could result in negative impacts
on our cable TV operation.



Potential Internet Regulatory
Obligations



In connection with our Internet access
offerings, we could become subject to laws and regulations as they are adopted or applied to the Internet. There is currently only a small body of laws and regulations applicable to access to or commerce on the Internet. As the significance of the
Internet expands, federal, state and local governments may adopt rules and regulations, or apply existing laws and regulations to the Internet. To date, the FCC has treated Internet service providers, or ISPs, as enhanced service providers, rather
than common carriers,



22



---

##### Table of Contents

and therefore ISPs are exempt from most federal and state regulation, including the requirement to pay access charges or contribute to the federal USF. The
FCC is currently reviewing the appropriate regulatory framework governing broadband access to the Internet through telephone and cable television operators communications networks. We cannot predict the nature of these regulations or their
impact on our business.



Employees



We had 717 employees as of December 31, 2004, of which 83 employees are
covered by a collective bargaining agreement. This agreement expires on May 9, 2005. While we expect to enter into a new bargaining agreement, no assurances can be made that we will be successful in doing so.



Factors Affecting Our Prospects



Our indebtedness could restrict our operations and ability to make
acquisitions.



As of December 31, 2004, we had
approximately $228,500,000 of total indebtedness, including current maturities, most of which was incurred in connection with the Conestoga acquisition. We will use a substantial portion of our cash flow from operations, if any, to pay principal and
interest on our indebtedness, which will reduce the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes. Additionally, our level of indebtedness may make us more vulnerable to economic or
industry downturns and competitive pressures. The agreements governing our indebtedness contain covenants imposing financial and operating restrictions on our business. These restrictions may limit our ability to take advantage of potential business
opportunities as they arise and adversely affect the conduct of our business. These covenants place restrictions on our ability and the ability of our subsidiaries to, among other things;



| |  |  | incur more indebtedness;
| | - |  | ------------------------



| |  |  | pay dividends over $10 million limit, redeem or repurchase our stock or make other distributions;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | make acquisitions or investments;
| | - |  | ---------------------------------



| |  |  | use assets as security in other transactions;
| | - |  | ---------------------------------------------



| |  |  | enter into transactions with affiliates;
| | - |  | ----------------------------------------



| |  |  | merge or consolidate with others;
| | - |  | ---------------------------------



| |  |  | dispose of assets or use asset sale proceeds;
| | - |  | ---------------------------------------------



| |  |  | create liens on our assets; and
| | - |  | -------------------------------



| |  |  | extend credit.
| | - |  | --------------



The convergence of voice and data communications technologies could eliminate our competitive advantages and may, in fact, put us at a competitive
disadvantage.



The convergence of voice and data
communication technologies is dramatically changing the communications industry. For several years, telephone and cable companies have been able to provide data transmission, with telephone companies having the advantage in voice and cable companies
having the advantage in video. Technology may be eliminating those advantages. The further development of voice over Internet protocol (VoIP) is changing voice communication to a packet data transmission process. This enables cable
companies, ISPs and new start-ups who need no facilities whatsoever, to compete with telephone companies for voice services and phone features like voicemail and unified communications. Furthermore, uncertainty in regulation of VoIP offerings at
this time, places VoIP at a possible regulatory advantage over legacy telephone services. The FCC has ruled that VoIP services such as those offered by Pulver.com are not telecommunications services and should be subject to minimal regulation. In a
related matter, however, the FCC has denied AT&Ts petition claiming that its service is an information service not subject to access charges. Additionally, the FCC has issued a Notice of Proposed Rulemaking to investigate the appropriate
regulatory treatment of VoIP services.



23



---

##### Table of Contents

To maintain and grow our voice communication business, we are planning to introduce VoIP offerings into our marketplace. Our VoIP initiatives will drive
converged services and networks to produce operational efficiencies. In certain markets, we are now able to offer video service over our fiber-copper network that competes with the video services offered by the cable companies.



Adding to the complexity of the competitive environment, wireless offerings
in voice and data are becoming more capable and competitive; and technology has been developed that will enable electric power transmission lines to compete in the communications industry. In the future, service offerings of telephone, cable and
electric power lines in voice, data and video may be similar, while wireless is a significant provider in voice and data. All of these developments will result in an even more highly competitive environment in which four types of companies are very
likely to be in direct competition with each other in many locations. This development could cause telephone companies to lose their competitive edge in their territories and consequently result in significant inroads into their core telephone/voice
business.



In April 2004, the 9thCircuit Court of Appeals refused to review its previous decision that cable modem service was in part a telecommunications
service. In its previous decision, the 9thCircuit determined that the FCC was wrong when it classified cable modem
service as an information service. The 9thCircuit granted a stay of its decision pending Supreme Court review. As
telecommunications service providers, cable operators may have to make their networks available to other ISPs and also may have to contribute to the USF. This development could result in negative impacts on our cable TV operation.



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 an integrated communications provider, we face competition from:



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



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



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



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



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



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



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



| |  |  | in the future could include electric power companies.
| | - |  | -----------------------------------------------------



Many of our competitors are, or are affiliated with, major communications companies. These competitors have substantially greater financial and marketing
resources, greater name recognition and more established relationships with a larger base of current and potential customers than we. 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. Our continued addition of fiber to enhance our broadband capacity may be more difficult as a result of our indebtedness than for our
competitors. Accordingly, it may be difficult to compete in any of our markets.



24



---

##### Table of Contents

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



In
connection with the acquisition of Conestoga, we committed to a plan to sell the assets of Conestogas wireless segment. The sale was completed on January 14, 2003. We have continuing involvement after the sale as a result of our continued
guarantees on cell site leases and our responsibilities under a Build-to-Suit agreement. Payments required under the Build-to-Suit agreement and payments, if any, that become due under the cell site guarantees could restrict our operations by
reducing the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes.



We may not be successful in entering into a new collective bargaining agreement.



We have 83 employees covered by a collective bargaining agreement which expires on May 9, 2005. We cannot provide assurance
that we will be successful in entering into a new agreement. Unsuccessful negotiations could potentially have a negative impact on future operations.



We may be unable to secure unbundled network elements at reasonable rates, or our CLEC growth 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 facilities and other telephone companies maintenance of these facilities. We must also maintain efficient procedures for ordering, provisioning, maintaining and repairing facilities from these other telephone
companies. We may not be able to obtain facilities and services of satisfactory quality from other telephone companies, or on satisfactory terms and conditions, in which case we may experience delays in the growth of our competitive local exchange
carrier networks and the degradation of the quality of our service to customers.



We also provide DSL services. To provide unbundled DSL-capable lines that connect each end user to equipment, we rely on other telephone companies. TA-96 generally requires that charges for these unbundled network
elements be cost-based and nondiscriminatory. Charges for DSL-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.



We are 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, and we may not be able to do so in a cost-effective manner. Federal and state regulatory trends toward a more competitive market place through reduced competitive
entry standards are likely to have negative effects on our business and our ability to compete. In this regard, the regulatory environment governing ILEC operations has been and will likely continue to be very liberal in its approach to promoting
competition and network access, which may increase the likelihood of new competitors offering similar services to our service areas. The introduction of new competitors could have a negative effect on our ILEC operating results yet at the same time
present operating benefits to our CLEC business.



Under the
Telecommunications Act of 1996, we may be subject to additional competition for telecommunications services.



Our RLEC services held a limited suspension until January 2003 from certain interconnection requirements of the TA-96. The suspension protected our RLEC
markets by excluding us from requirements to allow competitors to have access to our customers by relying upon our services and facilities. Since the new Chapter 30 law provides a suspension only to RLECs under 50,000 lines, two of our three RLECs
may see competitors



25



---

##### Table of Contents

seeking to remove 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.



The Systems Integration Segment could be affected by the overall economic climate.



The sale of equipment and services in the systems integration business is
dependent upon the willingness of companies to invest in improvements in their information and communications systems. General economic conditions play a role in companies investment decisions that directly affect the potential sales of
Systems Integration equipment and services. The business is more concentrated among a few major customers than other segments of our business and may be affected by the economic conditions in their business sectors.



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



Our properties consist primarily of administration buildings, central office switch facilities, telephone lines and related equipment and other land and
buildings related to telephone operations. Our major owned facilities include our corporate headquarters and central office switching facility, totaling approximately 113,700 square feet in Ephrata, Pennsylvania; an office building including our
network operations center totaling 80,100 square feet in Brownstown, Pennsylvania; and sixteen other buildings that serve a variety of functions including offices, warehouse, vehicle service center and switching facilities, totaling approximately
79,100 square feet. We lease 32,600 square feet in other buildings throughout our service territories primarily for offices, switching facilities and a garage. There are more than fifty other smaller locations totaling over 164,000 square feet,
either owned or leased, that are used for various purposes such as housing switching equipment. All our assets are maintained and upgraded on a continuing basis to assure our customers of receiving the highest quality service available.



We have transmission facilities referred to as our outside plant,
consisting of cables, wires, terminals and necessary supporting structures such as poles, conduit and manholes. Our cables are installed on poles, underground 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.



We were one of the first local exchange carriers in the nation to deploy a 100% digitally switched network, which enables us to economically provide a
broad portfolio of advanced voice and data communications services. Our network includes 1,230 route miles of fiber in a pattern of multiple rings, which provide a high level of redundancy in the event of a service failure. Our primary network
operations center further leverages network design with remote network management, maintenance and repair capabilities to pinpoint network problems, minimize technician deployment and improve operating efficiency. Our network is monitored 24 hours a
day, 365 days a year and continual upgrades to network elements ensure the uninterrupted delivery of quality services to customers.



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



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



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



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



There were no matters submitted to a vote of the shareholders during the fourth quarter of 2004.



26



---

##### Table of Contents

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.



|               |  |     |       |      |   |      
|-------------- |  | --- | ----- | ---- | - | -----
|2004           |  | Low |       | High
|First Quarter  |  | $   | 13.41 |      | $ | 15.48
|Second Quarter |  | $   | 11.04 |      | $ | 14.70
|Third Quarter  |  | $   | 9.83  |      | $ | 13.39
|Fourth Quarter |  | $   | 11.13 |      | $ | 14.02
|               |  |    
|2003           |  | Low |       | High
|First Quarter  |  | $   | 8.17  |      | $ | 13.12
|Second Quarter |  | $   | 9.26  |      | $ | 12.04
|Third Quarter  |  | $   | 10.90 |      | $ | 14.96
|Fourth Quarter |  | $   | 13.04 |      | $ | 15.10



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, 2004, was $12.05. Based on
records that we maintain, the approximate number of record holders of our common stock, as of December 31, 2004, was 2,307.



During the two most recent fiscal years, 2004 and 2003, cash dividends on our common stock have been declared quarterly in the annual amount of $0.50 per
share. Dividends are paid as and when declared by our Board of Directors and in accordance with restrictions set forth in covenants contained in our debt agreements.



The information required under this Item relating to equity compensation plans 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.



27



---

##### Table of Contents

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



The following table sets forth selected consolidated summary financial information as of December 31 and for each of the last five fiscal years ended
December 31, 2004. This information should be read in conjunction with our consolidated financial statements, including the notes thereto, and Managements Discussion and Analysis of Financial Condition and Results of Operations, both of which
are included in this annual report. Certain amounts have been reclassified for comparative purposes.



|                                                               |  |                                       |         |   |         |   |         |         |  |   |          |   |  |      |         |   |  |   |         |  
|-------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ------- | - | ------- | ------- |  | - | -------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                               |  | At or for the Year Ended December 31, |        
|                                                               |  | 2004(1)                               |         |   | 2003(1) |   |         | 2002(1) |  |   | 2001     |   |  | 2000 |        
|                                                               |  | (In thousands, except per share data) |        
|STATEMENT OF OPERATIONS DATA                                   |  |                                       |         |  
|Operating revenues                                             |  | $                                     | 176,271 |   |         | $ | 173,125 |         |  | $ | 137,334  |   |  | $    | 76,055  |   |  | $ | 64,945  |  
|Depreciation and amortization                                  |  |                                       | 39,119  |   |         |   | 38,626  |         |  |   | 28,690   |   |  |      | 15,289  |   |  |   | 12,108  |  
|Operating income (loss)                                        |  |                                       | 20,947  |   |         |   | 23,767  |         |  |   | 7,275    |   |  |      | (530    | ) |  |   | 5,160   |  
|Income (loss) from continuing operations                       |  |                                       | (2,739  | ) |         |   | 3,877   |         |  |   | (7,105   | ) |  |      | 1,810   |   |  |   | (5,025  | )
|Discontinued operations, net of tax(2)                         |  |                                       |        |   |         |   | (53     | )       |  |   | 55,499   |   |  |      | (5,969  | ) |  |   | (5,669  | )
|Extraordinary loss, net of tax                                 |  |                                       |        |   |         |   |        |         |  |   |         |   |  |      | 107     |   |  |   |        |  
|Cumulative effect of accounting change, net of tax             |  |                                       |        |   |         |   | 260     |         |  |   |         |   |  |      |        |   |  |   | (912    | )
|Net income (loss)                                              |  |                                       | (2,739  | ) |         |   | 4,084   |         |  |   | 48,394   |   |  |      | (4,052  | ) |  |   | (11,606 | )
|PER-SHARE DATA  BASIC AND DILUTED(3)                          |  |                                       |         |   |         |   |         |         |  |   |          |   |  |      |         |   |  |   |         |  
|Income (loss) from continuing operations                       |  | $                                     | (0.18   | ) |         | $ | 0.25    |         |  | $ | (0.58    | ) |  | $    | 0.25    |   |  | $ | (0.68   | )
|Discontinued operations                                        |  |                                       |        |   |         |   |        |         |  |   | 4.53     |   |  |      | (0.81   | ) |  |   | (0.77   | )
|Extraordinary items                                            |  |                                       |        |   |         |   |        |         |  |   |         |   |  |      | 0.01    |   |  |   |        |  
|Cumulative effect of accounting change                         |  |                                       |        |   |         |   | 0.01    |         |  |   |         |   |  |      |        |   |  |   | (0.12   | )
|Net income (loss) per common share                             |  |                                       | (0.18   | ) |         |   | 0.26    |         |  |   | 3.95     |   |  |      | (0.55   | ) |  |   | (1.57   | )
|Cash dividends declared per common share                       |  |                                       | 0.50    |   |         |   | 0.50    |         |  |   | 0.50     |   |  |      | 0.50    |   |  |   | 0.45    |  
|BALANCE SHEET DATA                                             |  |                                       |         |   |         |   |         |         |  |   |          |   |  |      |         |   |  |   |         |  
|Total assets                                                   |  | $                                     | 546,785 |   |         | $ | 575,911 |         |  | $ | 601,818  |   |  | $    | 142,878 |   |  | $ | 124,221 |  
|Long-term debt                                                 |  |                                       | 218,500 |   |         |   | 222,765 |         |  |   | 244,966  |   |  |      | 58,124  |   |  |   | 20,907  |  
|Preferred stock of subsidiary                                  |  |                                       | 1,446   |   |         |   | 1,446   |         |  |   | 1,446    |   |  |      | 1,446   |   |  |   | 1,446   |  
|OTHER DATA                                                     |  |                                       |         |   |         |   |         |         |  |   |          |   |  |      |         |   |  |   |         |  
|Net cash provided by continuing operating activities           |  | $                                     | 49,595  |   |         | $ | 45,009  |         |  | $ | 25,161   |   |  | $    | 13,684  |   |  | $ | 14,755  |  
|Net cash provided by/(used in) continuing investing activities |  |                                       | (25,736 | ) |         |   | (9,512  | )       |  |   | (177,579 | ) |  |      | (36,256 | ) |  |   | (5,436  | )
|Net cash provided by/(used in) continuing financing activities |  |                                       | (27,788 | ) |         |   | (18,183 | )       |  |   | 88,997   |   |  |      | 26,904  |   |  |   | (5,372  | )

---

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

|(2) | Reflects the results of our interest in the PCS ONE joint venture and our paging businesses as discontinued operations.
|--- | -----------------------------------------------------------------------------------------------------------------------

|(3) | 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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



28



---

##### Table of Contents

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



Overview



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



Business Segments



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



Our segments, excluding our D&E Wireless and paging services, which are reported as discontinued segments, are RLEC, CLEC, Internet Services, Systems
Integration and Conestoga Wireless until the sale of its assets in January 2003. The measure of profitability for our segments is operating income (loss) since individual segment managers are not responsible for such items as interest and taxes that
are reported below operating income (loss).



As of December 31,
2004, we served 139,607 RLEC access lines, 38,461 CLEC access lines, 11,535 dial-up Internet access subscribers, 11,052 DSL and 909 web hosting customers. For the year ended December 31, 2004, we generated total revenues of $176,271 and operating
income of $20,947.



Historically, we have derived a majority of
our revenues from the regulated RLEC segments. The RLEC segment accounts for approximately 58% of total 2004 revenues and substantially all of our operating income. Our RLEC revenue is derived primarily from network access charges, local telephone
service, enhanced telephone services and regional toll service. Our CLEC revenue is derived primarily from network access charges, local telephone service, enhanced telephone services and long distance service revenue. Our Internet services revenue
is derived from dial-up and high-speed Internet access services, in addition to web hosting services. Our systems integration revenue is derived from sales of solutions that support the design, implementation and maintenance of local and wide area
networks and telecommunications systems.



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 broadband



29



---

##### Table of Contents

data service. Our systems integration business incurs expenses primarily related to wages and employee benefit costs, and equipment and materials used in the
course of the installation and provision of our products and services.



We incur access line-related capital expenditures associated with access line additions, 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 serving additional customers or servicing existing customers on our own facilities and therefore tend to result in incremental
revenue or higher margins. 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.



Business Strategy



Our primary business objective is to be a leading, regional broadband ICP.
To achieve this objective, we will continue to pursue the following goals:



| |  |  | We will continue to operate under a disciplined strategy to increase our market share in our edge-out markets by offering competitive communication service packages primarily to
business customers. We will continue to leverage our modern network infrastructure, established reputation, extensive local knowledge and significant operating experience to attempt to gain new customers and increase our market share in our edge-out
markets.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will deliver multiple communication services such as high-speed data, VoIP and video over copper and fiber networks to meet bandwidth intensive demands of our residential and
business customers. We will continue to build-out our fiber-to-the-node infrastructure to support the future deployment of advanced IP communication services.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will endeavor to be a single source provider of voice and data communications services to our business customers. We believe that the convergence and complexity of voice
communications and data network technologies has increased the need for businesses to seek a single provider for all of their communications and data networking needs. Our systems integration business enhances our service through its Managed Service
offerings, and we believe bundling of video, high-speed data and voice is a key part of the strategy to grow revenue and strengthen customer relationships while providing increased value.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will make efforts to further expand our market share of the broadband and Internet services market by meeting or exceeding the customer service and technical requirements of
individual and business customers. We intend to minimize our dial-up Internet access customer base churn, but recognize as we migrate more customers on to our broadband service we help create that churn.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will offer a broad array of enhanced voice and data communication services to our customers that improve our general customer experience, thereby helping to retain customers.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will continue to make our commitment to customer service a top priority. Our NOC provides repair and emergency services 24 hours a day, 7 days a week and 365 days a year, which
strengthens our relationships with our customers and enhances our competitive position.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will consider increasing the scale and scope of our business through acquisitions of companies, including other RLECs that strategically fit with our integrated communications
strategy. Acquisition targets may include companies that deepen our industry focus, broaden service territories and increase the breadth of our services.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Business Risks



Our primary business risks include the external threat of increased competition in the telecommunications industry and the internal risk of our debt
financing, which was primarily incurred in connection with the acquisition of Conestoga in 2002.



30



---

##### Table of Contents

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



It is basic policy of the FCC and the Pennsylvania Public Utility Commission to encourage competition in the communications industry. The
limited suspension that we held until January 2003 from certain interconnection requirements of TA-96 has been discontinued, although recently enacted legislation in Pennsylvania in the fourth quarter of 2004 provided the limited suspension to our
Buffalo Valley RLEC through December 31, 2008. These developments mean that two of our RLECs could be required to allow competitors to have access to our customers by our competitors seeking the removal of our rural exemption, entering our territory
and using our services and facilities through interconnection agreements to provide local services.



The convergence of voice and data communication technologies is dramatically changing the communications industry. For several years,
telephone and cable companies have been able to provide data transmission, with telephone companies having the advantage in voice and cable companies having the advantage in video. Technology may be eliminating those advantages. The further
development of VoIP is changing voice communication to a packet data transmission process, which will place the cable companies in a competitive situation with the telephone companies. Furthermore, there is not consistent regulation of VoIP
offerings at this time, placing VoIP at a possible regulatory advantage over telephone services. To maintain our voice business, we plan to offer VoIP over our system. We are now able to offer video over a portion of our fiber-copper system that is
capable of competing with the video services offered by the cable companies.



To make the competitive picture even more complex, wireless offerings in voice and data are becoming more capable and competitive, and it appears that technology has been developed that will enable electric power
transmission lines to compete effectively in the communications industry. In the future, service offerings of telephone, cable and electric power lines in voice, data and video may be similar, and wireless is certainly a significant provider in
voice and data. All of this will result in a highly competitive environment in which four types of companies are very likely to be in direct competition with each other in many locations. This development could cause the telephone companies to lose
their competitive edge in their territories and could result in significant inroads into their business.



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



The foregoing opportunities and risks require management to attempt to balance several aspects of our business. Our relatively stable RLEC
business segment provides cash flow both to pursue our business plan to be a leading, regional broadband ICP and to provide a current return on investment to our shareholders in the form of our regular dividend. However, since our resources are
limited and the manner in which the communications industry will develop is uncertain, both in terms of technology and competition, we will not be able to pursue every possible avenue of development, and critical decisions will need to be made at
various stages of our evolution as a company. These decisions can be made more difficult by our desire to balance our short-term goals of maintaining our RLEC business segment and dividend return and our long-term goal of providing voice, data and
video services. Maintaining our dividend payout may be challenging due to the need to invest in our future and restrictions under our financing facilities, both in the form of an annual limitation of $10,000 in dividends and the requirement to
remain in compliance with financial covenants.



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



We refinanced our indebtedness in March 2004 and further amended it in November 2004. The effect of the refinancing was to lower the
interest rates on our indebtedness, provide greater flexibility in our



31



---

##### Table of Contents

financial covenants and spread out the amortization of principal. The refinancing also lifts restrictions on the expansion of our CLEC edge-out market and
eliminates the requirement of the prior loan agreement that excess cash flow be applied to prepayments of principal. This new structure, pursued to manage our balance sheet in order to better pursue our business plan, decreases the risks associated
with our indebtedness. However, our indebtedness of approximately $228,500 as of December 31, 2004 could restrict our operations because:



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



| |  |  | The level of indebtedness will make us more vulnerable to economic or industry down turns, and our debt service obligations increase our vulnerability to competitive pressures, as
we may be more leveraged than many of our competitors.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Results of Operations



The measure of segment
results used by management is operating income (loss). In 2003, D&E moved responsibility for some products to different segment managers. Certain amounts from prior years have been reclassified to conform to the current presentation. The
following table is a summary of our operating results by segment:



|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|----------------------------- |  | ---- | ------- | ---- | - | ------ | ----------------- |  | - | ------------------- | - |  | ---------------- | ------ | - | ------------ | - | ------ | ------------- |  | - | ------- | - |  | - | -------
|                              |  | RLEC |         | CLEC |   |        | Internet Services |  |   | Systems Integration |   |  | Corporate& Other |        |   | Eliminations |   |        | Total Company
|2004                          |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Revenues  External           |  | $    | 101,647 |      | $ | 36,183 |                   |  | $ | 10,337              |   |  | $                | 24,771 |   |              | $ | 3,333  |               |  | $ |        |   |  | $ | 176,271
|Revenues  Intercompany       |  |      | 9,314   |      |   | 1,409  |                   |  |   | 21                  |   |  |                  | 54     |   |              |   |       |               |  |   | (10,798 | ) |  |   |       
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Total Revenues                |  |      | 110,961 |      |   | 37,592 |                   |  |   | 10,358              |   |  |                  | 24,825 |   |              |   | 3,333  |               |  |   | (10,798 | ) |  |   | 176,271
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Depreciation and Amortization |  |      | 30,776  |      |   | 4,394  |                   |  |   | 1,083               |   |  |                  | 1,899  |   |              |   | 967    |               |  |   |        |   |  |   | 39,119 
|Other Operating Expenses      |  |      | 51,023  |      |   | 35,893 |                   |  |   | 8,948               |   |  |                  | 27,506 |   |              |   | 3,633  |               |  |   | (10,798 | ) |  |   | 116,205
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Total Operating Expenses      |  |      | 81,799  |      |   | 40,287 |                   |  |   | 10,031              |   |  |                  | 29,405 |   |              |   | 4,600  |               |  |   | (10,798 | ) |  |   | 155,324
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Operating Income (Loss)       |  | $    | 29,162  |      | $ | (2,695 | )                 |  | $ | 327                 |   |  | $                | (4,580 | ) |              | $ | (1,267 | )             |  | $ |        |   |  | $ | 20,947 
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|2003                          |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Revenues  External           |  | $    | 105,087 |      | $ | 34,830 |                   |  | $ | 6,862               |   |  | $                | 23,378 |   |              | $ | 2,968  |               |  | $ |        |   |  | $ | 173,125
|Revenues  Intercompany       |  |      | 8,207   |      |   | 923    |                   |  |   | 479                 |   |  |                  | 31     |   |              |   | 22     |               |  |   | (9,662  | ) |  |   |       
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Total Revenues                |  |      | 113,294 |      |   | 35,753 |                   |  |   | 7,341               |   |  |                  | 23,409 |   |              |   | 2,990  |               |  |   | (9,662  | ) |  |   | 173,125
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Depreciation and Amortization |  |      | 31,591  |      |   | 4,036  |                   |  |   | 794                 |   |  |                  | 1,734  |   |              |   | 471    |               |  |   |        |   |  |   | 38,626 
|Other Operating Expenses      |  |      | 48,040  |      |   | 35,554 |                   |  |   | 6,656               |   |  |                  | 25,997 |   |              |   | 4,147  |               |  |   | (9,662  | ) |  |   | 110,732
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Total Operating Expenses      |  |      | 79,631  |      |   | 39,590 |                   |  |   | 7,450               |   |  |                  | 27,731 |   |              |   | 4,618  |               |  |   | (9,662  | ) |  |   | 149,358
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Operating Income (Loss)       |  | $    | 33,663  |      | $ | (3,837 | )                 |  | $ | (109                | ) |  | $                | (4,322 | ) |              | $ | (1,628 | )             |  | $ |        |   |  | $ | 23,767 
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|2002                          |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Revenues  External           |  | $    | 77,091  |      | $ | 21,626 |                   |  | $ | 4,748               |   |  | $                | 23,582 |   |              | $ | 10,287 |               |  | $ |        |   |  | $ | 137,334
|Revenues  Intercompany       |  |      | 6,915   |      |   | 478    |                   |  |   | 282                 |   |  |                  | 37     |   |              |   | 240    |               |  |   | (7,952  | ) |  |   |       
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Total Revenues                |  |      | 84,006  |      |   | 22,104 |                   |  |   | 5,030               |   |  |                  | 23,619 |   |              |   | 10,527 |               |  |   | (7,952  | ) |  |   | 137,334
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Depreciation and Amortization |  |      | 23,497  |      |   | 2,775  |                   |  |   | 476                 |   |  |                  | 1,592  |   |              |   | 350    |               |  |   |        |   |  |   | 28,690 
|Other Operating Expenses      |  |      | 42,851  |      |   | 23,532 |                   |  |   | 5,050               |   |  |                  | 25,169 |   |              |   | 12,719 |               |  |   | (7,952  | ) |  |   | 101,369
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Total Operating Expenses      |  |      | 66,348  |      |   | 26,307 |                   |  |   | 5,526               |   |  |                  | 26,761 |   |              |   | 13,069 |               |  |   | (7,952  | ) |  |   | 130,059
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        
|Operating Income (Loss)       |  | $    | 17,658  |      | $ | (4,203 | )                 |  | $ | (496                | ) |  | $                | (3,142 | ) |              | $ | (2,542 | )             |  | $ |        |   |  | $ | 7,275  
|                              |  |      |         |      |   |        |                   |  |   |                     |   |  |                  |        |   |              |   |        |               |  |   |         |   |  |   |        



32



---

##### Table of Contents

Consolidated Operations



Overview of 2004 Compared to 2003



Consolidated operating revenues from continuing operations in 2004 increased $3,146, or 1.8%, to $176,271 in 2004 from $173,125 in 2003. The revenue
increase was primarily due to the growth in DSL Internet Services and an increased number of CLEC customers during 2004. Changes in how we are compensated by certain wireless carriers to use our RLEC network, have reduced revenues by a net of $1,300
in spite of an increase in total switched cellular minutes. The Corporate, Other revenues change includes an increase for video operations and a decrease in revenues due to the sale of Conestoga Wireless in January 2003, which resulted in decreased
revenue of $456.



Consolidated operating income from continuing
operations for 2004, decreased $2,820, to $20,947 in 2004 from $23,767 in 2003. The decreased operating income in 2004 was partially attributable to approximately $900 of increased employee medical benefit expenses, approximately $900 for compliance
with Sarbanes-Oxley regulations and over $400 of increased operating losses associated with the video services since its expansion into the Buffalo Valley market in mid 2003.



Income (loss) from continuing operations decreased $6,616 to a loss of $2,739 in 2004 from an income of $3,877 in 2003
partially due to the decrease in operating income discussed above, net of taxes. Other factors related to the decline were the loss on early extinguishment of debt of $5,252 related to the debt refinancing in March 2004 and the amendment in November
2004, which was only partially offset by an interest expense reduction of $3,685. In 2004, the equity in loss of affiliates includes $2,125 for our share of an impairment of assets at Pilicka and an impairment of our investment in EuroTel. Also, in
2003, there was a $790 realized gain on the disposition of investments available-for-sale.



Overview of 2003 Compared to 2002



Consolidated operating revenues from continuing operations in 2003, increased $35,791, or 26.1%, to $173,125 in 2003 from $137,334 in 2002. The revenue increase was primarily due to the inclusion of $95,965 of
Conestogas revenues for the full twelve months in 2003, compared to only $60,933 for seven months in 2002, after the May 24, 2002 acquisition. Conestoga revenues declined in 2003 by $7,180 from revenues in 2002 due to the sale of Conestoga
Wireless in January 2003.



Consolidated operating income from
continuing operations for 2003, increased $16,492, to $23,767 in 2003 from $7,275 in 2002. The increased operating income in 2003 was primarily attributable to Conestogas $18,629 contribution to income for twelve months rather than $7,513 for
the seven months in 2002. Further, in 2003, we did not incur the same $973 of expense due to the merger related costs experienced in 2002. D&E and Conestoga also benefited from the reduction of expenses primarily related to staff reductions at
the date of the merger and over the following six months.



Income from continuing operations increased $10,982 to income of $3,877 in 2003 from a loss of $7,105 in 2002 primarily due to the increase in operating income discussed above, net of taxes. Also, in 2003, there was an increase of $3,789 in
realized gains/losses on the disposition of investments available for sale, a $892 reduction in expenses from reduced equity losses in affiliates, and other miscellaneous income increases. This reduction was offset by the $6,179 increase in interest
expense related to larger borrowings for the full twelve months.



33



---

##### Table of Contents

RLEC Segment Results



Summary Operating Results  RLEC Segment



|                               |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                               |  | 2004 |         |   | 2003 |   |         | 2002 | 
|Revenues:                      |  |      |         |   |      |   |         |      |  |   |         |  
|Local Telephone Service        |  | $    | 33,607  |   |      | $ | 33,428  |      |  | $ | 24,782  |  
|Network Access                 |  |      | 54,915  |   |      |   | 57,017  |      |  |   | 41,595  |  
|Other                          |  |      | 22,439  |   |      |   | 22,849  |      |  |   | 17,629  |  
|                               |  |      |         |   |      |   |         |      |  |   |         |  
|Total Revenues                 |  |      | 110,961 |   |      |   | 113,294 |      |  |   | 84,006  |  
|                               |  |      |         |   |      |   |         |      |  |   |         |  
|Depreciation and Amortization  |  |      | 30,776  |   |      |   | 31,591  |      |  |   | 23,497  |  
|Other Operating Expenses       |  |      | 51,023  |   |      |   | 48,040  |      |  |   | 42,851  |  
|                               |  |      |         |   |      |   |         |      |  |   |         |  
|Total Operating Expenses       |  |      | 81,799  |   |      |   | 79,631  |      |  |   | 66,348  |  
|                               |  |      |         |   |      |   |         |      |  |   |         |  
|Operating Income               |  | $    | 29,162  |   |      | $ | 33,663  |      |  | $ | 17,658  |  
|                               |  |      |         |   |      |   |         |      |  |   |         |  
|Operating Income % of Revenues |  |      | 26.3    | % |      |   | 29.7    | %    |  |   | 21.0    | %
|Access Lines at December 31    |  |      | 139,607 |   |      |   | 142,799 |      |  |   | 145,310 |  



RLEC segment revenues
decreased $2,333, or 2.1%, to $110,961 in 2004 and increased $29,288, or 34.9%, to $113,294 in 2003. In 2004 local telephone service revenues increased and network access revenues decreased by similar amounts as part of the most recent rate
rebalancing in July 2003. Dedicated data circuits and leased facilities grew in 2004, increasing both local telephone service and network access revenues. Access revenues decreased due to a revision to our National Exchange Carrier Association
(NECA) settlements estimate, the effect of increased wireless minutes of use resulting in approximately $450 additional revenue, and a new reciprocal compensation agreement with a wireless carrier which decreased revenue approximately $1,750. Other
revenue decreased as a result of long distance, premise hardware and services decreasing, more than offsetting the increase in directory revenue. In 2003, the Conestoga acquisition added $64,512 of revenue, versus $36,794 for the seven months
included in 2002. D&E Telephone revenues increased $1,570, to $48,782 in 2003, from $47,212 in 2002. D&E Telephone local telephone service revenues increased $792, or 5.4%, to $15,509 in 2003, from $14,717 in 2002 as a result of increases in
enhanced services sold and rate increases in July 2003. D&E Telephone network access revenues increased $994, or 4.2%, to $24,427 in 2003, from $23,433 in 2002. This increase resulted partially from a favorable change in the National Exchange
Carrier Association (NECA) average schedule settlement formula for interstate access that took effect in July 2003. Other revenue increased $5,220 in 2003 from 2002 as a result of the additional Conestoga revenue that was primarily from directory
revenue. D&E Telephone other revenue decreased $213 in 2003 compared to 2002 primarily from a decrease in long distance revenues. Local telephone revenues are anticipated to increase as the result of sales of local dedicated circuits offsetting
the effect of continued line count erosion. Network access revenues are likely to decrease slightly due to a decline in minutes of use and a reduction in state access rates as regulatory trends move toward transferring cost to the local telephone
end user. Other revenues, which include enhanced services, directory advertising and other miscellaneous services are likely to continue the trend of moderate increases, while we expect decreased long distance service revenues.



RLEC segment operating expenses increased $2,168, or 2.7%, to $81,799 in 2004
and $13,283, or 20.0%, to $79,631, in 2003. In 2004, directory expense increased in line with directory revenues. Operating expenses increased due to the cost of complying with the provisions of the Sarbanes-Oxley Act relating to internal controls
over financial reporting which was primarily allocated to the RLEC segment. The 2003 increase was primarily attributable to including twelve months in 2003 of Conestoga operating expenses and seven months since the acquisition in 2002. Operating
income decreased $4,501, or 13.4% in 2004 to $29,162 and increased $16,005, or 90.6%, in 2003 to $33,663. The synergies resulting from the Conestoga acquisition, including staff reductions and other cost savings contributed to the improved
profitability in 2003.



34



---

##### Table of Contents

CLEC Segment Results



Summary Operating Results  CLEC Segment



|                              |  |      |        |    |      |   |        |      |  |   |        |   
|----------------------------- |  | ---- | ------ | -- | ---- | - | ------ | ---- |  | - | ------ | --
|                              |  | 2004 |        |    | 2003 |   |        | 2002 | 
|Revenues:                     |  |      |        |    |      |   |        |      |  |   |        |   
|Local Telephone Service       |  | $    | 11,607 |    |      | $ | 9,762  |      |  | $ | 5,584  |   
|Network Access                |  |      | 6,684  |    |      |   | 5,607  |      |  |   | 3,284  |   
|Long Distance                 |  |      | 18,285 |    |      |   | 19,570 |      |  |   | 12,774 |   
|Other                         |  |      | 1,016  |    |      |   | 814    |      |  |   | 462    |   
|                              |  |      |        |    |      |   |        |      |  |   |        |   
|Total Revenues                |  |      | 37,592 |    |      |   | 35,753 |      |  |   | 22,104 |   
|                              |  |      |        |    |      |   |        |      |  |   |        |   
|Depreciation and Amortization |  |      | 4,394  |    |      |   | 4,036  |      |  |   | 2,775  |   
|Other Operating Expenses      |  |      | 35,893 |    |      |   | 35,554 |      |  |   | 23,532 |   
|                              |  |      |        |    |      |   |        |      |  |   |        |   
|Total Operating Expenses      |  |      | 40,287 |    |      |   | 39,590 |      |  |   | 26,307 |   
|                              |  |      |        |    |      |   |        |      |  |   |        |   
|Operating Loss                |  | $    | (2,695 | )  |      | $ | (3,837 | )    |  | $ | (4,203 | ) 
|                              |  |      |        |    |      |   |        |      |  |   |        |   
|Operating Loss % of Revenues  |  |      | (7.2   | )% |      |   | (10.7  | )%   |  |   | (19.0  | )%
|Access Lines at December 31   |  |      | 38,461 |    |      |   | 35,140 |      |  |   | 29,072 |   



CLEC segment revenues
increased $1,839, or 5.1%, to $37,592 in 2004 and $13,649, or 61.7%, to $35,753 in 2003. The 2004 increase was related to the addition of access lines for new customers and growth in dedicated data circuits, which increased both local telephone
service and network access revenues. These increases were offset by a $1,285 decrease in long distance revenues due to rate reductions and decreased minutes of use. In 2003, the Conestoga acquisition added $24,294 of revenues versus $13,682 in 2002.
D&E Systems revenues increased $3,037, to $11,459 in 2003, from $8,422 in 2002.



CLEC segment operating expenses increased $697, or 1.8% to $40,287 in 2004 and $13,283, or 50.5%, to $39,590 in 2003. The increase in 2004 was primarily related to increases in the cost of leased facilities, wages and
benefits, and depreciation, offset by a decrease in long distance costs and reduction in subscriber billing costs. The increase in 2003 was partially attributable to including twelve months in 2003 of Conestoga operating expenses and seven months
since the acquisition in 2002 and due to increased costs of services related to an increase in our customer base. Operating losses decreased $1,142, or 29.8% in 2004 and decreased $366, or 8.7%, to $3,837 in 2003 primarily due to changes in
operating efficiencies and moving more customers to our own network.



Internet Services Segment Results



Summary
Operating Results  Internet Services Segment



|                                      |  |      |        |   |      |   |        |      |  |   |        |   
|------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | --
|                                      |  | 2004 |        |   | 2003 |   |        | 2002 | 
|Revenues                              |  | $    | 10,358 |   |      | $ | 7,341  |      |  | $ | 5,030  |   
|                                      |  |      |       
|Depreciation and Amortization         |  |      | 1,083  |   |      |   | 794    |      |  |   | 476    |   
|Other Operating Expenses              |  |      | 8,948  |   |      |   | 6,656  |      |  |   | 5,050  |   
|                                      |  |      |        |   |      |   |        |      |  |   |        |   
|Total Operating Expenses              |  |      | 10,031 |   |      |   | 7,450  |      |  |   | 5,526  |   
|                                      |  |      |        |   |      |   |        |      |  |   |        |   
|Operating Income (Loss)               |  | $    | 327    |   |      | $ | (109   | )    |  | $ | (496   | ) 
|                                      |  |      |        |   |      |   |        |      |  |   |        |   
|Operating Income (Loss) % of Revenues |  |      | 3.2    | % |      |   | (1.5   | )%   |  |   | (9.9   | )%
|Customers at December 31              |  |      |        |   |      |   |        |      |  |   |        |   
|DSL                                   |  |      | 11,052 |   |      |   | 7,303  |      |  |   | 5,615  |   
|Dial-up Access                        |  |      | 11,535 |   |      |   | 12,859 |      |  |   | 12,652 |   
|Web hosting Services                  |  |      | 909    |   |      |   | 814    |      |  |   | 651    |   



35



---

##### Table of Contents

Internet Services segment revenues increased $3,017, or 41.1%, to $10,358 in 2004 and increased $2,311,
or 45.9%, to $7,341 in 2003. The increase in 2004 resulted from a 51.3% increase in DSL customers, partially offset by a decrease of 10.3% in the number of dial-up Internet customers, some of whom switched to DSL. The Conestoga acquisition added
$1,567 to revenue in 2003, versus $1,116 in 2002. Operating expenses were $10,031 in 2004, and $7,450 in 2003, resulting in an operating income of $327 in 2004, compared to a loss of $109 in 2003. Direct cost of operations and increased depreciation
made up most of the increased costs. Labor and benefits, to a large extent for expanded customer services, accounted for over 40% of the increased costs.



Systems Integration Segment Results



Summary Operating Results  Systems Integration Segment



|                              |  |      |        |    |      |   |        |      |  |   |        |   
|----------------------------- |  | ---- | ------ | -- | ---- | - | ------ | ---- |  | - | ------ | --
|                              |  | 2004 |        |    | 2003 |   |        | 2002 | 
|Revenues                      |  | $    | 24,825 |    |      | $ | 23,409 |      |  | $ | 23,619 |   
|                              |  |      |        |    |      |   |        |      |  |   |        |   
|Depreciation and Amortization |  |      | 1,899  |    |      |   | 1,734  |      |  |   | 1,592  |   
|Other Operating Expenses      |  |      | 27,506 |    |      |   | 25,997 |      |  |   | 25,169 |   
|                              |  |      |        |    |      |   |        |      |  |   |        |   
|Total Operating Expenses      |  |      | 29,405 |    |      |   | 27,731 |      |  |   | 26,761 |   
|                              |  |      |        |    |      |   |        |      |  |   |        |   
|Operating Loss                |  | $    | (4,580 | )  |      | $ | (4,322 | )    |  | $ | (3,142 | ) 
|                              |  |      |        |    |      |   |        |      |  |   |        |   
|Operating Loss % of Revenues  |  |      | (18.4  | )% |      |   | (18.5  | )%   |  |   | (13.3  | )%



Systems Integration
segment revenues increased $1,416, or 6.0%, to 24,825 in 2004 and decreased $210, or 0.9%, to $23,409 in 2003. In 2004, communication services increased $706, made up of computer services of $1,243 and equipment rentals of $567 offset by decreases
in repairs of $1,104. Products sold increased $710, primarily in telephone systems and cabling with minor increases in computer hardware sales. In 2003, the Conestoga acquisition added $8,458 of revenue, versus $3,961 of revenue from the seven
months since the acquisition in 2002. Increases in revenue due to the Conestoga acquisition were offset by decreases in D&E revenues of $4,707 in 2003. The 2003 decreases were primarily $304 of communication services and $4,379 of product sales.
We believe these decreases partially related to the effects of a slow economy, increased competition and reductions in customer spending for communications related infrastructure and consulting services.



Operating expenses increased $1,674, or 6.0%, to $29,405 in 2004 and $970, or
3.6%, to $27,731 in 2003. Labor and benefits accounted for more than 80% of the 2004 expense increase. The 2003 expenses increased as a result of a full year of expenses from the Conestoga operations acquired in May 2002, selling expense increases
and increased expenses relating to integration of software systems. Operating losses increased $258 to $4,580 in 2004 and $1,180 to $4,322 in 2003.



Conestoga Wireless Segment Results



Amounts for all years for Conestoga Wireless are combined with the, Corporate and Other amounts and include no revenue in 2004 but $695 of operating
income was recorded principally from prior years tax settlements in the current year.



Other Income (Expense)



Other income (expense)
for 2004 was an expense of $22,191 compared to an expense of $17,857 in 2003. The primary reasons for this $4,334 change are as follows:



| |  |  | Our equity in net loss of affiliates increased to a loss of $3,172 in 2004 from $2,537 in 2003. The increased loss resulted from $1,068 for our share of an
impairment of assets in Pilicka offset by improved results of Pilickas telephone operations and lower EuroTel legal expenses. Since we and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



36



---

##### Table of Contents

| | EuroTel have no legal obligation nor intention to provide future funding to Pilicka, we each have written our investment in Pilicka to zero and will
discontinue recognizing our equity share of Pilickas ongoing losses. EuroTel no longer records any value to its investment in Pilicka and therefore the value of our investment in EuroTel was written down as an other-than-temporary loss on
investments of $1,057. We have also committed to fund EuroTel, on an equal basis with the other investors in EuroTel, certain of its operating cash needs and will continue to recognize our equity share of their ongoing losses.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our interest expense decreased $3,685 in 2004 to $14,389 primarily as a result of refinancing our syndicated senior secured credit facilities in March 2004 and amending the pricing
of the Term Loan B in November 2004 as well as the beginning of scheduled principal repayments during 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In 2003, we recognized a gain of $790 related to the sale of available-for-sale investments for which there was no similar gain in 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In 2004, we incurred a loss on early extinguishment of debt of $5,252 in regard to refinancing and amending our credit facility. There was no similar expense in 2003.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other, net decreased $285 principally due to a $325 reduction in a patronage dividend received as a borrower from a cooperative bank offset by increased interest income and initial
principal payment collected on the note receivable from the sale of Conestoga Wireless.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other income (expense) for 2003 was an expense of $17,857 compared to an expense of $17,901 in 2002. The primary reasons for this $44 change are as
follows:



| |  |  | Our equity in net loss of affiliates decreased to a loss of $2,537 in 2003 from $3,429 in 2002. The change was primarily from improved results of Pilickas telephone operations
and lower EuroTel legal expenses.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our interest expense increased $6,179 in 2003 to $18,074 primarily as a result of the borrowing to complete the Conestoga acquisition being outstanding for the full year.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In 2003, we recognized a gain of $790 related to the sale of the same available-for-sale investments for which we recognized a loss of $2,999 as other-than-temporary impairment of
investments in 2002. These two transactions resulted in a net increase to other income (expense) of $3,789 in 2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other, net increased approximately $400 principally from interest income collected on the note receivable from the sale of Conestoga Wireless offset by lower interest income on
working capital cash balances invested during 2003. As a borrower from a cooperative bank, we received approximately $835 more in a patronage dividend from our lender related to larger loan balances outstanding.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Income Taxes



Federal and state income taxes were an expense of $1,430 in 2004 on the $1,244 loss from continuing operations and a tax
expense of $1,968 on the $5,910 income from continuing operations in 2003. The 2004 tax expense reflects tax on income in the United States while the Pilicka asset impairment and the impairment of our investment in EuroTel created a deferred tax
deduction that may not be realizable. The effective tax rates were a negative 115.0% in 2004 and 33.3% in 2003.



Federal and state income tax on income from continuing operations increased $5,554 to an expense of $1,968 in 2003 from a benefit of $3,586 in 2002. The
effective tax rates were 33.3% in 2003 and 33.7% in 2002.



Discontinued
Operations, Extraordinary Items and Accounting Changes



In
2002, our discontinued D&E Wireless segment operations were sold resulting in a $55,506 gain, net of $29,337 in taxes.



37



---

##### Table of Contents

In 2002, a plan was entered into to sell our paging business. The paging business has been reported as a
discontinued operation. On May 29, 2003, we sold Conestogas and D&Es paging businesses. Paging assets at December 31, 2002 were classified as held for sale. The discontinued losses were $53 and $7 net of tax benefits of $27 and $3 in
2003 and 2002, respectively.



We adopted Statement of Financial
Accounting Standard No. 143 Accounting for Asset Retirement Obligations effective January 1, 2003 and recorded an after-tax benefit of $260 as a cumulative effect accounting adjustment in the first quarter 2003. The adjustment represents
the cumulative estimate of cost of removal charged to depreciation expense in earlier years for which D&E does not have a legal obligation associated with the retirement of the related tangible long-lived assets.



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 with a greater upward pressure on costs in 2005.



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 $49,595 in 2004. Cash provided by continuing operations has increased from
$45,009 in 2003 and $25,161 in 2002. In 2004, the increase was primarily attributable to a reduction of accounts receivable. In 2003, the increase is partially related to the five additional months of Conestoga operations included compared to the
seven months included in 2002 after the acquisition. Improved operating results relating to the operating efficiencies of the combined company have contributed to improved cash generated by continuing operating activities. Heightened competition in
the telecommunications industry could affect future cash flows related to continuing operations. See BUSINESS  Factors Affecting Our Prospects.



Net cash used in investing activities was $25,736 in 2004 and consisted primarily of $25,248 for capital expenditures and a
net $613 investment in affiliates offset by $125 collected on the note receivable from the sale of the assets of Conestoga Wireless. The capital additions by major categories and the approximate dollars spent on each were:



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



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



Net cash used
in investing activities was $9,512 in 2003 and consisted primarily of $20,153 for capital expenditures, offset by $12,475 from the sale of businesses and investments. The capital additions by major categories and the approximate dollars spent on
each were:



| |  |  | digital switching and circuit equipment, computers and software, and poles and cable purchases to upgrade our RLEC and CLEC operating systems  $13,200;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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  $3,400;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



38



---

##### Table of Contents

| |  |  | Internet e-mail software upgrade and modems  $1,400;
| | - |  | -----------------------------------------------------



| |  |  | Video test expansion equipment  $1,800.
| | - |  | ----------------------------------------



Net cash used in investing activities was $177,579 in 2002 and consisted primarily of $156,819 for the Conestoga business acquisition payments and $19,240
of capital expenditures. The capital additions by major categories and the approximate dollars spent on each were:



| |  |  | digital switching and circuit equipment, computers and software, and poles and cable purchases to upgrade our RLEC, CLEC and Internet operating systems  $13,115;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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  $2,526.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Cash used in financing activities in 2003 was $18,183, consisting primarily of $23,332 for payments on long-term borrowing,
offset by additional borrowings of $12,000. Payment of dividends used $7,408, and $1,037 of cash was received from issuing common stock.



Cash provided by financing activities in 2002 was $88,997, consisting primarily of $160,000 in increased long-term borrowing that, in addition to helping
finance the Conestoga acquisition, was used to pay other long-term debt of $45,022, repay revolving lines of credit of $11,757, and to pay $8,152 of related debt issuance costs. Payment of dividends used $6,414 and $687 of net cash was provided from
issuing common stock and repurchasing treasury shares.



Discontinued wireless operations used $20,553 of cash in 2003 primarily for the tax payment required on the gain from the PCS ONE sale in 2002. The operation and sale of PCS ONE in 2002 provided $78,320 of net cash.



External Sources of Capital at December 31, 2004



On March 5, 2004, we completed a syndicated senior secured debt financing in
the amount of $260,000. The credit facilities are in the form of a $25,000 Revolving Loan, Term Loan A in the amount of $50,000, Term Loan B in the amount of $150,000, and the assumption of $35,000 of term indebtedness of a D&E subsidiary. The
$200,000 of proceeds received related to the term loans of the new credit facilities were used to refinance indebtedness under prior credit facilities and for general corporate purposes. On November 22, 2004, D&E entered into an amendment with
respect to this senior financing. The amendment reduced the Term Loan B U.S. prime rate margin and LIBOR margin to 1.00% and 2.00%, respectively. As a result of the refinancing and subsequent amendment, we incurred a loss on the early extinguishment
of debt of $5,252, consisting of a non-cash write-off of $4,949 of unamortized debt issuance costs of the previous credit facility and the expensing of $303 of debt issuance costs related to the new credit facility and the amendment. We capitalized
approximately $2,293 of debt issuance costs related to the new credit facility and the amendment, which will be amortized into interest expense over the life of the new credit facility.



The Senior Secured Revolving Loan (Revolving Loan) is a $25,000 senior secured reducing revolving credit
facility maturing June 30, 2011. The Revolving Loan requires interest only payments at our option at either the U.S. prime rate plus 1.00% to 1.75% or a one, two, three or six month LIBOR rate plus 2.00% to 2.75% depending on the Companys
leverage ratio. At December 31, 2004, the average interest rate was 4.97%. The Revolving Loan will reduce permanently to $15,000 on December 31, 2006. The Revolving Loan also requires a quarterly commitment fee on the unused portion.



39



---

##### Table of Contents

The Senior Secured Term Loan A (Term Loan A) is a $50,000 term note maturing June 30, 2011.
Term Loan A bears interest at our option at either the U.S. prime rate plus 1.00% to 1.75% or a one, two, three or six month LIBOR rate plus 2.00% to 2.75%, depending on the Companys leverage ratio. At December 31, 2004, the average interest
rate was 5.12%. Term Loan A requires increasing quarterly principal payments beginning in the first quarter of 2004 and continuing through the second quarter of 2011.



The Senior Secured Term Loan B (Term Loan B) is a $150,000 term note maturing December 31, 2011. Term Loan B
bears interest at our option at either the U.S. prime rate plus 1.00% or a one, two, three or six month LIBOR rate plus 2.00%, regardless of the Companys leverage ratio. At December 31, 2004, the average interest rate was 4.99%. Term Loan B
requires quarterly principal payments of $375 beginning in the first quarter of 2004 through the fourth quarter of 2010, three quarterly principal payments of $34,875 in 2011 and a final principal payment of $33,314 on December 31, 2011.



The 9.34% Secured Term Loan in the amount of $20,000 was assumed as a
result of the Conestoga acquisition. The 9.34% Secured Term Loan requires interest to be paid quarterly at the stated rate and also requires principal to be paid in quarterly installments of $500 beginning in 2005 and continuing through 2014.



The 9.36% Secured Term Loan in the amount of $15,000 was
assumed as a result of the Conestoga acquisition. The 9.36% Secured Term Loan requires interest to be paid quarterly at the stated rate and also requires principal to be paid in quarterly installments of $375 beginning in 2005 and continuing through
2014.



As of December 31, 2004, $15,000 of the Revolving Loan
was available for borrowing without violating any of the covenants. Our ratio of total debt to total debt plus capital increased to 56.3% at December 31, 2004 from 53.6% at December 31, 2003 due partially to a decrease in our shareholders
equity as a result of dividend payments, purchasing treasury stock during 2004 and the loss on investments due to the Pilicka asset impairment.



The refinanced credit facility has no restrictions on expansion of our edge-out market areas and no excess cash flow payment requirement. Excess cash flow
for the fourth quarter of 2003 required a payment of $4,350 on the Revolving Loan on February 13, 2004. The cash balance was sufficient to make the excess cash flow payment and that reduction of debt added to the funds borrowed upon closing of the
$260,000 refinancing. The refinanced credit facility continues to include a number of significant covenants that impose restrictions on our business. These covenants include, among others, a limit of $10,000 in annual dividend payments, additional
indebtedness, mergers, acquisitions and the disposition of assets, sale and leaseback transactions and capital lease payments. The completion of the refinancing in the first quarter of 2004 and the subsequent amendment in November 2004 required us
to expense $4,949 of unamortized debt issuance costs from the old financing agreement and $303 of debt issuance costs related to the new amendment. We capitalized approximately $2,293 related to the new financing agreement and amendment. Assuming no
ongoing increase in market interest rates, we anticipate the refinancing in March and the amendment in November will provide an annual interest savings of $2,700.



|                                                 |  |                               
|------------------------------------------------ |  | ------------------------------
|Rates                                            |  | Amended RefinanceRequirement  
|Term Loan A  depending on our leverage ratio    |  | U.S. Prime plus 1.00% to 1.75%
|                                                 |  | LIBOR plus 2.00% to 2.75%     
|Term Loan B                                      |  | U.S. Prime plus 1.00%         
|                                                 |  | LIBOR plus 2.00%              
|Revolving Loan  depending on our leverage ratio |  | U.S. Prime plus 1.00% to 1.75%
|                                                 |  | LIBOR plus 2.00% to 2.75%     



40



---

##### Table of Contents

|                                                          |  |                              |  
|--------------------------------------------------------- |  | ---------------------------- | -
|Ratios                                                    |  | December 31, 2004Requirement |  
|Total Leverage Ratio = Indebtedness divided by Cash Flow  |  | <4.25                        |  
|Declines to < 2.75 after 1/1/2008                         |  |                              |  
|Total Indebtedness to Total Capitalization Ratio          |  | <60                          | %
|Debt Service Coverage = Cash Flow divided by Debt Service |  |                              |  
|Pro forma last year Cash Flow / next years Debt Service  |  | >1.75                        |  
|Operating Cash Flow divided by Fixed Charges              |  | >1.05                        |  



|                     |  |   |        
|-------------------- |  | - | -------
|Principal repayments |  |  
|2005                 |  | $ | 10,000 
|2006                 |  | $ | 10,000 
|2007                 |  | $ | 12,500 
|2008                 |  | $ | 12,500 
|2009                 |  | $ | 12,500 
|thereafter           |  | $ | 171,000

---

Note for covenant calculations that
Cash Flow uses the definition of Operating Cash Flow which means the sum of (i) net income or deficit, as the case may be (excluding extraordinary gains, extraordinary losses (including without limitation, any realization of the
unamortized debt issuance cost from the Current Credit Agreement), the non-cash write up or write down of any asset), (ii) total interest expense (including non-cash interest), (iii) depreciation and amortization expense and other similar non-cash
expenses, (iv) taxes, federal or state, imposed upon income and (v) non-cash employee and director compensation. For any period of calculation, Operating Cash Flow shall be adjusted to give effect to any acquisition, sale or other disposition of any
operation of business (or any portion thereof) during the period of calculation as if such acquisition, sale or other disposition occurred on the first day of such period of calculation. Further, the definition of fixed charges no longer includes
dividend payments.



Off-Balance Sheet Arrangements and
Contractual Obligations



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



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



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



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



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



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



Commitments, Contingencies and Projected Uses of Capital



Our most significant commitment for 2005 other than for operations, include
capital expenditures, the payment of common stock dividends, when and if declared, payment of principal and interest on our outstanding debt and other contractual obligations and commitments which are presented below. Scheduled principal payments
totaling $10,000 are due in 2005. Based on the amended agreement with CoBank, we believe that we will have sufficient resources to meet these commitments, contingencies and projected uses of funds.



We hold a 33.3% interest in EuroTel and a 28.8% interest in Pilicka, both of
which we account for under the equity method of accounting. Pilicka recognized an asset impairment late in 2004 requiring us to recognize a



41



---

##### Table of Contents

$1,068 loss for our equity share of the impairment. Since we and EuroTel have no legal obligation nor intention to provide future funding to Pilicka, we each
have written our investment in Pilicka to zero and will discontinue recognizing our equity share of their ongoing losses. EuroTel no longer records any value to its investment in Pilicka and therefore the value of our investment in EuroTel was
written down as an other-than-temporary loss on investments of $1,057. Neither the assets nor the liabilities of EuroTel or Pilicka are presented on a consolidated basis on our balance sheets. We have committed to fund EuroTel, on an equal basis
with the other investors in EuroTel, for certain of its operating cash needs and will continue to recognize our equity share of their ongoing losses. In 2004, we made advances of $636 pursuant to this commitment and expect that our 2005 funding
requirements for EuroTel will be less than $1,000.



At December
31, 2004, the long-term debt maturing in one year consisted of loan payments of $5,000 on Term Loan A, $1,500 on Term Loan B and $3,500 on the secured fixed rate term loans.



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



|                              |  |                        |         |        |   |           |  |           |        |               |   |        |  |   |        
|----------------------------- |  | ---------------------- | ------- | ------ | - | --------- |  | --------- | ------ | ------------- | - | ------ |  | - | -------
|                              |  | Payments Due by Period
|Obligation                    |  | Total                  |         | Year 1 |   | Years 2-3 |  | Years 4-5 |        | After 5 Years
|Debt maturing within one year |  | $                      | 10,000  |        | $ | 10,000    |  | $         |       |               | $ |       |  | $ |       
|Long-term Debt                |  |                        | 218,500 |        |   |          |  |           | 22,500 |               |   | 25,000 |  |   | 171,000
|Operating Leases              |  |                        | 1,934   |        |   | 1,005     |  |           | 620    |               |   | 169    |  |   | 140    
|Purchase Commitments          |  |                        | 9,535   |        |   | 2,831     |  |           | 4,366  |               |   | 2,367  |  |   | 1      
|                              |  |                        |         |        |   |           |  |           |        |               |   |        |  |   |        
|Total                         |  | $                      | 239,969 |        | $ | 13,836    |  | $         | 27,486 |               | $ | 27,536 |  | $ | 171,141
|                              |  |                        |         |        |   |           |  |           |        |               |   |        |  |   |        



Long-term debt listed
above is only principal and does not include required interest payments. We have commitments under contract to purchase telecommunication services to obtain the use of third-party network circuits or to maintain a minimum monthly volume for call
delivery. These commitments represent the total gross payments due under contract. We expect to contribute $2,750 and $3,000 to our pension plan for 2005 and 2006, respectively.



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 of America. The preparation of the financial statements requires us to make estimates and judgments that affect the reported amounts. On an on-going basis, we
evaluate our estimates, including those related to intangible assets, income taxes, revenues, contingencies and impairment of long-lived assets. We base our estimates on historical experience and other assumptions that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, as further described below.



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



Revenue Recognition



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



42



---

##### Table of Contents

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 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 or pay into the settlement pools differ from the amounts that we have recorded as accounts receivables or accrued liabilities on our balance sheets, we are required to record the amount of such a reduction or
increase as an adjustment to our earnings. Until December 2003, we did not experience significant adjustments to our revenues as a result of our participation in these pools. In December 2003, we recorded an increase in communications service
revenue of $933 as a result of a change in our estimated interstate revenue earned from the NECA pooling process. We revised our estimate, based on a recent decision rendered by the U.S. Court of Appeals for the District of Columbia Circuit, which
reaffirmed a FCC rule that mandates that refunds payable to long distance communication providers are not required for periods in which interstate rate-of-return revenues exceed FCC authorized levels if the rates for those periods were deemed to be
lawful rates. In December 2004, we recorded communication service revenue of $156 related to this estimate. NECAs access rates, in which our RLECs concur, were filed and approved consistent with the FCCs deemed lawful rules.



Regulated Asset Depreciation



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



In addition, use of the composite group remaining life method requires that
we periodically revise our depreciation rates. Such revisions are based on asset retirement activity, and often require that we make related estimates and assumptions. If actual outcomes differ from our estimates and assumptions, we may be required
to adjust depreciation and amortization expense, which could impact our earnings.



Impairment of Long-Lived Assets



Long-lived assets, including our property, plant and equipment and our finite-lived intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may
not be recoverable in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Recoverability is assessed based on future cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the undiscounted cash flows is less than the carrying value of the asset, an impairment loss is recognized. Any impairment loss, if indicated, would be measured as the amount by which the carrying amount of the asset
exceeds the estimated fair value of the asset. While we have never recorded a material impairment charge for long-lived assets, future events or changes in circumstances could result in a material charge to earnings.



Impairment of Goodwill and Indefinite-Lived Intangibles



Upon the adoption of SFAS No. 142, Goodwill and
Other Intangible Assets, on January 1, 2002, goodwill and indefinite-lived intangibles are no longer subject to amortization. Goodwill and indefinite-lived intangibles are subject to at least an annual assessment for impairment by comparing
carrying value to fair value. There is a



43



---

##### Table of Contents

two-step process for goodwill. The first step is to identify a potential impairment by comparing the fair value of reporting units to their carrying value.
If the results of the first step of the impairment testing indicate a potential impairment, the second step would be completed to measure the amount of any impairment loss. We continually evaluate whether events and circumstances have occurred that
indicate the remaining balances of goodwill and indefinite-lived intangibles may not be recoverable. In evaluating impairment, we estimate the sum of the expected future cash flows derived from such goodwill and indefinite-lived intangibles. Such
evaluations for impairment are significantly impacted by estimates of future revenues, costs and expenses, the market price of our stock and other factors. While we have never recorded a material impairment charge for goodwill and indefinite-lived
intangibles, future events or changes in circumstances could result in a material charge to earnings.



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. In December 2003, we adopted SFAS No. 132R,
Employers Disclosures about Pensions and Other Postretirement Benefits, which provides expanded disclosures related to our employee benefit plans. 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. Our pension expense for 2004 would have increased
approximately $100 if our assumed investment return were one quarter of a percent lower. The expense would have increased approximately $280 if our assumed discount rate were one quarter of a percent lower or decreased $275 if our assumed discount
rate were one quarter of a percent higher.



Income Taxes



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



Managements judgment is required in determining
the provision for current income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against the net deferred tax assets. A valuation



44



---

##### Table of Contents

allowance is established for any deferred tax asset that we may not be able to use in the preparation and filing of our future tax returns. We have recorded
a valuation allowance due to uncertainties related to the ability to utilize some of the deferred tax assets.



Recent Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-based Payment (SFAS
123R). SFAS 123R revises FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This
standard requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees (including stock options and discount stock purchase plans). SFAS No. 123R requires an entity to
measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The compensation cost of the award is recognized over the period during which an employee is required to
provide service, i.e. the requisite service period (usually the vesting period).



SFAS 123R is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. D&E expects to adopt this standard in July 2005 under the modified prospective transition
method. Under this method, a company records compensation expense for all new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation expense is recorded for the unvested portion of
previously granted awards that remain outstanding at the date of adoption. The cost of the unvested portion of the award is recognized as the requisite service is rendered on or after the required effective date. The adoption of SFAS 123R is not
expected to have a material impact on our consolidated financial position, results of operations or cash flows.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29 (SFAS 153).
The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions (APB 29), is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of assets exchanged, with certain
exceptions. SFAS 153 amends APB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The Companys
adoption of SFAS No. 153 is not expected to have a material impact on the Companys financial position, results of operations or cash flows.



In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, (SFAS 151) which clarifies
the types of costs that should be expensed rather than capitalized as inventory. This statement also clarifies the circumstances under which fixed overhead costs associated with operating facilities involved in inventory processing should be
capitalized. The provisions of SFAS No. 151 are applied prospectively and are effective for fiscal years beginning after June 15, 2005. The adoption of SFAS 151 is not expected to have a material impact on the Companys financial position,
results of operations or cash flows.



On October 22, 2004, the
American Jobs Creation Act was signed into law. This new law contains numerous changes to existing tax laws, including both domestic and foreign tax incentives. In December 2004, the FASB issued two Staff Positions (FSP) that provide accounting
guidance on how companies should account for the effects of the American Jobs Creation Act. FSP FAS 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004, states that the manufacturers deduction provided for under this legislation should be accounted for as a special deduction instead of a tax rate change. FSP FAS 109-2, Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of



45



---

##### Table of Contents

2004, allows a company additional time to evaluate the effects of the legislation on any plan for reinvestment or repatriation of foreign earnings for
purposes of applying SFAS No. 109, Accounting for Income Taxes. The Company is currently evaluating the impact from these FSPs on its results of operations, financial position and cash flows.



In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (The Act) was enacted into law. The Act provides a voluntary prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care plans that provide at least an actuarially
equivalent benefit. In May 2004, the FASB issued Staff Position No. FSP FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FAS 106-2). FAS
106-2 provides guidance on accounting for the effects of the new Medicare prescription drug benefit and the related federal subsidy available to employers whose prescription drug benefits are at least actuarially equivalent to the drug benefit
provided under Medicare Part D. Based upon this guidance, the Company did not believe its postretirement health care plans were actuarially equivalent. In January 2005, the Centers for Medicare and Medicaid Services issued final guidelines to define
actuarial equivalence under the regulations. The Company is evaluating the January 2005 guidelines to determine if the benefits provided by the Companys plan are at least actuarially equivalent to benefits available though Medicare Part D
under these new guidelines. Accordingly, the accumulated postretirement benefit obligation and the net periodic postretirement benefit cost reported in the financial statements and the accompanying notes do not reflect any effect of the federal
subsidy provided by the Act.



In January 2003, D&E adopted
SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS 143). This Statement establishes accounting practices relating to legal obligations associated with the retirement of tangible long-lived assets that result from
the acquisition, construction, development or normal operation of a long-lived asset. SFAS 143 requires that companies recognize the fair value of a liability for asset retirement obligations in the period in which the legal obligations are incurred
and capitalize that amount as a part of the book value of the long-lived asset. That cost is then depreciated over the remaining life of the underlying long-lived asset. D&E recorded an after-tax benefit of $260 as a cumulative effect accounting
adjustment in the first quarter 2003. The adjustment represents the cumulative estimate of cost of removal charged to depreciation expense in earlier years for which D&E does not have a legal obligation associated with the retirement of the
related tangible long-lived assets. The adoption of this pronouncement had no material effect on D&Es ongoing financial position, results of operations or cash flows.



In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest
Entities  An Interpretation of Accounting Research Bulletin (ARB) No. 51 (FIN 46). This interpretation clarifies how to identify variable interest entities (VIEs) and how a company should assess its
interests in a variable interest entity to decide whether to consolidate the entity. FIN 46 applies immediately to variable interest entities created after January 31, 2003, in which a company obtains an interest after that date. In December 2003,
the FASB issued FIN 46-R, a revision to FASB Interpretation No. 46 which among other things, defers the effective date of implementation for certain entities. The revised interpretation is effective for the first interim or annual reporting period
ending after March 15, 2004, with the exception of special-purpose entities for which the statement is effective for periods ending after December 15, 2003. The Company does not have any special-purpose entities.



FIN 46-R requires the consolidation of entities which are determined to be
VIEs when the reporting company determines that it will absorb a majority of the VIEs expected losses, receive a majority of the VIEs residual returns, or both. An entity is considered to be a VIE when its capital is insufficient to permit it
to finance its activities without additional subordinated financial support or its equity investors lack the characteristics of having a controlling financial interest.



D&E has one significant variable interest entity through its ownership interest in EuroTel, L.L.C.
(EuroTel). 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, and



46



---

##### Table of Contents

holds a 27.85% investment in Pilicka, a telecommunications company located in Poland. D&E has participated in this joint venture since January 1997.
EuroTel, PenneCom and Pilicka are referred to herein as our European affiliates. D&Es participation in this joint venture has been to provide working capital for the development of Pilickas telephone business in Poland and to manage
EuroTels investments. EuroTel has assets of approximately $200, with no annual operating revenue. D&Es exposure to loss from its involvement in EuroTel continues at one-third of EuroTels losses. Based on the accounting guidance
of FIN 46-R, D&E has determined it is not the primary beneficiary of this entity. According to the guidance of FIN 46-R, consolidation of EuroTel is not required and thus there is no effect on the Companys financial position, results of
operations and cash flows.



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



We are highly leveraged and, as a result, our cash flows and earnings are exposed to fluctuations in interest rates. Our debt obligations are U.S. dollar
denominated. Our market risk, therefore, is the potential loss arising from adverse changes in interest rates and changes in our leverage ratio which may increase the margin added to the interest rate as provided in our loan agreement. As of
December 31, 2004, our debt can be categorized as follows in thousands:



|                                         |  |   |        
|---------------------------------------- |  | - | -------
|Fixed interest rates:                    |  |   |        
|Secured Term Loans                       |  | $ | 35,000 
|Subject to interest rate fluctuations:   |  |   |        
|Senior Secured Revolving Credit Facility |  | $ | 10,000 
|Senior Secured Term Loans                |  | $ | 183,500



As part of our loan
covenant conditions, we have arranged interest rate protection on a minimum of one-half of the total amount of senior indebtedness outstanding, with a weighted average life of at least 2 years. As of December 31, 2004, our bank debt is as follows:



|                                                        |  |           |         |             |      |   |            |   |        
|------------------------------------------------------- |  | --------- | ------- | ----------- | ---- | - | ---------- | - | -------
|                                                        |  | Principal |         | AverageRate |      |   | Fair Value
|Rates fixed for three years through interest rate swaps |  | $         | 35,000  |             | 5.05 | % |            | $ | 35,000 
|Rates fixed for four years through interest rate swaps  |  | $         | 35,000  |             | 5.49 | % |            | $ | 35,000 
|Rates fixed for four years through interest rate swaps  |  | $         | 15,000  |             | 5.98 | % |            | $ | 15,000 
|Fixed rate debt, rates fixed for twelve years           |  | $         | 35,000  |             | 9.35 | % |            | $ | 41,583 
|Total fixed rates 53% of total debt                     |  | $         | 120,000 |             | 6.55 | % |            | $ | 126,583
|Variable rate debt 47% of total debt                    |  | $         | 108,500 |             | 4.72 | % |            | $ | 108,500



If interest rates rise
above the rates of the variable debt, we could incur extra interest expense of $543 for each 50 basis points above the current rates. If rates were to decline, we would realize reductions in interest expense of approximately $543 for each 50 basis
point decrease in rates.



The interest rate swaps were arranged
to hedge against the effect of interest rate fluctuations. The swaps were arranged with three banks that participate in our senior indebtedness. Under these interest rate swap contracts, we agree to pay an amount equal to a specified fixed-rate of
interest times a notional principal amount and to receive in turn an amount equal to a specified variable-rate of interest times the same notional amount. The notional amounts of the contracts are not exchanged. Net interest positions are settled
quarterly.



|                     |  |                 |        |                 |      |   |                     |      |   |            |   |    
|-------------------- |  | --------------- | ------ | --------------- | ---- | - | ------------------- | ---- | - | ---------- | - | ---
|Terms of Swaps       |  | NotionalAmounts |        | AveragePay Rate |      |   | AverageReceivedRate |      |   | Fair Value
|12/04/02 to 12/04/05 |  | $               | 35,000 |                 | 6.93 | % |                     | 4.44 | % |            | $ | 13 
|11/25/02 to 11/25/06 |  | $               | 35,000 |                 | 7.23 | % |                     | 4.38 | % |            | $ | 131
|11/26/04 to 11/26/08 |  | $               | 15,000 |                 | 8.36 | % |                     | 4.38 | % |            | $ | 146



47



---

##### Table of Contents

If interest rates rise above the rates fixed by these swaps, we could realize other income of $425 for
each 50 basis points above the fixed rates. If rates were to decline, we would realize other expense of approximately $425 for each 50 basis point decrease in rates.



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



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



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



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



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



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



As of December 31, 2004, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporations management,
including the Corporations Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Disclosure controls and procedures
are controls and procedures that are designed to ensure that information required to be disclosed in Corporation reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commissions rules and forms. Based upon that evaluation, the Corporations Chief Executive Officer and Chief Financial Officer concluded that the Corporations disclosure controls and procedures were
effective as of the end of the period covered by this Annual Report.



Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404) requires D&E to include a report regarding the effectiveness of its internal control over financial reporting, beginning with its Annual Report on Form 10-K for the
year ending December 31, 2004. That report includes an assessment by D&Es management on the design and operating effectiveness of its internal control over financial reporting as of the end of the fiscal year. To comply with the
requirements of Section 404, the Company designed and implemented a comprehensive compliance process to evaluate its internal control over financial reporting across the enterprise. Managements report and assessment on the effectiveness of its
internal control over financial reporting is included herein on page F-2.



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



In
October 2004, D&E completed the process to consolidate two of its existing billing systems into one billing program. This billing conversion was completed in the fourth quarter, 2004. In connection with the billing system conversion process, we
made significant changes to the internal controls of the Company as a result of consolidating the related internal control processes. Although changes in controls were completed during the fourth quarter 2004, management has concluded based on an
evaluation and assessment of controls, that there has been no material affect, nor is it reasonably likely to materially affect, the effectiveness of the Companys internal control over financial reporting.



48



---

##### Table of Contents

PART III



|Item 10. | Directors and Executive Officers of the Registrant
|-------- | --------------------------------------------------



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



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



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



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



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



|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.



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



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



49



---

##### Table of Contents

PART IV



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



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



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



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



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



(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 (15) is set forth in the Index to Financial Statements on page F-1.



50



---

##### Table of Contents

INDEX TO EXHIBITS



|           |  |                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                               |  | 
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | 
|ExhibitNo. |  | Identification of Exhibit                                                                                                                                                                                                                                                                                                     |  | Reference                                                                                                                    
|2.         |  | Plan of acquisition, reorganization, arrangement, liquidation or succession:                                                                                                                                                                                                                                                  |  |                                                                                                                              
|           |  |                                                                                                                                                                                                                                                                                                                              
|2.1        |  | Amended and Restated Agreement and Plan of Merger, by and among D&E, Inc., D&E Acquisition Corp. and Conestoga Enterprises, Inc. dated as of January 9, 2002.                                                                                                                                                                 |  | Incorporated herein by reference from Exhibit 2.1 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 3.1 to D&Es Annual Report on Form 10-K for the year ended December 31, 2002.  
|           |  |                                                                                                                                                                                                                                                                                                                              
|3.2        |  | By-laws                                                                                                                                                                                                                                                                                                                       |  | Incorporated herein by reference from Exhibit 3.1 to the Current Report on Form 8-K filed by D&E on December 8, 2004.        
|           |  |                                                                                                                                                                                                                                                                                                                              
|4.         |  | Instruments defining the rights of security holders, including debentures:                                                                                                                                                                                                                                                    |  | None.                                                                                                                        
|           |  |                                                                                                                                                                                                                                                                                                                              
|9.         |  | Voting Trust Agreement.                                                                                                                                                                                                                                                                                                       |  |                                                                                                                              
|           |  |                                                                                                                                                                                                                                                                                                                              
|9.1        |  | Voting Trust Agreement of Denver and Ephrata Telephone and Telegraph Company dated as of November 19, 1992. (Voting Trust Agreement).                                                                                                                                                                                       |  | Incorporated herein by reference from Exhibit 9.1 to D&Es Annual Report on Form 10-K for the year ended December 31, 2002.  
|           |  |                                                                                                                                                                                                                                                                                                                              
|9.2        |  | Amendment to the Voting Trust Agreement dated as of December 31, 1995.                                                                                                                                                                                                                                                        |  | Incorporated herein by reference from Exhibit 9.2 to D&Es Annual Report on Form 10-K for the year ended December 31, 2002.  
|           |  |                                                                                                                                                                                                                                                                                                                              
|9.3        |  | Amendment to the Voting Trust Agreement dated as of November 19, 2002.                                                                                                                                                                                                                                                        |  | Incorporated herein by reference from Exhibit 9.1 to the Form 8-K Current Report filed by D&E on November 19, 2002.          
|           |  |                                                                                                                                                                                                                                                                                                                              
|10.        |  | Material Contracts                                                                                                                                                                                                                                                                                                            |  |                                                                                                                              
|           |  |                                                                                                                                                                                                                                                                                                                              
|10.1       |  | AT&T Communications Standard Agreement for the Provision of Telecommunications Services and Facilities between AT&T Communications of Pennsylvania, Inc. and Denver and
Ephrata Telephone and Telegraph Company;                                                                                                              |  | Incorporated herein by reference from Exhibit 10.2 to D&Es Registration Statement on Form 10 filed by D&E on April 30, 1993.
|           |  |                                                                                                                                                                                                                                                                                                                               | 
|           |  | Article 1                                                                                                                                                                                                                                                                                                                     |  | General Provisions, effective May 25, 1984;                                                                                   |  | 
|           |  |                                                                                                                                                                                                                                                                                                                               | 
|           |  | Article 8-2                                                                                                                                                                                                                                                                                                                   |  | Billing and Collection Services effective April 1, 1992;                                                                      |  | 
|           |  |                                                                                                                                                                                                                                                                                                                              
|10.2       |  | Telecommunications Services and Facilities Agreement between the Bell Telephone Company of Pennsylvania and Denver and Ephrata Telephone and Telegraph Company, effective January 1,
1986; and Amendment to Telecommunications Services and Facilities Agreement and the IntraLATA Compensation Agreement, dated May 7, 1992; |  | Incorporated herein by reference from Exhibit 10.3 to D&Es Registration Statement on Form 10 filed by D&E on April 30, 1993.
|           |  |                                                                                                                                                                                                                                                                                                                               | 
|           |  | Appendix 1                                                                                                                                                                                                                                                                                                                    |  | IntraLATA Telecommunications Services, effective January 1, 1986;                                                             |  | 



51



---

##### Table of Contents

|           |  |                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                     |  | 
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------- |  | 
|ExhibitNo. |  | Identification of Exhibit                                                                                                                                                                                                                                                                                    |  | Reference                                                                                                                          
|           |  |                                                                                                                                                                                                                                                                                                              | 
|           |  | Appendix 2                                                                                                                                                                                                                                                                                                   |  | Ancillary Services, effective January 1, 1986;                                                                                      |  | 
|           |  |                                                                                                                                                                                                                                                                                                              | 
|           |  | Appendix 5                                                                                                                                                                                                                                                                                                   |  | Jointly Provided Feature Group A Compensation effective July 24, 1986; and                                                          |  | 
|           |  |                                                                                                                                                                                                                                                                                                              | 
|           |  | Appendix 7                                                                                                                                                                                                                                                                                                   |  | Extended Area Service, effective October 1,1988.                                                                                    |  | 
|           |  |                                                                                                                                                                                                                                                                                                             
|10.3       |  | IntraLATA Compensation Agreement between the Pennsylvania Non-Bell Telephone Companies and Denver and Ephrata Telephone and Telegraph Company, effective January 1, 1986; and
Amendment to Telecommunications Services and Facilities Agreement and the IntraLATA Compensation Agreement, dated May 7, 1992. |  | Incorporated herein by reference from Exhibit 10.4 to D&Es Registration Statement on Form 10 filed by D&E on April 30, 1993.      
|           |  |                                                                                                                                                                                                                                                                                                             
|10.4       |  | Agreement for the Distribution of Interstate Access Revenues between the National Exchange Carrier Association, Inc. and Denver and Ephrata Telephone and Telegraph Company, effective
May 25, 1984.                                                                                                         |  | Incorporated herein by reference from Exhibit 10.6 to D&Es Registration Statement on Form 10 filed by D&E on April 30, 1993.      
|           |  |                                                                                                                                                                                                                                                                                                             
|10.5       |  | Agreement for the Provision of Enhanced 9-1-1 Services between the County of Lancaster and Denver and Ephrata Telephone and Telegraph Company, effective upon approval of the
Pennsylvania Public Utility Commission which occurred May 18, 1994                                                             |  | Incorporated herein by reference from Exhibit 10.7 to D&Es Annual Report on Form 10-K for the year ended 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.                                                                                           |  | 
|           |  |                                                                                                                                                                                                                                                                                                             
|10.6       |  | Modification #2 to the Agreement for the Provision of Enhanced 9-1-1 Services between the County of Lancaster and D&E Telephone Company, signed July 14, 1999.                                                                                                                                               |  | Incorporated herein by reference from Exhibit 10.1 to D&Es Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
|           |  |                                                                                                                                                                                                                                                                                                             
|10.7       |  | Stock Acquisition Agreement between D&E, Inc. and Southwestern Investments, Inc., a subsidiary of Citizens Utilities Company, dated November 3, 1997.                                                                                                                                                        |  | Incorporated herein by reference from Exhibit 10.7 to D&Es Annual Report on Form 10-K for the year ended December 31, 2002.       
|           |  |                                                                                                                                                                                                                                                                                                             
|10.8       |  | Partnership Interest Purchase Agreement among D&E Wireless, Inc., D&E Communications, Inc., VoiceStream PA II, LLC, and VoiceStream PA I, LLC dated as of October 17,
2001.                                                                                                                                  |  | Incorporated herein by reference from Exhibit 10.13 to D&Es Annual Report on Form 10-K for the year ended December 31, 2001.      



52



---

##### Table of Contents

|           |  |                                                                                                                                                                                                                                            |  |                                                                                                                                                       |  | 
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|ExhibitNo. |  | Identification of Exhibit                                                                                                                                                                                                                  |  | Reference                                                                                                                                            
|           |  |                                                                                                                                                                                                                                           
|10.9       |  | 2001 Stock Compensation Plan and Policy for non-employee Directors of D&E Communications, Inc.                                                                                                                                             |  | Incorporated herein by reference from Exhibit A to D&Es definitive proxy statement for its 2001 Annual Meeting of Shareholders filed March 23, 2001.
|           |  |                                                                                                                                                                                                                                           
|10.10      |  | Employment Agreement dated May 24, 2002 between Albert H. Kramer and D&E Communications, Inc.                                                                                                                                              |  | Incorporated herein by reference from Exhibit 10.1 to D&Es Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.                  
|           |  |                                                                                                                                                                                                                                           
|10.11      |  | Amended and Restated Agreement and Plan of Merger by and among D&E Communications, Inc., D&E Acquisition Corp. and Conestoga Enterprises, Inc. dated January 9,
2002.                                                                      |  | Incorporated herein by reference from Exhibit 2.1 to the Form 8-K current report filed by D&E on January 9, 2002.                                    
|           |  |                                                                                                                                                                                                                                           
|10.12      |  | Conestoga Enterprises, Inc. 1999 Stock Option Plan.                                                                                                                                                                                        |  | Incorporated herein by reference to Exhibit 99.1 to Form S-8 filed by D&E on May 24, 2002.                                                           
|           |  |                                                                                                                                                                                                                                           
|10.13      |  | D&E Communications, Inc. Exempt Employee Short-Term Incentive Plan for 2004.                                                                                                                                                               |  | Incorporated herein by reference from Exhibit 10.14 to Form 10-K for the year ended December 31, 2003.                                               
|           |  |                                                                                                                                                                                                                                           
|10.14      |  | D&E Communications, Inc. Exempt Employee Short-Term Incentive Plan for 2005.                                                                                                                                                               |  | Incorporated herein by reference from Exhibit 99.1 to the Current Report on Form 8-K filed by D&E on March 2, 2005.                                  
|           |  |                                                                                                                                                                                                                                           
|10.15      |  | Asset Purchase Agreement by and among D&E Communications, Inc., Conestoga Wireless Company and Keystone Wireless, LLC dated November 12, 2002.                                                                                             |  | Incorporated herein by reference from Exhibit 2.1 to the Form 8-K current report filed by D&E on January 29, 2003.                                   
|           |  |                                                                                                                                                                                                                                           
|10.16      |  | Limited Guarantee Agreement dated June 29, 2001 by Conestoga Enterprises, Inc. with Mountain Union.                                                                                                                                        |  | Incorporated herein by reference from Exhibit 10.19 to D&Es Annual Report on Form 10-K for the year ended December 31, 2002.                        
|           |  |                                                                                                                                                                                                                                           
|10.17      |  | Build-to-Suit Agreement dated June 29, 2001 by and between Conestoga Enterprises, Inc. on behalf of itself and its wholly-owned subsidiaries, Conestoga Mobile Systems, Inc. and
Conestoga Wireless, Inc. and Mountain Union Telecom, LLC. |  | Incorporated herein by reference from Exhibit 10.20 to D&Es Annual Report on Form 10-K for the year ended December 31, 2002.                        
|           |  |                                                                                                                                                                                                                                           
|10.18      |  | Credit Agreement Dated as of March 5, 2004 by and among D&E Communications, Inc. as borrower and CoBank, ACB as Administrative Agent, a CoLead Arranger and a Lender and other
Lenders referred to therein.                                |  | Incorporated herein by reference from Exhibit 10.18 to Form 10-K for the year ended December 31, 2003.                                               
|           |  |                                                                                                                                                                                                                                           
|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 Kiesling Associates LLP                                                                                                                                                                                                         |  | Filed herewith.                                                                                                                                      
|           |  |                                                                                                                                                                                                                                           
|23.3       |  | Consent of PricewaterhouseCoopers Sp. z o. o, Warsaw, Poland                                                                                                                                                                               |  | Filed herewith.                                                                                                                                      
|           |  |                                                                                                                                                                                                                                           
|31.1       |  | Certification of Chief Executive Officer.                                                                                                                                                                                                  |  | Filed herewith.                                                                                                                                      
|           |  |                                                                                                                                                                                                                                           
|31.2       |  | Certification of Chief Financial Officer.                                                                                                                                                                                                  |  | Filed herewith.                                                                                                                                      
|           |  |                                                                                                                                                                                                                                           
|32.1       |  | Certification of Chief Executive Officer.                                                                                                                                                                                                  |  | Filed herewith.                                                                                                                                      
|           |  |                                                                                                                                                                                                                                           
|32.2       |  | Certification of Chief Financial Officer.                                                                                                                                                                                                  |  | Filed herewith.                                                                                                                                      



53



---

##### Table of Contents

SIGNATURES



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



Date: March 14, 2005



D&E COMMUNICATIONS, INC.By:

/s/    G. WILLIAM RUHLG. William Ruhl Chairman of the Board, President andChief Executive Officer




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



|                                              |  |                                                                                                           |  |               
|--------------------------------------------- |  | --------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                     |  | Title                                                                                                     |  | Date          
|/s/    G. WILLIAM RUHLG. William Ruhl         |  | Chairman of the Board, President and Chief Executive Officer(Principal executive officer)                 |  | March 14, 2005
|                                              |  |                                                                                                          
|/s/    THOMAS E.
MORELLThomas E.
Morell       |  | Senior Vice President, Chief Financial Officer and Treasurer (Principal financial and accounting officer) |  | March 14, 2005
|                                              |  |                                                                                                          
|/s/    W. GARTH
SPRECHERW. Garth
Sprecher     |  | Senior Vice President, Secretary and Director                                                             |  | March 14, 2005
|                                              |  |                                                                                                          
|/s/    JOHN AMOSJohn Amos                     |  | Director                                                                                                  |  | March 14, 2005
|                                              |  |                                                                                                          
|/s/    THOMAS H.
BAMFORDThomas H.
Bamford     |  | Director                                                                                                  |  | March 14, 2005
|                                              |  |                                                                                                          
|/s/    PAUL W.
BRUBAKERPaul W.
Brubaker       |  | Director                                                                                                  |  | March 14, 2005
|                                              |  |                                                                                                          
|/s/    RONALD E.
FRISBIERonald E.
Frisbie     |  | Director                                                                                                  |  | March 14, 2005
|                                              |  |                                                                                                          
|/s/    ROBERT A.
KINSLEYRobert A.
Kinsley     |  | Director                                                                                                  |  | March 14, 2005
|                                              |  |                                                                                                          
|/s/    ROBERT M.
LAUMANRobert M.
Lauman       |  | Director                                                                                                  |  | March 14, 2005
|                                              |  |                                                                                                          
|/s/    STEVEN B.
SILVERMANSteven B.
Silverman |  | Director                                                                                                  |  | March 14, 2005
|                                              |  |                                                                                                          
|/s/    ANNE B.
SWEIGARTAnne B.
Sweigart       |  | Director and Chairman Emeritus of the Board                                                               |  | March 14, 2005
|                                              |  |                                                                                                          
|/s/    D. MARK THOMASD. Mark Thomas           |  | Director                                                                                                  |  | March 14, 2005
|                                              |  |                                                                                                          
|/s/    RICHARD G.
WEIDNERRichard G.
Weidner   |  | Director                                                                                                  |  | March 14, 2005



54



---

##### Table of Contents

INDEX TO FINANCIAL STATEMENTS



|              |  |                                                                                                                                      |  |     
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|              |  |                                                                                                                                      |  | Page
|Item 8        |  | D&E Communications, Inc. and Subsidiaries.                                                                                           |  |     
|              |  | Managements Report on Responsibility for Financial Information                                                                      |  | F-2 
|              |  | Managements Report on Internal Control Over Financial Reporting                                                                     |  | F-2 
|              |  | Report of Independent Registered Public Accounting Firm                                                                              |  | F-3 
|              |  | Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002                                           |  | F-5 
|              |  | Consolidated Balance Sheets as of December 31, 2004 and 2003                                                                         |  | F-6 
|              |  | Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002                                           |  | F-7 
|              |  | Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) for the years ended December 31, 2004, 2003 and 2002 |  | F-8 
|              |  | Notes to Consolidated Financial Statements                                                                                           |  | F-9 
|              |  |                                                                                                                                     
|Item 15(a)(2) |  | Financial Schedule II  Valuation and Qualifying Accounts                                                                            |  | F-45
|              |  |                                                                                                                                     
|Item 15(d)(1) |  | EuroTel L.L.C.                                                                                                                       |  |     
|              |  | Cover Page                                                                                                                           |  | F-46
|              |  | Report of Independent Auditor                                                                                                        |  | F-48
|              |  | Consolidated Balance Sheets as of December 31, 2004 and 2003                                                                         |  | F-49
|              |  | Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002                                           |  | F-51
|              |  | Consolidated Statements of Members Equity (Deficit) and Comprehensive Income (Loss) for the years ended December 31, 2004 and 2003  |  | F-52
|              |  | Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003                                                 |  | F-53
|              |  | Notes to Consolidated Financial Statements                                                                                           |  | F-54
|              |  |                                                                                                                                     
|Item 15(d)(2) |  | Pilicka Telefonia Sp. z o.o.                                                                                                         |  |     
|              |  | Cover Page                                                                                                                           |  | F-60
|              |  | Report of Independent Registered Public Accounting Firm                                                                              |  | F-62
|              |  | Balance Sheets as of December 31, 2004 and 2003                                                                                      |  | F-63
|              |  | Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002                                                        |  | F-64
|              |  | Statements of Changes in Shareholders Equity for the Years ended December 31, 2004, 2003 and 2002                                   |  | F-65
|              |  | Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002                                                        |  | F-66
|              |  | Notes to the Financial Statements                                                                                                    |  | F-68



F-1



---

##### Table of Contents

MANAGEMENTS REPORTS TO D&E COMMUNICATIONS, INC. SHAREHOLDERS



MANAGEMENTS REPORT ON RESPONSIBILITY FOR FINANCIAL INFORMATION



The management of D&E Communications, Inc. is responsible for the preparation and integrity of the Companys Consolidated Financial Statements
and all related information appearing in this Annual Report. Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control
over financial reporting as of December 31, 2004.



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



The Audit Committee of the Board of Directors oversees D&Es financial reporting process on behalf of the Board of Directors. The Audit Committee
is composed solely of outside independent directors, and meets periodically with members of management and the independent auditors to review and discuss internal controls over financial reporting, the annual financial statement audit, and
accounting and other financial reporting matters.



MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING



Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management performed an assessment of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (or the COSO framework). This evaluation included a review of the documentation of
internal control over financial reporting and an evaluation of the design effectiveness of those controls. We also conducted testing for the operating effectiveness of our internal control over financial reporting. Based on our assessment,
management has concluded that our internal control over financial reporting was effective as of December 31, 2004.



PricewaterhouseCoopers LLP, an independent registered public accounting firm has issued an audit report on managements assessment of the
effectiveness of internal control over financial reporting as of December 31, 2004, which is included herein. As stated in their report, PricewaterhouseCoopers LLP has also audited D&Es consolidated financial statements included in Item 8.



F-2



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Shareholders

of D&E Communications, Inc.:



We have completed an integrated audit of D&E Communications Inc.s 2004 consolidated financial statements and of its internal control over
financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are
presented below.



Consolidated financial statements and financial statement
schedule



In our opinion, the consolidated financial
statements listed in the accompanying index present fairly, in all material respects, the financial position of D&E Communications Inc. at December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index 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 the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.



As discussed in Note 2, effective January 1, 2003, the Company changed its accounting for asset retirement obligations pursuant to the provisions of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations.



Internal control over financial reporting



Also, in our opinion, managements assessment, included in
Managements Report on Internal Control Over Financial Reporting appearing under Item 8, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal
Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control  Integrated Framework issued by the COSO. The Companys
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on managements
assessment and on the effectiveness of the Companys internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit
of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.



F-3



---

##### Table of Contents

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



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



/s/    PRICEWATERHOUSECOOPERS LLP



Philadelphia, Pennsylvania

March 11, 2005



F-4



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                                                                          |  |                                         |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                                          |  | Year Ended December 31,                 |        
|                                                                                                                                          |  | 2004                                    |         |   | 2003 |   |         | 2002 | 
|                                                                                                                                          |  | (In thousands, exceptper-share amounts) |        
|OPERATING REVENUES Communication service revenues                                                                                         |  | $                                       | 160,820 |   |      | $ | 158,486 |      |  | $ | 121,243 |  
|Communication products sold                                                                                                               |  |                                         | 12,656  |   |      |   | 12,255  |      |  |   | 14,266  |  
|Other                                                                                                                                     |  |                                         | 2,795   |   |      |   | 2,384   |      |  |   | 1,825   |  
|                                                                                                                                          |  |                                         |         |   |      |   |         |      |  |   |         |  
|Total operating revenues                                                                                                                  |  |                                         | 176,271 |   |      |   | 173,125 |      |  |   | 137,334 |  
|                                                                                                                                          |  |                                         |         |   |      |   |         |      |  |   |         |  
|OPERATING EXPENSES                                                                                                                        |  |                                         |         |   |      |   |         |      |  |   |         |  
|Communication service expenses (exclusive of depreciation and amortization below)                                                         |  |                                         | 65,049  |   |      |   | 60,846  |      |  |   | 50,140  |  
|Cost of communication products sold                                                                                                       |  |                                         | 10,100  |   |      |   | 9,317   |      |  |   | 12,497  |  
|Depreciation and amortization                                                                                                             |  |                                         | 39,119  |   |      |   | 38,626  |      |  |   | 28,690  |  
|Marketing and customer services                                                                                                           |  |                                         | 15,977  |   |      |   | 16,073  |      |  |   | 15,093  |  
|Merger-related costs                                                                                                                      |  |                                         |        |   |      |   |        |      |  |   | 973     |  
|General and administrative services                                                                                                       |  |                                         | 25,079  |   |      |   | 24,496  |      |  |   | 22,666  |  
|                                                                                                                                          |  |                                         |         |   |      |   |         |      |  |   |         |  
|Total operating expenses                                                                                                                  |  |                                         | 155,324 |   |      |   | 149,358 |      |  |   | 130,059 |  
|                                                                                                                                          |  |                                         |         |   |      |   |         |      |  |   |         |  
|Operating income                                                                                                                          |  |                                         | 20,947  |   |      |   | 23,767  |      |  |   | 7,275   |  
|OTHER INCOME (EXPENSE)                                                                                                                    |  |                                         |         |   |      |   |         |      |  |   |         |  
|Equity in net losses of affiliates                                                                                                        |  |                                         | (3,172  | ) |      |   | (2,537  | )    |  |   | (3,429  | )
|Interest expense                                                                                                                          |  |                                         | (14,389 | ) |      |   | (18,074 | )    |  |   | (11,895 | )
|Gain (loss) on investments                                                                                                                |  |                                         | (1,057  | ) |      |   | 790     |      |  |   | (2,999  | )
|Loss on early extinguishment of debt                                                                                                      |  |                                         | (5,252  | ) |      |   |        |      |  |   |        |  
|Other, net                                                                                                                                |  |                                         | 1,679   |   |      |   | 1,964   |      |  |   | 422     |  
|                                                                                                                                          |  |                                         |         |   |      |   |         |      |  |   |         |  
|Total other income (expense)                                                                                                              |  |                                         | (22,191 | ) |      |   | (17,857 | )    |  |   | (17,901 | )
|                                                                                                                                          |  |                                         |         |   |      |   |         |      |  |   |         |  
|Income (loss) from continuing operations before income taxes and dividends on utility preferred stock                                     |  |                                         | (1,244  | ) |      |   | 5,910   |      |  |   | (10,626 | )
|INCOME TAXES AND DIVIDENDS ON UTILITY PREFERRED STOCK                                                                                     |  |                                         |         |   |      |   |         |      |  |   |         |  
|Income taxes (benefit)                                                                                                                    |  |                                         | 1,430   |   |      |   | 1,968   |      |  |   | (3,586  | )
|Dividends on utility preferred stock                                                                                                      |  |                                         | 65      |   |      |   | 65      |      |  |   | 65      |  
|                                                                                                                                          |  |                                         |         |   |      |   |         |      |  |   |         |  
|Total income taxes and dividends on utility preferred stock                                                                               |  |                                         | 1,495   |   |      |   | 2,033   |      |  |   | (3,521  | )
|                                                                                                                                          |  |                                         |         |   |      |   |         |      |  |   |         |  
|Income (loss) from continuing operations                                                                                                  |  |                                         | (2,739  | ) |      |   | 3,877   |      |  |   | (7,105  | )
|Discontinued operations:                                                                                                                  |  |                                         |         |   |      |   |         |      |  |   |         |  
|Gain on disposal of discontinued D&E Wireless segment, net of operating losses during phase-out period and net of income taxes of
$29,337 |  |                                         |        |   |      |   |        |      |  |   | 55,506  |  
|Loss from operations of Paging business, net of income tax benefit of $27 and $3                                                          |  |                                         |        |   |      |   | (53     | )    |  |   | (7      | )
|                                                                                                                                          |  |                                         |         |   |      |   |         |      |  |   |         |  
|Income (loss) before cumulative effect of change in accounting principle                                                                  |  |                                         | (2,739  | ) |      |   | 3,824   |      |  |   | 48,394  |  
|Cumulative effect of change in accounting principle, net of income taxes of $177                                                          |  |                                         |        |   |      |   | 260     |      |  |   |        |  
|                                                                                                                                          |  |                                         |         |   |      |   |         |      |  |   |         |  
|NET INCOME (LOSS)                                                                                                                         |  | $                                       | (2,739  | ) |      | $ | 4,084   |      |  | $ | 48,394  |  
|                                                                                                                                          |  |                                         |         |   |      |   |         |      |  |   |         |  
|Weighted average common shares outstanding (basic)                                                                                        |  |                                         | 15,057  |   |      |   | 15,484  |      |  |   | 12,254  |  
|Weighted average common shares outstanding (diluted)                                                                                      |  |                                         | 15,057  |   |      |   | 15,541  |      |  |   | 12,254  |  
|BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE                                                                                        |  |                                         |         |   |      |   |         |      |  |   |         |  
|Income (loss) from continuing operations                                                                                                  |  | $                                       | (0.18   | ) |      | $ | 0.25    |      |  | $ | (0.58   | )
|Income (loss) from discontinued operations                                                                                                |  |                                         |        |   |      |   |        |      |  |   | 4.53    |  
|Cumulative effect of accounting change                                                                                                    |  |                                         |        |   |      |   | 0.01    |      |  |   |        |  
|                                                                                                                                          |  |                                         |         |   |      |   |         |      |  |   |         |  
|Net income (loss) per common share                                                                                                        |  | $                                       | (0.18   | ) |      | $ | 0.26    |      |  | $ | 3.95    |  
|                                                                                                                                          |  |                                         |         |   |      |   |         |      |  |   |         |  
|Dividends per common share                                                                                                                |  | $                                       | 0.50    |   |      | $ | 0.50    |      |  | $ | 0.50    |  
|                                                                                                                                          |  |                                         |         |   |      |   |         |      |  |   |         |  
|Proforma net income (loss) assuming SFAS 143 is applied retroactively                                                                     |  | $                                       | (2,739  | ) |      | $ | 3,824   |      |  | $ | 48,418  |  
|                                                                                                                                          |  |                                         |         |   |      |   |         |      |  |   |         |  



See notes to
consolidated financial statements.



F-5



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                |  |                |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                                                |  | December 31,   |        
|                                                                                                                                                                                                |  | 2004           |         |   | 2003 |  
|                                                                                                                                                                                                |  | (In thousands) |        
|ASSETS                                                                                                                                                                                          | 
|CURRENT ASSETS                                                                                                                                                                                  |  |                |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                                                                                       |  | $              | 8,517   |   |      | $ | 12,446  |  
|Accounts receivable, net of reserves of $1,024 and $1,410                                                                                                                                       |  |                | 16,570  |   |      |   | 20,956  |  
|Inventories, lower of cost or market, at average cost                                                                                                                                           |  |                | 3,523   |   |      |   | 3,552   |  
|Prepaid expenses                                                                                                                                                                                |  |                | 8,466   |   |      |   | 8,914   |  
|Other                                                                                                                                                                                           |  |                | 2,465   |   |      |   | 2,804   |  
|                                                                                                                                                                                                |  |                |         |   |      |   |         |  
|TOTAL CURRENT ASSETS                                                                                                                                                                            |  |                | 39,541  |   |      |   | 48,672  |  
|                                                                                                                                                                                                |  |                |         |   |      |   |         |  
|INVESTMENTS                                                                                                                                                                                     |  |                |         |   |      |   |         |  
|Investments in and advances to affiliated companies                                                                                                                                             |  |                | 52      |   |      |   | 3,611   |  
|                                                                                                                                                                                                |  |                |         |   |      |   |         |  
|PROPERTY, PLANT AND EQUIPMENT                                                                                                                                                                   |  |                |         |   |      |   |         |  
|In service                                                                                                                                                                                      |  |                | 335,883 |   |      |   | 320,720 |  
|Under construction                                                                                                                                                                              |  |                | 8,768   |   |      |   | 5,964   |  
|                                                                                                                                                                                                |  |                |         |   |      |   |         |  
|                                                                                                                                                                                                |  |                | 344,651 |   |      |   | 326,684 |  
|Less accumulated depreciation                                                                                                                                                                   |  |                | 162,078 |   |      |   | 137,533 |  
|                                                                                                                                                                                                |  |                |         |   |      |   |         |  
|                                                                                                                                                                                                |  |                | 182,573 |   |      |   | 189,151 |  
|                                                                                                                                                                                                |  |                |         |   |      |   |         |  
|OTHER ASSETS                                                                                                                                                                                    |  |                |         |   |      |   |         |  
|Goodwill                                                                                                                                                                                        |  |                | 149,032 |   |      |   | 149,127 |  
|Intangible assets, net of accumulated amortization                                                                                                                                              |  |                | 167,396 |   |      |   | 173,594 |  
|Other                                                                                                                                                                                           |  |                | 8,191   |   |      |   | 11,756  |  
|                                                                                                                                                                                                |  |                |         |   |      |   |         |  
|                                                                                                                                                                                                |  |                | 324,619 |   |      |   | 334,477 |  
|                                                                                                                                                                                                |  |                |         |   |      |   |         |  
|TOTAL ASSETS                                                                                                                                                                                    |  | $              | 546,785 |   |      | $ | 575,911 |  
|                                                                                                                                                                                                |  |                |         |   |      |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                            | 
|CURRENT LIABILITIES                                                                                                                                                                             |  |                |         |   |      |   |         |  
|Long-term debt maturing within one year                                                                                                                                                         |  | $              | 10,000  |   |      | $ | 11,001  |  
|Accounts payable and accrued liabilities                                                                                                                                                        |  |                | 18,701  |   |      |   | 18,507  |  
|Accrued taxes                                                                                                                                                                                   |  |                | 1,819   |   |      |   | 2,120   |  
|Accrued interest and dividends                                                                                                                                                                  |  |                | 1,683   |   |      |   | 1,949   |  
|Advance billings, customer deposits and other                                                                                                                                                   |  |                | 11,585  |   |      |   | 10,323  |  
|                                                                                                                                                                                                |  |                |         |   |      |   |         |  
|TOTAL CURRENT LIABILITIES                                                                                                                                                                       |  |                | 43,788  |   |      |   | 43,900  |  
|                                                                                                                                                                                                |  |                |         |   |      |   |         |  
|LONG-TERM DEBT                                                                                                                                                                                  |  |                | 218,500 |   |      |   | 222,765 |  
|                                                                                                                                                                                                |  |                |         |   |      |   |         |  
|OTHER LIABILITIES                                                                                                                                                                               |  |                |         |   |      |   |         |  
|Deferred income taxes                                                                                                                                                                           |  |                | 86,402  |   |      |   | 89,958  |  
|Other                                                                                                                                                                                           |  |                | 20,530  |   |      |   | 17,248  |  
|                                                                                                                                                                                                |  |                |         |   |      |   |         |  
|                                                                                                                                                                                                |  |                | 106,932 |   |      |   | 107,206 |  
|                                                                                                                                                                                                |  |                |         |   |      |   |         |  
|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 shares, outstanding 14 shares                     |  |                | 1,446   |   |      |   | 1,446   |  
|                                                                                                                                                                                                |  |                |         |   |      |   |         |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                   |  |                |         |   |      |   |         |  
|SHAREHOLDERS EQUITY                                                                                                                                                                            |  |                |         |   |      |   |         |  
|Common stock, par value $0.16, authorized shares: 100,000 at December 31, 2004 and 30,000 at December 31, 2003, Outstanding shares: 14,268 at
December 31, 2004 and 15,547 at December 31, 2003 |  |                | 2,542   |   |      |   | 2,533   |  
|Additional paid-in capital                                                                                                                                                                      |  |                | 160,255 |   |      |   | 159,515 |  
|Accumulated other comprehensive income (loss)                                                                                                                                                   |  |                | (6,574  | ) |      |   | (4,865  | )
|Retained earnings                                                                                                                                                                               |  |                | 38,513  |   |      |   | 48,693  |  
|Treasury stock at cost, 1,640 shares at December 31, 2004 and 307 shares at December 31, 2003                                                                                                   |  |                | (18,617 | ) |      |   | (5,282  | )
|                                                                                                                                                                                                |  |                |         |   |      |   |         |  
|                                                                                                                                                                                                |  |                | 176,119 |   |      |   | 200,594 |  
|                                                                                                                                                                                                |  |                |         |   |      |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                      |  | $              | 546,785 |   |      | $ | 575,911 |  
|                                                                                                                                                                                                |  |                |         |   |      |   |         |  

See notes to consolidated financial statements.



F-6



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                                                                                  |  |                |          |   |      |   |         |      |  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                                                                                                  |  | 2004           |          |   | 2003 |   |         | 2002 | 
|                                                                                                                                                                  |  | (In thousands) |         
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                                                                              |  |                |          |  
|Net income (loss)                                                                                                                                                 |  | $              | (2,739   | ) |      | $ | 4,084   |      |  | $ | 48,394   |  
|Add: Loss (income) from discontinued operations                                                                                                                   |  |                |         |   |      |   | 53      |      |  |   | (55,499  | )
|Cumulative effect of accounting change                                                                                                                            |  |                |         |   |      |   | (260    | )    |  |   |         |  
|                                                                                                                                                                  |  |                |          |   |      |   |         |      |  |   |          |  
|Income (loss) from continuing operations                                                                                                                          |  |                | (2,739   | ) |      |   | 3,877   |      |  |   | (7,105   | )
|Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities, net of effects of
acquisitions of businesses: |  |                |          |   |      |   |         |      |  |   |          |  
|Depreciation and amortization                                                                                                                                     |  |                | 39,119   |   |      |   | 38,626  |      |  |   | 28,690   |  
|Bad debt expense                                                                                                                                                  |  |                | 551      |   |      |   | 745     |      |  |   | 1,406    |  
|Deferred income taxes                                                                                                                                             |  |                | (1,892   | ) |      |   | 1,105   |      |  |   | (905     | )
|Equity in net losses of affiliates                                                                                                                                |  |                | 3,172    |   |      |   | 2,537   |      |  |   | 3,429    |  
|(Gain) loss on investments                                                                                                                                        |  |                | 1,057    |   |      |   | (790    | )    |  |   | 2,999    |  
|Gain from cash recovery of note receivable                                                                                                                        |  |                | (125     | ) |      |   |        |      |  |   |         |  
|Loss on retirement of property, plant and equipment                                                                                                               |  |                | 171      |   |      |   | 209     |      |  |   | 72       |  
|Loss on early extinguishment of debt                                                                                                                              |  |                | 5,252    |   |      |   |        |      |  |   |         |  
|Changes in operating assets and liabilities, net of effects of acquisitions of businesses:                                                                        |  |                |          |   |      |   |         |      |  |   |          |  
|Accounts receivable                                                                                                                                               |  |                | 3,835    |   |      |   | (2,333  | )    |  |   | (1,126   | )
|Inventories                                                                                                                                                       |  |                | 29       |   |      |   | (77     | )    |  |   | 224      |  
|Prepaid expenses                                                                                                                                                  |  |                | 448      |   |      |   | (1,460  | )    |  |   | 906      |  
|Accounts payable and accrued liabilities                                                                                                                          |  |                | (1,061   | ) |      |   | (1,300  | )    |  |   | (3,788   | )
|Accrued taxes and accrued interest                                                                                                                                |  |                | (567     | ) |      |   | 3,268   |      |  |   | (5,452   | )
|Advance billings, customer deposits and other                                                                                                                     |  |                | 1,262    |   |      |   | 1,788   |      |  |   | 4,345    |  
|Other, net                                                                                                                                                        |  |                | 1,083    |   |      |   | (1,186  | )    |  |   | 1,466    |  
|                                                                                                                                                                  |  |                |          |   |      |   |         |      |  |   |          |  
|Net Cash Provided by Operating Activities from Continuing Operations                                                                                              |  |                | 49,595   |   |      |   | 45,009  |      |  |   | 25,161   |  
|                                                                                                                                                                  |  |                |          |   |      |   |         |      |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                                                                              |  |                |          |   |      |   |         |      |  |   |          |  
|Capital expenditures, net of proceeds from sales                                                                                                                  |  |                | (25,248  | ) |      |   | (20,153 | )    |  |   | (19,240  | )
|Collection of note receivable                                                                                                                                     |  |                | 125      |   |      |   |        |      |  |   |         |  
|Proceeds from sale of businesses                                                                                                                                  |  |                |         |   |      |   | 10,005  |      |  |   |         |  
|Acquisition of businesses, net of cash acquired of $989                                                                                                           |  |                |         |   |      |   |        |      |  |   | (156,819 | )
|Proceeds from sale of investments                                                                                                                                 |  |                |         |   |      |   | 2,470   |      |  |   |         |  
|Purchase of FCC licenses                                                                                                                                          |  |                |         |   |      |   | (828    | )    |  |   |         |  
|Investments in and advances to affiliates                                                                                                                         |  |                | (767     | ) |      |   | (1,232  | )    |  |   | (2,187   | )
|Investment returns and repayments from affiliates                                                                                                                 |  |                | 154      |   |      |   | 226     |      |  |   | 667      |  
|                                                                                                                                                                  |  |                |          |   |      |   |         |      |  |   |          |  
|Net Cash Used in Investing Activities from Continuing Operations                                                                                                  |  |                | (25,736  | ) |      |   | (9,512  | )    |  |   | (177,579 | )
|                                                                                                                                                                  |  |                |          |   |      |   |         |      |  |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                                                                              |  |                |          |   |      |   |         |      |  |   |          |  
|Dividends on common stock                                                                                                                                         |  |                | (7,122   | ) |      |   | (7,408  | )    |  |   | (6,414   | )
|Proceeds from long-term debt financing                                                                                                                            |  |                | 210,000  |   |      |   | 12,000  |      |  |   | 160,000  |  
|Payment of debt issuance costs                                                                                                                                    |  |                | (2,495   | ) |      |   | (101    | )    |  |   | (8,152   | )
|Payments on long-term debt                                                                                                                                        |  |                | (215,266 | ) |      |   | (23,332 | )    |  |   | (45,022  | )
|Payments on notes payable for acquired businesses                                                                                                                 |  |                |         |   |      |   | (379    | )    |  |   | (345     | )
|Net payments on revolving lines of credit                                                                                                                         |  |                |         |   |      |   |        |      |  |   | (11,757  | )
|Proceeds from issuance of common stock                                                                                                                            |  |                | 430      |   |      |   | 1,037   |      |  |   | 865      |  
|Purchase of treasury stock                                                                                                                                        |  |                | (13,335  | ) |      |   |        |      |  |   | (178     | )
|                                                                                                                                                                  |  |                |          |   |      |   |         |      |  |   |          |  
|Net Cash Provided By (Used in) Financing Activities from Continuing Operations                                                                                    |  |                | (27,788  | ) |      |   | (18,183 | )    |  |   | 88,997   |  
|                                                                                                                                                                  |  |                |          |   |      |   |         |      |  |   |          |  
|CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS                                                                                                                  |  |                | (3,929   | ) |      |   | 17,314  |      |  |   | (63,421  | )
|CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS                                                                                                                |  |                |          |   |      |   |         |      |  |   |          |  
|Cash provided by (used in) operating activities of discontinued operations                                                                                        |  |                |         |   |      |   | (20,553 | )    |  |   | 70       |  
|Cash provided by investing activities of discontinued operations                                                                                                  |  |                |         |   |      |   | 171     |      |  |   | 78,250   |  
|                                                                                                                                                                  |  |                |          |   |      |   |         |      |  |   |          |  
|Net Cash Provided By (Used in) Discontinued Operations                                                                                                            |  |                |         |   |      |   | (20,382 | )    |  |   | 78,320   |  
|                                                                                                                                                                  |  |                |          |   |      |   |         |      |  |   |          |  
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                                                                                  |  |                | (3,929   | ) |      |   | (3,068  | )    |  |   | 14,899   |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                                                                                                      |  |                | 12,446   |   |      |   | 15,514  |      |  |   | 615      |  
|                                                                                                                                                                  |  |                |          |   |      |   |         |      |  |   |          |  
|CASH AND CASH EQUIVALENTS, END OF YEAR                                                                                                                            |  | $              | 8,517    |   |      | $ | 12,446  |      |  | $ | 15,514   |  
|                                                                                                                                                                  |  |                |          |   |      |   |         |      |  |   |          |  



See notes to
consolidated financial statements.



F-7



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

AND COMPREHENSIVE INCOME (LOSS)



|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | - |  | ------ | ------- | - | ------ | ------ | - | ------ | - | ------- | ------ |  | ------ | ------ |  | - | ------- | -
|                                                                                                                                                                    |  | Year Ended December 31, |  
|                                                                                                                                                                    |  | 2004                    |   |  | 2003   |         |   | 2002   |       
|                                                                                                                                                                    |  | Shares                  |   |  | Amount |         |   | Shares |        |   | Amount |   |         | Shares |  |        | Amount | 
|                                                                                                                                                                    |  | (In thousands)          |  
|COMMON STOCK                                                                                                                                                        |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Balance at beginning of year                                                                                                                                        |  | 15,854                  |   |  | $      | 2,533   |   |        | 15,721 |   |        | $ | 2,512   |        |  | 7,639  |        |  | $ | 1,219   |  
|Common stock issued for acquisitions                                                                                                                                |  |                        |   |  |        |        |   |        |       |   |        |   |        |        |  | 7,877  |        |  |   | 1,260   |  
|Common stock issued for Employee Stock Purchase, Long-Term Incentive, Dividend Reinvestment and Stock Compensation Plan and Policy for
Non-Employee Directors Plans |  | 54                      |   |  |        | 9       |   |        | 61     |   |        |   | 10      |        |  | 163    |        |  |   | 26      |  
|Common Stock issued for stock options exercised                                                                                                                     |  |                        |   |  |        |        |   |        | 72     |   |        |   | 11      |        |  | 42     |        |  |   | 7       |  
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Balance at end of year                                                                                                                                              |  | 15,908                  |   |  |        | 2,542   |   |        | 15,854 |   |        |   | 2,533   |        |  | 15,721 |        |  |   | 2,512   |  
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|ADDITIONAL PAID-IN CAPITAL                                                                                                                                          |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Balance at beginning of year                                                                                                                                        |  |                         |   |  |        | 159,515 |   |        |        |   |        |   | 158,101 |        |  |        |        |  |   | 39,956  |  
|Common stock issued for acquisitions                                                                                                                                |  |                         |   |  |        |        |   |        |        |   |        |   |        |        |  |        |        |  |   | 115,668 |  
|Common stock issued for Employee Stock Purchase, Long-Term Incentive, Dividend Reinvestment and Stock Compensation Plan and Policy for
Non-Employee Directors Plans |  |                         |   |  |        | 740     |   |        |        |   |        |   | 772     |        |  |        |        |  |   | 2,094   |  
|Common Stock issued for stock options exercised                                                                                                                     |  |                         |   |  |        |        |   |        |        |   |        |   | 642     |        |  |        |        |  |   | 383     |  
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Balance at end of year                                                                                                                                              |  |                         |   |  |        | 160,255 |   |        |        |   |        |   | 159,515 |        |  |        |        |  |   | 158,101 |  
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)                                                                                                                       |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Balance at beginning of year                                                                                                                                        |  |                         |   |  |        | (4,865  | ) |        |        |   |        |   | (7,071  | )      |  |        |        |  |   | (2,833  | )
|Unrealized gain (loss) on investments, net of tax                                                                                                                   |  |                         |   |  |        |        |   |        |        |   |        |   | 723     |        |  |        |        |  |   | (1,903  | )
|Reclassification adjustment for realized (gain) loss on investments, net of tax                                                                                     |  |                         |   |  |        |        |   |        |        |   |        |   | (498    | )      |  |        |        |  |   | 1,825   |  
|Equity adjustment for minimum pension liability, net of tax                                                                                                         |  |                         |   |  |        | (2,744  | ) |        |        |   |        |   | 1,777   |        |  |        |        |  |   | (3,426  | )
|Currency translation adjustment from EuroTel                                                                                                                        |  |                         |   |  |        | 57      |   |        |        |   |        |   |        |        |  |        |        |  |   | 620     |  
|Unrealized gain (loss) on derivative financial instruments, net of tax                                                                                              |  |                         |   |  |        | 978     |   |        |        |   |        |   | 204     |        |  |        |        |  |   | (1,354  | )
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Balance at end of year                                                                                                                                              |  |                         |   |  |        | (6,574  | ) |        |        |   |        |   | (4,865  | )      |  |        |        |  |   | (7,071  | )
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|RETAINED EARNINGS                                                                                                                                                   |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Balance at beginning of year                                                                                                                                        |  |                         |   |  |        | 48,693  |   |        |        |   |        |   | 52,343  |        |  |        |        |  |   | 10,637  |  
|Net income (loss)                                                                                                                                                   |  |                         |   |  |        | (2,739  | ) |        |        |   |        |   | 4,084   |        |  |        |        |  |   | 48,394  |  
|Dividends on common stock: $.50 per share for each year                                                                                                             |  |                         |   |  |        | (7,441  | ) |        |        |   |        |   | (7,734  | )      |  |        |        |  |   | (6,688  | )
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Balance at end of year                                                                                                                                              |  |                         |   |  |        | 38,513  |   |        |        |   |        |   | 48,693  |        |  |        |        |  |   | 52,343  |  
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|TREASURY STOCK                                                                                                                                                      |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Balance at beginning of year                                                                                                                                        |  | (307                    | ) |  |        | (5,282  | ) |        | (307   | ) |        |   | (5,282  | )      |  | (277   | )      |  |   | (5,104  | )
|Treasury stock acquired                                                                                                                                             |  | (1,333                  | ) |  |        | (13,335 | ) |        |       |   |        |   |        |        |  | (30    | )      |  |   | (178    | )
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Balance at end of year                                                                                                                                              |  | (1,640                  | ) |  |        | (18,617 | ) |        | (307   | ) |        |   | (5,282  | )      |  | (307   | )      |  |   | (5,282  | )
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                          |  | 14,268                  |   |  | $      | 176,119 |   |        | 15,547 |   |        | $ | 200,594 |        |  | 15,414 |        |  | $ | 200,603 |  
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|COMPREHENSIVE INCOME (LOSS)                                                                                                                                         |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Net income (loss)                                                                                                                                                   |  |                         |   |  | $      | (2,739  | ) |        |        |   |        | $ | 4,084   |        |  |        |        |  | $ | 48,394  |  
|Unrealized gain (loss) on investments, net of income taxes of $434 and ($1,208)                                                                                     |  |                         |   |  |        |        |   |        |        |   |        |   | 723     |        |  |        |        |  |   | (1,903  | )
|Reclassification adjustment for realized (gain) loss on investments, net of income taxes of ($292) and $1,174                                                       |  |                         |   |  |        |        |   |        |        |   |        |   | (498    | )      |  |        |        |  |   | 1,825   |  
|Equity adjustment for minimum pension liability, net of income taxes of ($1,876), $1,214 and ($2,343)                                                               |  |                         |   |  |        | (2,744  | ) |        |        |   |        |   | 1,777   |        |  |        |        |  |   | (3,426  | )
|Currency translation adjustment from EuroTel                                                                                                                        |  |                         |   |  |        | 57      |   |        |        |   |        |   |        |        |  |        |        |  |   | 620     |  
|Unrealized gain (loss) on derivative financial instruments, net of income taxes of $668, $140 and ($925)                                                            |  |                         |   |  |        | 978     |   |        |        |   |        |   | 204     |        |  |        |        |  |   | (1,354  | )
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  
|Total comprehensive income (loss)                                                                                                                                   |  |                         |   |  | $      | (4,448  | ) |        |        |   |        | $ | 6,290   |        |  |        |        |  | $ | 44,156  |  
|                                                                                                                                                                    |  |                         |   |  |        |         |   |        |        |   |        |   |         |        |  |        |        |  |   |         |  



See notes to
consolidated financial statements.



F-8



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per-share amounts)



1. Nature of Business



Description and Principles of Consolidation



D&E Communications, Inc. (D&E) provides integrated communications services to residential and business customers in markets throughout the
eastern half of Pennsylvania. On May 24, 2002, D&E completed the acquisition of Conestoga Enterprises, Inc. (Conestoga) (see Note 4). D&Es consolidated financial statements include the accounts of Denver and Ephrata Telephone and
Telegraph Company; D&E Systems, Inc.; D&E Networks, Inc.; D&E Wireless, Inc.; and D&E Investments, Inc. for all periods presented. The consolidated financial statements also include the accounts of Conestoga Telephone and Telegraph
Company; Buffalo Valley Telephone Company; CEI Networks, Inc.; Infocore, Inc.; Conestoga Wireless Company; Conestoga Mobile Systems, Inc. (see Note 6); and Conestoga Investment Corporation from May 24, 2002 to December 31, 2004. All significant
intercompany balances and transactions are eliminated in consolidation.



D&Es business segments are as follows: incumbent rural local exchange carrier (RLEC), competitive local exchange carrier (CLEC), internet services, systems integration, and corporate and other. In 2003, D&E moved
responsibility for some products to different segment managers. The RLEC provides local and long distance telephone services in a franchised territory, including custom calling features and directory advertising. The CLEC provides telecommunication
services in markets near those served by the RLEC. Internet services include internet access and web-hosting services. Systems integration provides computer networking services and programming and the sale and installation of communications
equipment to business customers. Corporate and other includes D&Es cable television operations in State College, PA, video operations in Lewisburg, PA, D&Es share of the earnings or losses of investments accounted for on the
equity method, the wireless telephony services of Conestoga Wireless Company (see Note 5).



D&E has a one-third interest in EuroTel, L.L.C. (EuroTel), a domestic corporate joint venture that holds an investment in Pilicka Telefonia Sp. z o.o. (Pilicka), a telecommunications company located in Poland.
D&E also owns a direct investment in Pilicka (see Note 7). D&E accounts for its investments in EuroTel and Pilicka using the equity method of accounting. Under the equity method, D&E reports its interest in the entity as an investment in
its consolidated balance sheets and its percentage share of the earnings or losses from the entity in its consolidated statements of operations. D&E also owned an interest in PenTeleData Limited Partnership I until its sale on February 28, 2005.
The investment in PenTeleData is reported at cost in other long-term assets on the consolidated balance sheets at December 31, 2004 and 2003.



Until the sale on April 1, 2002, D&E owned a 50% interest in D&E/Omnipoint Wireless Joint Venture, L.P., doing business as PCS ONE, a partnership
that provided Personal Communications Services (PCS) and related equipment for digital wireless voice and data communications, which was accounted for on the equity method. D&Es interest in PCS ONE and related contract services provided to
PCS ONE that were discontinued subsequent to sale are reported as discontinued operations.



Regulatory Environment and Competition



D&Es RLEC and CLEC operations are subject to regulation at both the federal and state levels by the Federal Communications Commission (FCC) and the Pennsylvania Public Utility Commission (PUC). The passage
of the Telecommunications Act of 1996 (TA-96) provided comprehensive changes to federal and state regulations that govern telecommunications. On November 30, 2004, the Governor of Pennsylvania signed into law new Chapter 30 regulations
that will impact D&Es RLECs. The new law provides additional options that



F-9



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



will promote broadband deployment in the state and encourage faster rollout of broadband capability to all consumers. RLECs will be required to spend capital
dollars sooner to have broadband services available to all consumers by December 31, 2008. As an offset to the increased capital expenditure requirements, the new law removes the two percentage points reduction used to calculate intrastate rates
annually. The new law adds other provisions to further the advancement of broadband services to schools in Pennsylvania and provides a suspension of certain interconnection requirements until December 31, 2008 to companies with less than 50,000
access lines. Consequently, in D&Es two largest RLEC companies, competitors are still permitted to seek removal of the rural exemption from the more burdensome interconnection obligations for the purposes of entering those territories and
using its services and facilities through interconnection agreements to provide competitive services. However, they are unable to do so in Buffalo Valleys RLEC territory until after December 31, 2008.



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



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



Concentrations of Credit Risk



Financial
instruments that subject D&E to concentrations of credit risk consist primarily of trade receivables. Concentrations of credit risk with respect to trade receivables are primarily limited due to the large number of residential and business
customers in D&Es customer base. The systems integration segment receives a significant portion of its revenue from several large customers, however, none of these customers represent more than 10% of the companys revenue.



2. Significant Accounting Policies



Use of Estimates



The preparation of financial statements under 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. Management bases its estimates on historical results and other assumptions that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates under different assumptions or conditions.



Recent Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-based Payment (SFAS
123R). SFAS 123R revises FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This
standard requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees (including stock options and discount stock purchase plans). SFAS No. 123R requires an entity to
measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The compensation cost of the award is recognized over the period during which an employee is required to
provide service, i.e. the requisite service period (usually the vesting period).



F-10



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



SFAS 123R is effective as of the beginning of the first interim or annual reporting period that
begins after June 15, 2005. D&E expects to adopt this standard in July 2005 under the modified prospective transition method. Under this method, a company records compensation expense for all new awards and to awards modified, repurchased, or
cancelled after the required effective date. Additionally, compensation expense is recorded for the unvested portion of previously granted awards that remain outstanding at the date of adoption. The cost of the unvested portion of the award is
recognized as the requisite service is rendered on or after the required effective date. The adoption of SFAS 123R is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.



In December 2004, the FASB issued SFAS No. 153, Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29 (SFAS 153). The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions (APB 29), is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of assets exchanged, with certain exceptions. SFAS 153 amends APB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with an exception
for exchanges that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary
exchanges occurring in fiscal periods beginning after June 15, 2005. The Companys adoption of SFAS No. 153 is not expected to have a material impact on the Companys financial position, results of operations or cash flows.



In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4, (SFAS 151) which clarifies the types of costs that should be expensed rather than capitalized as inventory. This statement also clarifies the circumstances under which fixed overhead costs
associated with operating facilities involved in inventory processing should be capitalized. The provisions of SFAS No. 151 are applied prospectively and are effective for fiscal years beginning after June 15, 2005. The adoption of SFAS 151 is not
expected to have a material impact on the Companys financial position, results of operations or cash flows.



On October 22, 2004, the American Jobs Creation Act was signed into law. This new law contains numerous changes to existing tax laws, including both
domestic and foreign tax incentives. In December 2004, the FASB issued two Staff Positions (FSP) that provide accounting guidance on how companies should account for the effects of the American Jobs Creation Act. FSP FAS 109-1, Application of
FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, states that the manufacturers deduction provided for under this
legislation should be accounted for as a special deduction instead of a tax rate change. FSP FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,
allows a company additional time to evaluate the effects of the legislation on any plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109, Accounting for Income Taxes. The Company is currently
evaluating the impact from these FSPs on its results of operations, financial position and cash flows.



In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (The Act) was enacted into law. The Act provides a
voluntary prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care plans that provide at least an actuarially equivalent benefit. In May 2004, the FASB issued Staff Position No. FSP FAS 106-2,
Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FAS 106-2). FAS 106-2 provides guidance on accounting for the effects of the new Medicare
prescription drug benefit and the



F-11



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



related federal subsidy available to employers whose prescription drug benefits are at least actuarially equivalent to the drug benefit provided under
Medicare Part D. Based upon this guidance, the Company did not believe its postretirement health care plans were actuarially equivalent. In January 2005, the Centers for Medicare and Medicaid Services issued final guidelines to define actuarial
equivalence under the regulations. The Company is evaluating the January 2005 guidelines to determine if the benefits provided by the Companys plan are at least actuarially equivalent to benefits available through Medicare Part D under these
new guidelines. Accordingly, the accumulated postretirement benefit obligation and the net periodic postretirement benefit cost reported in the financial statements and the accompanying notes do not reflect any effect of the federal subsidy provided
by the Act.



In January 2003, D&E adopted SFAS No. 143,
Accounting for Asset Retirement Obligations (SFAS 143). This Statement establishes accounting practices relating to legal obligations associated with the retirement of tangible long-lived assets that result from the
acquisition, construction, development or normal operation of a long-lived asset. SFAS 143 requires that companies recognize the fair value of a liability for asset retirement obligations in the period in which the legal obligations are incurred and
capitalize that amount as a part of the book value of the long-lived asset. That cost is then depreciated over the remaining life of the underlying long-lived asset. D&E recorded an after-tax benefit of $260 as a cumulative effect accounting
adjustment in the first quarter 2003. The adjustment represents the cumulative estimate of cost of removal charged to depreciation expense in earlier years for which D&E does not have a legal obligation associated with the retirement of the
related tangible long-lived assets. The adoption of this pronouncement had no material effect on D&Es ongoing financial position, results of operations or cash flows.



The following proforma amounts have been adjusted for the effect of retroactive application on depreciation and costs of
removal expense and related income taxes which would have been made had the new method been in effect at the beginning of 2002.



|                                                                      |  |             |        |   |          |   |        |             |  |          |       |             |   |          |  |   |        |  |   |       
|--------------------------------------------------------------------- |  | ----------- | ------ | - | -------- | - | ------ | ----------- |  | -------- | ----- | ----------- | - | -------- |  | - | ------ |  | - | ------
|                                                                      |  | 2004        |        |   | 2003     |   | 2002  
|                                                                      |  | As Reported |        |   | Proforma |   |        | As Reported |  | Proforma |       | As Reported |   | Proforma
|Net income (loss)                                                     |  | $           | (2,739 | ) |          | $ | (2,739 | )           |  | $        | 4,084 |             | $ | 3,824    |  | $ | 48,394 |  | $ | 48,418
|Income (loss) before cumulative effect of accounting change per share |  | $           | (0.18  | ) |          | $ | (0.18  | )           |  | $        | 0.25  |             | $ | 0.25     |  | $ | 3.95   |  | $ | 3.95  
|Basic earnings (loss) per share                                       |  | $           | (0.18  | ) |          | $ | (0.18  | )           |  | $        | 0.26  |             | $ | 0.25     |  | $ | 3.95   |  | $ | 3.95  
|Diluted earnings (loss) per share                                     |  | $           | (0.18  | ) |          | $ | (0.18  | )           |  | $        | 0.26  |             | $ | 0.25     |  | $ | 3.95   |  | $ | 3.95  



In January 2003, the
FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities  An Interpretation of Accounting Research Bulletin (ARB) No. 51 (FIN 46). This interpretation clarifies how to identify variable
interest entities (VIEs) and how a company should assess its interests in a variable interest entity to decide whether to consolidate the entity. FIN 46 applies immediately to variable interest entities created after January 31, 2003, in
which a company obtains an interest after that date. In December 2003, the FASB issued FIN 46-R, a revision to FASB Interpretation No. 46 which among other things, defers the effective date of implementation for certain entities. The revised
interpretation is effective for the first interim or annual reporting period ending after March 15, 2004, with the exception of special-purpose entities for which the statement is effective for periods ending after December 15, 2003. The Company
does not have any special-purpose entities.



FIN 46-R requires
the consolidation of entities which are determined to be VIEs when the reporting company determines that it will absorb a majority of the VIEs expected losses, receive a majority of the VIEs



F-12



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



residual returns, or both. An entity is considered to be a VIE when its capital is insufficient to permit it to finance its activities without additional
subordinated financial support or its equity investors lack the characteristics of having a controlling financial interest.



D&E has one significant variable interest entity through its ownership interest in EuroTel, L.L.C. (EuroTel). 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, and holds a 27.85% investment in Pilicka, a telecommunications
company located in Poland. D&E has participated in this joint venture since January 1997. EuroTel, PenneCom and Pilicka are referred to herein as our European affiliates. D&Es participation in this joint venture has been to provide
working capital for the development of Pilickas telephone business in Poland and to manage EuroTels investments. EuroTel has assets of approximately $200, with no annual operating revenue. D&Es exposure to loss from its
involvement in EuroTel continues at one-third of EuroTels losses. Based on the accounting guidance of FIN 46-R, D&E has determined it is not the primary beneficiary of this entity. According to the guidance of FIN 46-R, consolidation of
EuroTel is not required and thus there is no effect on the Companys financial position, results of operations and cash flows.



Revenue Recognition



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



The RLEC business
segment receives a portion of its interstate access revenues from settlement pools in which it participates with other telephone companies through the National Exchange Carrier Association, Inc. (NECA). These pools were established at the direction
of the FCC and are funded by access service charges, which the FCC regulates. Revenues earned through this pooling process are initially recognized based on estimates and are subject to adjustments that may either increase or decrease the amount of
interstate access revenues. If the actual amounts that the Company receives from the settlement pools differ from the estimated amounts recorded, the Company records the change as a current adjustment to earnings. Until December 2003, D&E did
not experience significant adjustments to our revenues as a result of participation in these pools. In December 2003, the Company recorded an increase in communications services revenue of $933 as a result of a change in its estimated interstate
revenue earned from the NECA pooling process. The estimate was revised based on a U.S. Court decision which indicates that a refund payable to long distance communication providers was not required for periods in which the interstate rate-of-return
exceeded FCC authorized levels if the rates for those periods were deemed to be lawful rates. In December 2004, D&E recorded communications services revenue of $156 related to this estimate. D&E continues to monitor ongoing proceedings at
the FCC and will evaluate and revise its estimates accordingly.



F-13



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



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. Revenues on short-term projects that take less than three months to complete are recognized under the completed contract method.



Cash and Cash Equivalents



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.



Prepaid Directory



Directory advertising revenues and costs are deferred and amortized over the 12-month period related to the directory publication. Prepaid directory advertising costs, included in prepaid expenses, at December 31, 2004 and 2003 were $6,047
and $5,193, respectively. Deferred directory revenues, included in advance billings, customer deposits and other, at December 31, 2004 and 2003 were $6,819 and $5,414, respectively.



Investments In and Advances To Unconsolidated Affiliates



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



Investments Available-for-Sale



All marketable equity securities were classified as investments available-for-sale. Marketable securities available-for-sale were recorded at fair market
value, based on market quotes from national exchanges. Any unrealized holding gains or losses, net of deferred taxes, were reported as a separate component of shareholders equity. Any realized gains or losses, including other than temporary
impairment losses, are included in the statement of operations. The Company sold its entire portfolio of investments available-for-sale in December 2003.



Property, Plant and Equipment



Property, plant and equipment is stated at cost and depreciated using a composite group remaining life method and straight-line composite rates for the
regulated telephone property of the RLEC and CLEC segments and the straight-line method of depreciation for other depreciable property. The estimated useful lives are 24 to 40 years for buildings, 5 to 27 years for digital switching equipment, 11 to
48 years for outside plant facilities and 3 to 26 years for other equipment.



Depreciation expense as a percentage of average depreciable plant in service amounted to 10.1% in 2004 and 10.4% in 2003 and 2002. The costs of maintenance and repairs are charged to operating expense.



F-14



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



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



Capitalized Interest



The cost of funds used to finance construction projects is reflected as part of the construction costs and a reduction of interest expense. Interest costs capitalized on assets were $323 for 2004, $228 for 2003 and $110 for 2002.



Intangible Assets



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



Impairment of Long-Lived Assets



Long-lived assets, including finite-lived intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Recoverability is assessed based on future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the undiscounted cash flows is
less than the carrying value of the asset, an impairment loss is recognized. Any impairment loss, if indicated, would be measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.



Impairment of Goodwill and Indefinite-Lived Intangibles



Upon the adoption of SFAS No. 142, Goodwill and Other Intangible
Assets, on January 1, 2002, goodwill and indefinite-lived intangibles are no longer subject to amortization. Goodwill and indefinite-lived intangibles are subject to at least an annual assessment for impairment by comparing carrying value to
fair value. There is a two-step process for goodwill. The first step is to identify a potential impairment by comparing the fair value of reporting units to their carrying value. If the results of the first step of the impairment testing indicate a
potential impairment, the second step would be completed to measure the amount of any impairment loss. As of January 1, 2002, the results of the first step indicated no potential impairment of D&Es goodwill. In April 2004 and 2003, the
Company completed its annual impairment reviews and determined that no impairment charge was required. D&E continually evaluates whether events and circumstances have occurred that indicate the remaining balances of goodwill and indefinite-lived
intangibles may not be recoverable. In evaluating impairment, D&E estimates the sum of the expected future cash flows derived from such goodwill and indefinite-lived intangibles. Such evaluations for impairment are significantly impacted by
estimates of future revenues, costs and expenses, the market price of our stock and other factors.



Advertising



D&E
expenses advertising costs as incurred. Advertising expense was $1,387 for 2004, $1,991 for 2003 and $1,664 for 2002.



F-15



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



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 more likely than not.



Derivative Financial
Instruments



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



F-16



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



Earnings per Common Share



Basic earnings per common share is calculated by dividing net income (the numerator) by the weighted average number of
common shares outstanding (the denominator) during the period. The computation of diluted earnings per share is similar to basic earnings per share except the denominator is increased to include the number of additional common shares that would have
been outstanding for dilutive potential common shares. D&E has potential common shares as a result of outstanding stock option grants to purchase our common stock, outstanding since the acquisition of Conestoga. However, including potential
common shares in the denominator of a diluted per-share computation for continuing operations always will result in an antidilutive per-share amount when D&E has a loss from continuing operations. Although including those potential common shares
in the other diluted per-share computations may be dilutive to their comparable basic per-share amounts, no potential common shares are included in the computation of any diluted per-share amount when a loss from continuing operations exists, even
if D&E reports net income.



|                                                                   |  |                                  |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------ |  | -------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                   |  | For the years ended December 31, |       
|                                                                   |  | 2004                             |        |   | 2003 |   |        | 2002 | 
|Income (loss) from continuing operations                           |  | $                                | (2,739 | ) |      | $ | 3,877  |      |  | $ | (7,105 | )
|Income (loss) from discontinued operations                         |  |                                  |       |   |      |   | (53    | )    |  |   | 55,499 |  
|Cumulative effect of accounting change                             |  |                                  |       |   |      |   | 260    |      |  |   |       |  
|                                                                   |  |                                  |        |   |      |   |        |      |  |   |        |  
|Net income (loss)                                                  |  | $                                | (2,739 | ) |      | $ | 4,084  |      |  | $ | 48,394 |  
|                                                                   |  |                                  |        |   |      |   |        |      |  |   |        |  
|Basic earnings per share:                                          |  |                                  |        |   |      |   |        |      |  |   |        |  
|Weighted average shares outstanding (thousands)                    |  |                                  | 15,057 |   |      |   | 15,484 |      |  |   | 12,254 |  
|                                                                   |  |                                  |        |   |      |   |        |      |  |   |        |  
|Income (loss) from continuing operations                           |  | $                                | (0.18  | ) |      | $ | 0.25   |      |  | $ | (0.58  | )
|Income (loss) from discontinued operations                         |  |                                  |       |   |      |   |       |      |  |   | 4.53   |  
|Cumulative effect of accounting change                             |  |                                  |       |   |      |   | 0.01   |      |  |   |       |  
|                                                                   |  |                                  |        |   |      |   |        |      |  |   |        |  
|Net income (loss) per common share                                 |  | $                                | (0.18  | ) |      | $ | 0.26   |      |  | $ | 3.95   |  
|                                                                   |  |                                  |        |   |      |   |        |      |  |   |        |  
|Diluted earnings per share:                                        |  |                                  |        |   |      |   |        |      |  |   |        |  
|Weighted average shares outstanding (thousands)                    |  |                                  | 15,057 |   |      |   | 15,484 |      |  |   | 12,254 |  
|Incremental shares from assumed stock option exercises (thousands) |  |                                  |       |   |      |   | 57     |      |  |   |       |  
|                                                                   |  |                                  |        |   |      |   |        |      |  |   |        |  
|Adjusted weighted average shares outstanding (thousands)           |  |                                  | 15,057 |   |      |   | 15,541 |      |  |   | 12,254 |  
|                                                                   |  |                                  |        |   |      |   |        |      |  |   |        |  
|Income (loss) from continuing operations                           |  | $                                | (0.18  | ) |      | $ | 0.25   |      |  | $ | (0.58  | )
|Income (loss) from discontinued operations                         |  |                                  |       |   |      |   |       |      |  |   | 4.53   |  
|Cumulative effect of accounting change                             |  |                                  |       |   |      |   | 0.01   |      |  |   |       |  
|                                                                   |  |                                  |        |   |      |   |        |      |  |   |        |  
|Net income (loss) per common share                                 |  | $                                | (0.18  | ) |      | $ | 0.26   |      |  | $ | 3.95   |  
|                                                                   |  |                                  |        |   |      |   |        |      |  |   |        |  



Options to purchase
221,358, 70,104 and 328,432 shares as of December 31, 2004, 2003 and 2002, respectively, were not included in the computation of earnings per share assuming dilution because their effect on earnings per share would have been antidilutive. D&E
had a loss from continuing operations during 2004 and 2002 when common stock options were outstanding and, as such, diluted earnings per share in 2004 and 2002 are equivalent to basic earnings per share.



Stock Compensation



The Company accounts for stock compensation under the intrinsic value method of APB Opinion 25, Accounting for Stock
Issued to Employees and related interpretations. The following table illustrates the effect



F-17



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation to its stock-based employee compensation plans.



|                                                                                                                     |  |                                         |        |   |      |   |       |      |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------ | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                                                                                                     |  | Years Ended December 31,                |       
|                                                                                                                     |  | 2004                                    |        |   | 2003 |   |       | 2002 | 
|                                                                                                                     |  | (In thousands, except per shareamounts) |       
|Net income (loss), as reported                                                                                       |  | $                                       | (2,739 | ) |      | $ | 4,084 |      |  | $ | 48,394 |  
|Add: stock based employee compensation included in reported net income (loss), net of related tax                    |  |                                         |       |   |      |   |      |      |  |   |       |  
|Deduct: total stock-based employee compensation expense determined under fair value-based method, net of related tax |  |                                         | (39    | ) |      |   | (50   | )    |  |   | (50    | )
|                                                                                                                     |  |                                         |        |   |      |   |       |      |  |   |        |  
|Pro forma net income (loss)                                                                                          |  | $                                       | (2,778 | ) |      | $ | 4,034 |      |  | $ | 48,344 |  
|                                                                                                                     |  |                                         |        |   |      |   |       |      |  |   |        |  
|Basic earnings (loss) per share:                                                                                     |  |                                         |        |   |      |   |       |      |  |   |        |  
|As reported                                                                                                          |  | $                                       | (0.18  | ) |      | $ | 0.26  |      |  | $ | 3.95   |  
|Pro forma                                                                                                            |  | $                                       | (0.18  | ) |      | $ | 0.26  |      |  | $ | 3.95   |  
|Diluted earnings (loss) per share:                                                                                   |  |                                         |        |   |      |   |       |      |  |   |        |  
|As reported                                                                                                          |  | $                                       | (0.18  | ) |      | $ | 0.26  |      |  | $ | 3.95   |  
|Pro forma                                                                                                            |  | $                                       | (0.18  | ) |      | $ | 0.26  |      |  | $ | 3.95   |  





The fair value of option grants of $4.46 and $6.20 in the year ended December 31, 2002 and options converted at the Conestoga acquisition of $7.20 is
estimated using the Black-Scholes option price model with the following weighted average assumptions:



|                        |  |         |  
|----------------------- |  | ------- | -
|                        |  | 2002    |  
|Dividend yield          |  | 2.55    | %
|Expected life           |  | 5 years |  
|Expected volatility     |  | 60.30   | %
|Risk-free interest rate |  | 4.47    | %



Comprehensive Income (Loss)



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



Foreign Currency Translations and
Transactions



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



F-18



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



foreign operations are reported in earnings. D&E records its share of EuroTels foreign currency transaction gains and losses as part of its equity
in net income or losses of affiliates. In addition, D&E has recorded its share of EuroTels currency translation adjustments in accumulated other comprehensive income (loss).



Reclassifications



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



3. Cash Flow and Statement of Shareholders Equity Information



Cash Flow Information



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



|                 |  |      |        |      |   |        |  |   |      
|---------------- |  | ---- | ------ | ---- | - | ------ |  | - | -----
|                 |  | 2004 |        | 2003 |   | 2002  
|Interest expense |  | $    | 13,694 |      | $ | 16,134 |  | $ | 9,932
|Income taxes     |  |      | 1,987  |      |   | 24,310 |  |   | 1,430



D&E recorded
noncash transactions in connection with its investing and financing activities. At December 31, 2004, accounts payable included capital expenditures of $1,700. During 2004, D&E issued common stock of $319 for dividends reinvested. At December
31, 2003, accounts payable included capital expenditures of $445. During 2003, D&E issued common stock of $326 for dividends reinvested.



At December 31, 2002, accounts payable included capital expenditures of $440. During 2002, D&E issued common stock of $274 for dividends reinvested,
$114,763 for the acquisition of Conestoga Enterprises, Inc (see Note 4) and $1,348 under the 1999 Long-Term Incentive Plan. D&E also received $2,014 of equipment as part of the proceeds from the sale of PCS ONE. During 2002, D&E also
recognized a non-cash realized loss on investments of $2,999 due to the other than temporary decline in the value of available for sale investments.



Shareholders Equity Information



At December 31, 2004 and 2003, accumulated other comprehensive income (loss) consisted of the following items:



|                                                                |  |      |        |   |      |   |        |  
|--------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                |  | 2004 |        |   | 2003 |  
|Equity adjustment for minimum pension liability, net of tax     |  | $    | (6,402 | ) |      | $ | (3,658 | )
|Currency translation adjustment from EuroTel                    |  |      |       |   |      |   | (57    | )
|Unrealized loss on derivative financial instruments, net of tax |  |      | (172   | ) |      |   | (1,150 | )
|                                                                |  |      |        |   |      |   |        |  
|Total accumulated other comprehensive income (loss)             |  | $    | (6,574 | ) |      | $ | (4,865 | )
|                                                                |  |      |        |   |      |   |        |  



4. Conestoga Enterprises, Inc.
Acquisition



On May 24, 2002, D&E completed the
acquisition of Conestoga Enterprises, Inc., a neighboring rural local telephone company providing integrated communications services in markets throughout the eastern half of



F-19



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



Pennsylvania. The acquisition was completed through the merger of Conestoga with and into D&E Acquisition Corp., a wholly owned subsidiary of D&E,
pursuant to the Amended and Restated Agreement and Plan of Merger, dated as of January 9, 2002.



As of December 31, 2002, the purchase price allocation had been determined by D&E based on reports of independent appraisers. The allocation included
recognition of adjustments to tangible assets and liabilities to state them at their fair values, and recognition of additional identifiable intangible assets at their fair values. The purchase-price allocation for the Conestoga acquisition follows:



|                                                                                                                                                                      |  |   |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | -------
|Consideration paid:                                                                                                                                                   |  |   |        
|Cash consideration to Conestoga stockholders                                                                                                                          |  | $ | 149,422
|Transaction costs ($937 paid in 2001 and $5,781 paid in 2002)                                                                                                         |  |   | 6,718  
|D&E stock to Conestoga stockholders (7,876,655 shares) at $14.57 per share based on 3-day average market price per share prior to close of
the merger on May 24, 2002 |  |   | 114,763
|Fair value of Conestoga stock options                                                                                                                                 |  |   | 2,165  
|                                                                                                                                                                      |  |   |        
|Purchase price                                                                                                                                                        |  | $ | 273,068
|                                                                                                                                                                      |  |   |        
|Assets acquired:                                                                                                                                                      |  |   |        
|Cash                                                                                                                                                                  |  | $ | 989    
|Accounts receivable                                                                                                                                                   |  |   | 9,542  
|Inventories                                                                                                                                                           |  |   | 1,918  
|Prepaid expenses                                                                                                                                                      |  |   | 14,596 
|Other current assets                                                                                                                                                  |  |   | 103    
|Property, plant and equipment                                                                                                                                         |  |   | 111,788
|Other non-current assets                                                                                                                                              |  |   | 1,601  
|Net assets of wireless and paging operations, held for sale                                                                                                           |  |   | 6,665  
|Customer base (10-15 year life)                                                                                                                                       |  |   | 75,700 
|Franchise (indefinite life)                                                                                                                                           |  |   | 104,800
|Trademarks (3 year life)                                                                                                                                              |  |   | 1,200  
|Goodwill                                                                                                                                                              |  |   | 142,362
|                                                                                                                                                                      |  |   |        
|Total assets acquired                                                                                                                                                 |  |   | 471,264
|                                                                                                                                                                      |  |   |        
|Liabilities assumed:                                                                                                                                                  |  |   |        
|Long-term debt and lines of credit                                                                                                                                    |  |   | 79,178 
|Accounts payable and accrued liabilities                                                                                                                              |  |   | 8,542  
|Accrued transactions costs ($2,605 paid through December 31, 2002)                                                                                                    |  |   | 2,605  
|Accrued taxes                                                                                                                                                         |  |   | 10,298 
|Advance billings, customer deposits and other                                                                                                                         |  |   | 1,208  
|Deferred income taxes                                                                                                                                                 |  |   | 86,172 
|Other                                                                                                                                                                 |  |   | 7,427  
|Capital lease obligations                                                                                                                                             |  |   | 2,766  
|                                                                                                                                                                      |  |   |        
|Total liabilities assumed                                                                                                                                             |  |   | 198,196
|                                                                                                                                                                      |  |   |        
|Net assets acquired                                                                                                                                                   |  | $ | 273,068
|                                                                                                                                                                      |  |   |        



In 2004, goodwill
related to the Conestoga acquisition decreased $95 as a result of a reduction in a valuation allowance on deferred tax assets recognized in connection with the Conestoga acquisition.



F-20



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



In 2003, D&E determined that it had not properly recorded deferred revenue for advance billings
to Conestoga customers upon acquisition of Conestoga in May 2002. Accordingly in 2003, the Company recorded additional goodwill of $561, deferred taxes of $384 and $1,006 of additional deferred revenue, including a cumulative $61 increase to
deferred revenue since acquisition. The adjustment reduced net income by $36 in the fourth quarter of 2003. Also in 2003 in conjunction with the preparation of tax returns, D&E determined that an adjustment to deferred income taxes recorded upon
acquisition primarily related to deferred state income taxes of Conestoga Wireless Company was required. Accordingly, in 2003, the Company has recorded additional goodwill of $1,078 and deferred income taxes of $1,078.



The statement of operations for the year ended December 31, 2002 includes
$973 of costs related to the merger including $839 of costs related to an abandoned debt offering contemplated to finance the acquisition, as well as $134 of severance costs for terminating approximately 50 D&E employees as a result of the
merger.



The following unaudited pro forma combined results of
operations is provided for illustrative purposes only and assumes that the Conestoga acquisition had occurred as of the beginning of each of the periods presented. The following unaudited pro forma information should not be relied upon as
necessarily being indicative of the historical results that would have been obtained if this acquisition had actually occurred during this period, nor of the results that the Company may experience in the future.



|                                                    |  |      |        
|--------------------------------------------------- |  | ---- | -------
|                                                    |  | 2002
|Years ended December 31:                            |  |      |        
|Proforma operating revenues                         |  | $    | 175,117
|Proforma income before extraordinary item           |  |      | 48,545 
|Proforma net income                                 |  |      | 48,545 
|Proforma income before extraordinary item per share |  |      | 3.20   
|Proforma net income per share                       |  |      | 3.20   



5. Sale of Conestoga Wireless
Assets



In connection with the acquisition of Conestoga
(see Note 4), the Company had committed to a plan to sell the assets of Conestogas wireless segment. As such, these assets were reported as held for sale in accordance with SFAS No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets. The assets were not depreciated while they were held for sale.



On November 12, 2002, D&E entered into a definitive agreement to sell substantially all of the assets of the Conestoga wireless segment to Keystone Wireless, LLC (Keystone), a Delaware limited
liability company. Keystone is an affiliate of PC Management, Inc., a Ft. Myers, Florida-based company that owns and manages wireless communications systems throughout the United States. The sale was completed on January 14, 2003. Upon completion of
the sale, D&E received approximately $10,000 in cash and a $10,000 face value secured promissory note issued by Keystone. The promissory note requires monthly principal payments for 48 months beginning in January 2005. The note bears interest at
the 60 day LIBOR rate plus 5% and is receivable beginning on December 31, 2003 and on the last day of each quarter thereafter. As this note receivable is from a highly leveraged entity and the business sold had not generated positive cash flows,
D&E records value to the note when cash recoveries are received. D&E received its first monthly principal payment of $125 in December 2004 which is reported in Other, net in the consolidated statements of operations. The note carries certain
rights where we can convert a portion or all of the principal balance of the note into equity interests of Keystone. The conversion period began on December 31, 2004 and ends May 1, 2005.



F-21



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



The results of operations of the Conestoga wireless segment held for sale are not reported in
discontinued operations because D&E has continuing involvement since the sale as a result of D&Es continued guarantees on cell site leases and D&Es responsibilities under a Build-to-Suit agreement which is more fully
described in Note 14. No gain or loss was recorded as a result of the sale, however a loss of $675 related to D&Es estimated commitments in the Build-to-Suit agreement was recorded in communication services expenses in 2002 and an
additional $300 expense was recorded in 2003. The fair value of the Conestoga wireless segment of $6,450 included in the final purchase price allocation was determined as follows:



|                                             |  |   |        |  
|-------------------------------------------- |  | - | ------ | -
|Cash                                         |  | $ | 10,000 |  
|Less: costs to sell                          |  |   | (350   | )
|Fair value of lease guarantees (See Note 14) |  |   | (3,200 | )
|                                             |  |   |        |  
|Total                                        |  | $ | 6,450  |  
|                                             |  |   |        |  



The carrying amounts
of the major classes of assets included as part of the Conestoga wireless business sold are as follows:



|                                                       |  |                   |        |  
|------------------------------------------------------ |  | ----------------- | ------ | -
|                                                       |  | December 31, 2002 |       
|Inventories                                            |  | $                 | 166    |  
|Property and equipment                                 |  |                   | 9,084  |  
|PCS licenses                                           |  |                   | 400    |  
|                                                       |  |                   |        |  
|Total assets sold                                      |  |                   | 9,650  |  
|Less: Fair value of lease guarantee remaining with D&E |  |                   | (3,200 | )
|                                                       |  |                   |        |  
|Net assets sold                                        |  | $                 | 6,450  |  
|                                                       |  |                   |        |  



6. Discontinued Operations



D&E Wireless



D&Es fifty percent partnership interest in PCS ONE and the related
contract services D&E provided to PCS ONE constituted a separate segment of D&Es business. On October 17, 2001, D&E entered into a definitive agreement to sell its interest in PCS ONE to VoiceStream Wireless Corporation for
$117,000 less working capital and long-term debt adjustments.



The results of operations of D&E Wireless are reported as discontinued operations in accordance with APB Opinion No. 30 with a measurement date of December 31, 2001. In accordance with EITF 85-36, beginning January 1, 2002, through
disposal date (the phase-out period), losses from PCS ONE were deferred because it was reasonably assured that the ultimate disposition of this business would result in the recognition of a gain.



On April 1, 2002, D&E consummated the sale of PCS ONE. The related
contract services D&E provided to PCS ONE were terminated subsequent to the sale, after a six-month post closing period ended September 30, 2002.



Upon completion of the sale, D&E received $74,168 in cash, subject to post closing adjustments as set forth in the sale agreement. These adjustments
were finalized in the third quarter of 2002 and resulted in additional cash proceeds of $2,294, which were collected in October 2002. In addition, D&E received equipment with a fair value of approximately $2,014. Selling and other estimated
costs were approximately $3,836 and the gain on sale



F-22



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



was $84,738 after eliminating the $10,098 liability for the equity in net losses of discontinued D&E Wireless operations in excess of investments and
advances. The associated income taxes were $29,301 resulting in an after tax gain of $55,437. The proceeds from the sale of PCS ONE were used to help finance the acquisition of Conestoga Enterprises, Inc. (see Note 4). Taxes related to the gain on
the sale of PCS ONE were paid primarily in 2003.



Summarized
financial information for the discontinued operations of D&E Wireless Services is as follows:



|                                                  |  |      |        |  
|------------------------------------------------- |  | ---- | ------ | -
|                                                  |  | 2002 |       
|Year ended December 31:                           |  |      |        |  
|Revenue                                           |  | $    | 4,760  |  
|Expenses                                          |  |      | 4,334  |  
|                                                  |  |      |        |  
|Operating income                                  |  |      | 426    |  
|Equity in net loss of affiliate                   |  |      | (1,605 | )
|Phase-out losses deferred until sale              |  |      | 1,284  |  
|Gain on sale of PCS ONE                           |  |      | 84,738 |  
|                                                  |  |      |        |  
|Income from D&E Wireless operations before taxes  |  |      | 84,843 |  
|Income taxes                                      |  |      | 29,337 |  
|                                                  |  |      |        |  
|Income from D&E Wireless operations, net of taxes |  | $    | 55,506 |  
|                                                  |  |      |        |  



Summarized financial
information for PCS ONE for the period from January 1, 2002 through April 1, 2002 (date of sale) is presented as follows:



|          |  |      |        |  
|--------- |  | ---- | ------ | -
|          |  | 2002 |       
|Net sales |  | $    | 12,312 |  
|Net loss  |  |      | (3,211 | )



A summary of changes
for our investment in and advances to PCS ONE is as follows:



|                                                                                      |  |      |         |  
|------------------------------------------------------------------------------------- |  | ---- | ------- | -
|                                                                                      |  | 2002 |        
|Investment in PCS ONE:                                                                |  |      |         |  
|Beginning balance (deficit)                                                           |  | $    | (13,277 | )
|Equity in losses                                                                      |  |      | (1,605  | )
|Investments                                                                           |  |      | 3,500   |  
|Phase-out losses deferred until sale                                                  |  |      | 1,284   |  
|Sale of investment in PCS ONE                                                         |  |      | 10,098  |  
|                                                                                      |  |      |         |  
|Ending balance                                                                        |  |      |        |  
|                                                                                      |  |      |         |  
|Advances to PCS ONE and sale costs:                                                   |  |      |         |  
|Beginning balance                                                                     |  |      | 2,889   |  
|Advances                                                                              |  |      | 325     |  
|Repayments                                                                            |  |      | (2,904  | )
|Selling costs deferred until gain recognized                                          |  |      | 3,526   |  
|Sale of investment in PCS ONE                                                         |  |      | (3,836  | )
|                                                                                      |  |      |         |  
|Ending balance                                                                        |  |      |        |  
|                                                                                      |  |      |         |  
|Equity in net losses of discontinued operations in excess of investments and advances |  | $    |        |  
|                                                                                      |  |      |         |  



F-23



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



D&E provided support and management services to PCS ONE. All amounts owed to D&E for support
and management services to PCS ONE were paid in full in 2002.



Paging
Services



During the third quarter of 2002, D&E
committed to a plan to sell the assets of Conestoga Mobile Systems ($205) and D&Es paging operations ($10). As such, the assets were reported as held for sale and the results of operations were reported in discontinued operations in
accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. The assets were not depreciated while they were held for sale. In January 2003, D&E entered into an agreement to sell the paging
operations assets for $215. The transaction closed for $171 on May 29, 2003. The final selling price was less than anticipated and resulted in a $29 net of tax asset impairment due to a smaller customer base on the date of sale than
anticipated when the agreement was entered into. No liabilities were included as part of the sale.



The carrying amounts of the major classes of assets included as part of the paging operations sold are as follows:



|                       |  |                  |    
|---------------------- |  | ---------------- | ---
|                       |  | December 31,2002
|Inventories            |  | $                | 47 
|Property and equipment |  |                  | 168
|                       |  |                  |    
|Total assets sold      |  | $                | 215
|                       |  |                  |    



Summarized income
statement information for the discontinued operations of the paging services, including Conestoga Mobile Systems operations post D&Es acquisition on May 24, 2002 were as follows:



|                                          |  |      |     |   |      |   |     |  
|----------------------------------------- |  | ---- | --- | - | ---- | - | --- | -
|                                          |  | 2003 |     |   | 2002 |  
|Years ended December 31:                  |  |      |     |   |      |   |     |  
|Revenue                                   |  | $    | 236 |   |      | $ | 468 |  
|Expenses                                  |  |      | 316 |   |      |   | 478 |  
|                                          |  |      |     |   |      |   |     |  
|Operating loss                            |  |      | (80 | ) |      |   | (10 | )
|Income taxes                              |  |      | 27  |   |      |   | 3   |  
|                                          |  |      |     |   |      |   |     |  
|Loss from paging operations, net of taxes |  | $    | (53 | ) |      | $ | (7  | )
|                                          |  |      |     |   |      |   |     |  



7. Investments in Affiliated
Companies



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, and holds a 27.85% investment in Pilicka, a telecommunications company located in Poland. D&E
also owns a 28.88% direct investment in Pilicka. D&E accounts for both its investment in EuroTel and its investment in Pilicka using the equity method of accounting.



Pilicka recognized an asset impairment late in 2004 requiring D&E to recognize a $1,068 loss for its equity share of the
impairment. Since D&E and EuroTel have no legal obligation nor intention to provide future funding to Pilicka, both have written their investment in Pilicka to zero and will discontinue recognizing their equity share of Pilickas ongoing
losses. EuroTel no longer records any value to its investment in Pilicka and therefore the value of D&Es investment in EuroTel was written down as an other-than-temporary loss on investments of



F-24



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



$1,057. D&E has committed to fund EuroTel, on an equal basis with the other investors in EuroTel, certain of its operating cash needs and will continue
to recognize its equity share of their ongoing losses.



Until
January 1, 2002, PenneCom held a 100% interest in Pilicka. 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). PenneCom agreed with EuroTel and the EuroTel
investors to satisfy a portion of its indebtedness to EuroTel and the EuroTel investors by transferring PenneComs entire equity interests in Pilicka to EuroTel and the investors. 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 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. These transactions were effective
as of January 1, 2002. In February 2002, the EuroTel investors contributed additional funds to EuroTel, which invested those funds in Pilicka. Concurrent with the investments, the ownership of Pilicka was restructured such that EuroTel now owns
27.85%, D&E owns 28.88% and the other EuroTel investors own 43.27%. D&E continues to own a one-third interest in EuroTel. As a result of these transactions, D&E now has a 28.88% direct ownership in Pilicka and an indirect 9.28% ownership
in Pilicka, through its continuing one-third interest in EuroTel.



In April 1999, PenneCom had 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 portion of the proceeds to reduce outstanding loans with a domestic bank. In July 2002, PenneCom
initiated a legal action against an investment bank, and an individual, alleging violations of applicable law relating to the advice given by the investment bank and the individual to a prospective buyer not to close on the purchase of Pilicka. On
June 28, 2004, the Second Circuit Court of Appeals reversed an order of the United States District Court for the Southern District of New York, which earlier had dismissed the case. Management of EuroTel continues to believe that, based on the
advice of its legal counsel, the suit is meritorious. However, the ultimate outcome of the litigation cannot be determined and no amount has been recognized for possible collection of any claims in the litigation. Legal costs are expected to
continue to be incurred in pursuit of such litigation.



The
equity investments in EuroTel and Pilicka are 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:



|                                 |  |      |         |   |      |   |         |      |  |   |        |  
|-------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                 |  | 2004 |         |   | 2003 |   |         | 2002 | 
|Years ended December 31:         |  |      |         |   |      |   |         |      |  |   |        |  
|Equity in loss of affiliate      |  | $    | (2,560  | ) |      | $ | (957    | )    |  | $ | (967   | )
|Net loss                         |  |      | (4,426  | ) |      |   | (3,209  | )    |  |   | (5,719 | )
|At December 31:                  |  |      |         |   |      |   |         |      |  |   |        |  
|Current assets                   |  | $    | 199     |   |      | $ | 124     |      |  |   |        |  
|Noncurrent assets                |  |      | 1       |   |      |   | 2,386   |      |  |   |        |  
|Current liabilities              |  |      | 33,753  |   |      |   | 31,811  |      |  |   |        |  
|Currency translation adjustments |  |      |        |   |      |   | (174    | )    |  |   |        |  
|Members equity (deficit)        |  |      | (33,553 | ) |      |   | (29,301 | )    |  |   |        |  



F-25



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



Summarized financial information for Pilicka is presented as follows:



|                         |  |      |         |   |      |   |        |      |  |   |        |  
|------------------------ |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                         |  | 2004 |         |   | 2003 |   |        | 2002 | 
|Years ended December 31: |  |      |         |   |      |   |        |      |  |   |        |  
|Net sales                |  | $    | 14,131  |   |      | $ | 10,548 |      |  | $ | 9,482  |  
|Net loss                 |  |      | (23,237 | ) |      |   | (3,436 | )    |  |   | (3,540 | )
|At December 31:          |  |      |         |   |      |   |        |      |  |   |        |  
|Current assets           |  | $    | 6,164   |   |      | $ | 2,816  |      |  |   |        |  
|Noncurrent assets        |  |      | 25,471  |   |      |   | 41,106 |      |  |   |        |  
|Current liabilities      |  |      | 2,405   |   |      |   | 1,811  |      |  |   |        |  
|Noncurrent liabilities   |  |      | 745     |   |      |   | 932    |      |  |   |        |  
|Shareholders equity     |  |      | 28,485  |   |      |   | 41,179 |      |  |   |        |  



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



|                                                  |  |      |         |   |      |   |        |      |  |   |        |  
|------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                  |  | 2004 |         |   | 2003 |   |        | 2002 | 
|Investment in EuroTel:                            |  |      |         |   |      |   |        |      |  |   |        |  
|Beginning balance (deficit)                       |  | $    | (9,804  | ) |      | $ | (8,697 | )    |  | $ | (8,192 | )
|Equity in losses                                  |  |      | (1,474  | ) |      |   | (1,107 | )    |  |   | (1,907 | )
|Equity in currency translation adjustments        |  |      | 57      |   |      |   |       |      |  |   | 620    |  
|Other-than-temporary loss on investment           |  |      | (1,057  | ) |      |   |       |      |  |   |       |  
|Investments                                       |  |      |        |   |      |   |       |      |  |   | 782    |  
|                                                  |  |      |         |   |      |   |        |      |  |   |        |  
|Ending balance (deficit)                          |  |      | (12,278 | ) |      |   | (9,804 | )    |  |   | (8,697 | )
|                                                  |  |      |         |   |      |   |        |      |  |   |        |  
|Advances to EuroTel and affiliates:               |  |      |         |   |      |   |        |      |  |   |        |  
|Beginning balance                                 |  |      | 11,717  |   |      |   | 10,711 |      |  |   | 14,623 |  
|Advances                                          |  |      | 767     |   |      |   | 1,232  |      |  |   | 1,405  |  
|Repayments                                        |  |      | (154    | ) |      |   | (226   | )    |  |   | (667   | )
|Exchange of advance for Pilicka equity investment |  |      |        |   |      |   |       |      |  |   | (4,650 | )
|                                                  |  |      |         |   |      |   |        |      |  |   |        |  
|Ending balance                                    |  |      | 12,330  |   |      |   | 11,717 |      |  |   | 10,711 |  
|                                                  |  |      |         |   |      |   |        |      |  |   |        |  
|Investment in Pilicka:                            |  |      |         |   |      |   |        |      |  |   |        |  
|Beginning balance                                 |  | $    | 1,698   |   |      | $ | 3,128  |      |  | $ |       |  
|Exchange of EuroTel advance for equity investment |  |      |        |   |      |   |       |      |  |   | 4,650  |  
|Equity in losses                                  |  |      | (1,233  | ) |      |   | (965   | )    |  |   | (1,055 | )
|Investments amortization                          |  |      | (465    | ) |      |   | (465   | )    |  |   | (467   | )
|                                                  |  |      |         |   |      |   |        |      |  |   |        |  
|Ending balance                                    |  |      |        |   |      |   | 1,698  |      |  |   | 3,128  |  
|                                                  |  |      |         |   |      |   |        |      |  |   |        |  
|Investments in and advances to affiliates         |  | $    | 52      |   |      | $ | 3,611  |      |  | $ | 5,142  |  
|                                                  |  |      |         |   |      |   |        |      |  |   |        |  



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 were $75 at December 31, 2004, which is included in accounts receivable. Amounts owed to D&E for
services performed at December 31, 2003 are reported as advances to EuroTel and affiliates.



8. Investments Available-for-Sale



During the fourth quarter of 2003, D&E sold its entire portfolio of investments available-for-sale for $2,470 and recorded a realized gain on the sale of $790. During the second quarter of 2002, D&E determined
that the



F-26



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



decline in value of some of its investments available-for-sale was other than temporary and recorded a realized loss of $2,999.



9. Property, Plant and Equipment



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



|                                    |  |      |          |   |      |   |          |  
|----------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                    |  | 2004 |          |   | 2003 |  
|Land and buildings                  |  | $    | 52,979   |   |      | $ | 51,571   |  
|Digital switching equipment         |  |      | 109,498  |   |      |   | 108,455  |  
|Outside plant facilities            |  |      | 124,172  |   |      |   | 119,950  |  
|Other equipment                     |  |      | 49,234   |   |      |   | 40,744   |  
|Plant under construction            |  |      | 8,768    |   |      |   | 5,964    |  
|                                    |  |      |          |   |      |   |          |  
|Total property, plant and equipment |  |      | 344,651  |   |      |   | 326,684  |  
|Less accumulated depreciation       |  |      | (162,078 | ) |      |   | (137,533 | )
|                                    |  |      |          |   |      |   |          |  
|Property, plant and equipment, net  |  | $    | 182,573  |   |      | $ | 189,151  |  
|                                    |  |      |          |   |      |   |          |  



10. Goodwill and Intangible Assets



Goodwill was $149,032 at December 31, 2004 and $149,127
at December 31, 2003. In 2004, goodwill decreased $95 as a result of a reduction in a valuation allowance on deferred tax assets recognized in connection with the Conestoga acquisition. In 2003, goodwill increased $561 for deferred revenue not
recorded at acquisition of Conestoga in May 2002, and $1,078 for a change in deferred taxes for the Conestoga acquisition.



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



|                              |  |      |         |   |      |   |         |  
|----------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                              |  | 2004 |         |   | 2003 |  
|Indefinite-lived intangibles: |  |      |         |   |      |   |         |  
|Franchises                    |  | $    | 104,800 |   |      | $ | 104,800 |  
|FCC licenses                  |  |      | 828     |   |      |   | 828     |  
|Finite-lived intangibles:     |  |      |         |   |      |   |         |  
|Customer relationships:       |  |      |         |   |      |   |         |  
|Gross carrying amount         |  |      | 75,700  |   |      |   | 75,700  |  
|Accumulated amortization      |  |      | (14,243 | ) |      |   | (8,729  | )
|Trademarks and trade names:   |  |      |         |   |      |   |         |  
|Gross carrying amount         |  |      | 1,200   |   |      |   | 1,200   |  
|Accumulated amortization      |  |      | (1,033  | ) |      |   | (633    | )
|Non-compete agreements:       |  |      |         |   |      |   |         |  
|Gross carrying amount         |  |      | 1,424   |   |      |   | 1,424   |  
|Accumulated amortization      |  |      | (1,280  | ) |      |   | (996    | )
|                              |  |      |         |   |      |   |         |  
|Net intangible assets         |  | $    | 167,396 |   |      | $ | 173,594 |  
|                              |  |      |         |   |      |   |         |  



F-27



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



In December 2003, D&E acquired five FCC licenses for a cost of $828. These licenses will allow
the Company to provide wireless data services in Lancaster, Reading, Altoona, Williamsport, and State College, Pennsylvania. The licenses are deemed to have an indefinite life as there is an observable market and perfunctory renewal provisions.



Amortization expense related to intangible assets was $6,198,
$6,198 and $3,727 for the years ended December 31, 2004, 2003 and 2002, respectively. Estimated amortization expense for the succeeding five years is as follows:



|     |  |        |      
|---- |  | ------ | -----
|Year |  | Amount
|2005 |  | $      | 5,824
|2006 |  |        | 5,513
|2007 |  |        | 5,513
|2008 |  |        | 5,513
|2009 |  |        | 5,513



11. Accounts Payable and Accrued
Liabilities



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



|                                               |  |      |        |      |   |       
|---------------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                               |  | 2004 |        | 2003
|Trade payables                                 |  | $    | 7,338  |      | $ | 6,209 
|Accrued compensation                           |  |      | 1,703  |      |   | 2,888 
|Accrued pension                                |  |      | 2,733  |      |   | 2,348 
|Other                                          |  |      | 6,927  |      |   | 7,062 
|                                               |  |      |        |      |   |       
|Total accounts payable and accrued liabilities |  | $    | 18,701 |      | $ | 18,507
|                                               |  |      |        |      |   |       



12. Long-Term Debt



On March 5, 2004, D&E completed a syndicated senior secured debt
financing in the amount of $260,000. The credit facilities are in the form of a $25,000 Revolving Loan, Term Loan A in the amount of $50,000, Term Loan B in the amount of $150,000, and the assumption of $35,000 of term indebtedness of a D&E
subsidiary. The $200,000 of proceeds received related to the term loans of the new credit facilities were used to refinance indebtedness under prior credit facilities and for general corporate purposes. On November 22, 2004, D&E entered into an
amendment with respect to this senior financing. The amendment reduced the Term Loan B U.S. prime rate margin and LIBOR margin to 1.00% and 2.00%, respectively. As a result of the refinancing and subsequent amendment, D&E incurred a loss on the
early extinguishment of debt of $5,252, consisting of a non-cash write-off of $4,949 of unamortized debt issuance costs of the previous credit facility and the expensing of $303 of debt issuance costs related to the new credit facility and the
amendment. D&E capitalized approximately $2,293 of debt issuance costs related to the new credit facility and the amendment, which will be amortized into interest expense over the life of the new credit facility.



F-28



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



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



|                              |  |              |   |  |          |  |      |         |      |   |        
|----------------------------- |  | ------------ | - |  | -------- |  | ---- | ------- | ---- | - | -------
|                              |  | InterestRate |   |  | Maturity |  | 2004 |         | 2003
|Senior Secured Revolving Loan |  | 4.97         | % |  | 2011     |  | $    | 10,000  |      | $ |       
|Senior Secured Term Loan A    |  | 5.12         | % |  | 2011     |  |      | 36,561  |      |   |       
|Senior Secured Term Loan B    |  | 4.99         | % |  | 2011     |  |      | 146,939 |      |   |       
|Secured Term Loan             |  | 9.34         | % |  | 2014     |  |      | 20,000  |      |   | 20,000 
|Secured Term Loan             |  | 9.36         | % |  | 2014     |  |      | 15,000  |      |   | 15,000 
|Senior Secured Revolving Loan |  | 4.88         | % |  | 2010     |  |      |        |      |   | 29,550 
|Senior Secured Term Loan B    |  | 6.02         | % |  | 2010     |  |      |        |      |   | 119,000
|Senior Secured Term Loan A    |  | 6.42         | % |  | 2011     |  |      |        |      |   | 47,500 
|Capital lease obligations     |  |              |   |  |          |  |      |        |      |   | 2,716  
|                              |  |              |   |  |          |  |      |         |      |   |        
|                              |  |              |   |  |          |  |      | 228,500 |      |   | 233,766
|Less current maturities       |  |              |   |  |          |  |      | 10,000  |      |   | 11,001 
|                              |  |              |   |  |          |  |      |         |      |   |        
|Total long-term debt          |  |              |   |  |          |  | $    | 218,500 |      | $ | 222,765
|                              |  |              |   |  |          |  |      |         |      |   |        



The Senior Secured
Revolving Loan (Revolving Loan) is a $25,000 senior secured reducing revolving credit facility maturing June 30, 2011. The Revolving Loan requires interest only payments at our option at either the U.S. prime rate plus 1.00% to 1.75% or
a one, two, three or six month LIBOR rate plus 2.00% to 2.75% depending on the Companys leverage ratio. At December 31, 2004 the average interest rate was 4.97%. The Revolving Loan will reduce permanently to $15,000 on December 31, 2006. The
Revolving Loan also requires a quarterly commitment fee on the unused portion.



The Senior Secured Term Loan A (Term Loan A) is a $50,000 term note maturing June 30, 2011. Term Loan A bears interest at our option at either the U.S. prime rate plus 1.00% to 1.75% or a one, two, three
or six month LIBOR rate plus 2.00% to 2.75%, depending on the Companys leverage ratio. At December 31, 2004 the average interest rate was 5.12%. Term Loan A requires increasing quarterly principal payments beginning in the first quarter of
2004 and continuing through the second quarter of 2011.



The
Senior Secured Term Loan B (Term Loan B) is a $150,000 term note maturing December 31, 2011. Term Loan B bears interest at our option at either the U.S. prime rate plus 1.00% or a one, two, three or six month LIBOR rate plus 2.00%,
regardless of the Companys leverage ratio. At December 31, 2004 the average interest rate was 4.99%. Term Loan B requires quarterly principal payments of $375 beginning in the first quarter of 2004 through the fourth quarter of 2010, three
quarterly principal payments of $34,875 in 2011 and a final principal payment of $33,314 on December 31, 2011.



The 9.34% Secured Term Loan in the amount of $20,000 was assumed as a result of the Conestoga acquisition (see Note 4). The 9.34% Secured Term Loan
requires interest to be paid quarterly at the stated rate and also requires principal to be paid in quarterly installments of $500 beginning in 2005 and continuing through 2014.



The 9.36% Secured Term Loan in the amount of $15,000 was assumed as a result of the Conestoga acquisition (see Note 4). The
9.36% Secured Term Loan requires interest to be paid quarterly at the stated rate and also requires principal to be paid in quarterly installments of $375 beginning in 2005 and continuing through 2014.



F-29



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



D&Es indebtedness requires the Company to maintain compliance with certain financial and
operational covenants. The most restrictive covenant is the total leverage ratio. The covenants include a limit of $10,000 in annual dividend payments. At December 31, 2004, D&E was in compliance with all covenants. D&E is also required to
maintain interest rate protection on one-half of the total amount of senior indebtedness outstanding, with a weighted average life of at least 2 years. At December 31, 2004, $120,000 of D&Es senior indebtedness was protected from interest
rate fluctuations. Of this amount, $35,000 of the Companys senior indebtedness has fixed interest rates. The Company also entered interest rate swap agreements as interest rate protection for $85,000 of debt (see Note 13). The loans are
secured by D&Es personal property, mortgages on land and buildings with a value exceeding $3,000, and the capital stock and guarantees of its subsidiaries.



Based on the borrowing rate currently available to the Company for bank loans, the fair market value of long-term debt at
December 31, 2004 is $235,083.



Maturities of long-term debt
for each year ending December 31, 2005 through 2009 are as follows:



|     |  |        |       
|---- |  | ------ | ------
|Year |  | Amount
|2005 |  | $      | 10,000
|2006 |  |        | 10,000
|2007 |  |        | 12,500
|2008 |  |        | 12,500
|2009 |  |        | 12,500



Capital lease
obligations included a long-term lease agreement assumed as a result of the Conestoga acquisition (see Note 4) for a building that required monthly rent payments of $24 including interest at 7.95% through April 2020 and an equipment lease that
required monthly payments of $5 through October 2004. On June 8, 2004, the long-term capital lease obligation of $2,613 was eliminated in connection with the purchase of an office building previously held under a capital lease arrangement. The
transaction did not materially impact the results of operations for the year ending December 31, 2004.



13. Derivative Financial Instruments



Beginning in November 2002, the Company utilizes interest rate swap derivatives to manage changes in market conditions related to interest rate payments on its variable rate debt obligations. These swap agreements
provide for the exchange of variable rate payments for fixed rate payments without the exchange of the underlying notional amounts by agreeing to pay an amount equal to a specified fixed rate of interest times the notional principal amount and to
receive in turn an amount equal to a specified variable rate of interest times the same notional amount.



As of December 31, 2004 and 2003, the Company had interest rate swap agreements with total notional amounts of $85,000 and $105,000, respectively, with
maturity dates ranging from December 2005 to November 2008. The Company 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 (Loss) and reclassified into earnings as the underlying hedged items affect earnings. Amounts reclassified into earnings related to
interest rate swap agreements are included in interest expense. The ineffective portion of the gain or loss on a derivative is recognized in earnings within other income or expense. The fair value of the derivatives was recorded as an other
long-term liability of $290 and $1,935 at December 31, 2004 and 2003, respectively. Unrealized net losses of



F-30



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



$290 ($172 net of tax) and $1,935 ($1,150 net of tax) related to these interest rate swaps were included in Accumulated Other Comprehensive Income (Loss) at
December 31, 2004 and 2003, respectively. No hedge ineffectiveness has been recorded for existing derivative instruments based on calculations in accordance with SFAS No. 133, as amended.



14. Commitments and Contingencies



D&E leases buildings and other property under various operating lease agreements that expire between 2005 and 2024. Future minimum lease payments
under operating leases are as follows:



|           |  |        |      
|---------- |  | ------ | -----
|Year       |  | Amount
|2005       |  | $      | 1,005
|2006       |  |        | 440  
|2007       |  |        | 180  
|2008       |  |        | 112  
|2009       |  |        | 57   
|Thereafter |  |        | 140  



Total rent expense for
the years ended December 31 was approximately $2,642 in 2004, $2,882 in 2003 and $4,080 in 2002.



Effective May 24, 2002, pursuant to the merger agreement with Conestoga Enterprises, Inc., we entered into or acquired obligations under existing
agreements for compensation, retention bonuses and change of control payments due to former officers, employees and existing employees. These agreements require future annual payments as listed below. Interest is imputed at 6.5%.



|           |  |       
|---------- |  | ------
|Year       |  | Amount
|2005       |  | 176   
|2006       |  | 74    
|2007       |  | 74    
|2008       |  | 65    
|2009       |  | 57    
|Thereafter |  | 199   



On May 24, 2002,
pursuant to the merger agreement with Conestoga, D&E assumed Conestogas obligations under a Build-to-Suit agreement (BTS) with Mountain Union Telecom LLC (Mountain Union). The obligations related to the construction
of 20 wireless tower sites for Conestogas wireless subsidiary, Conestoga Wireless Company (CWC). In November 2002, D&E entered into an asset purchase agreement with Keystone Wireless LLC (Keystone Wireless) for the
sale of CWC. Although D&E sold the assets of this business, its obligations under the BTS were not assumed by Keystone Wireless. Under the BTS, D&E is obligated to work with Mountain Union to find and develop 20 wireless tower sites and
after construction of each site, enter into a long-term operating lease with Mountain Union for the site. Keystone is also contractually obligated to assume any operating leases entered into under the BTS. In accordance with the terms of the BTS
agreement, D&E paid Mountain Union $700 in October 2003 and $200 in July 2004 for nonperformance penalties due for nine wireless tower sites that will not be constructed. Under the terms of the asset purchase agreement, Keystone will reimburse
D&E for one-half of the penalties paid not to exceed $125. Because the underlying assets of CWC were sold under the asset purchase agreement, D&E has considered any remaining



F-31



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



obligations and potential penalties under the BTS a contingent liability. As of December 31, 2004, D&E has recorded a $200 liability for its remaining
commitment under the BTS.



As part of the Companys
acquisition of Conestoga, D&E assumed a guarantee agreement with Mountain Union for lease obligations on the wireless tower sites of Conestogas wireless subsidiary. When D&E entered into the asset purchase agreement with Keystone
Wireless, whereby Keystone Wireless was assigned the responsibility for the leases, Mountain Union declined to release D&E from its guarantee. In the event of a default by Keystone Wireless, D&E continues to guarantee the wireless tower site
lease payments, which cover a 10-year period beginning on the commencement date of the lease of each tower. As such, the guarantee is a continuing guarantee provided on an individual tower site basis. The lease payments start at $1.5 per site per
month, with provision for an increase of 4% per year. The maximum potential amount of undiscounted future payments that D&E could be required to make under the guarantee as of December 31, 2004 is $13,160. The majority of these tower site leases
and our guarantee will expire between 2011 and 2013. As of December 31, 2004, D&E has recorded a liability for the lease guarantees of $3,200. D&E will recognize release from risk for the guarantee upon expiration or settlement of the
guarantee.



D&E has committed to loan EuroTel, on an equal
basis with the other investors in EuroTel, certain of its operating cash needs. D&E expects that its 2005 funding requirements for EuroTel will be less than $1,000. D&E will not make any further cash contributions to Pilicka.



15. Income Taxes



The provision for income taxes consists of the following:



|                                                 |  |      |        |   |      |   |       |      |  |   |         |  
|------------------------------------------------ |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ------- | -
|                                                 |  | 2004 |        |   | 2003 |   |       | 2002 | 
|Current:                                         |  |      |        |   |      |   |       |      |  |   |         |  
|Federal                                          |  | $    | 2,990  |   |      | $ | 448   |      |  | $ | 28,391  |  
|State                                            |  |      | 332    |   |      |   | 1,083 |      |  |   | 916     |  
|                                                 |  |      |        |   |      |   |       |      |  |   |         |  
|                                                 |  |      | 3,322  |   |      |   | 1,531 |      |  |   | 29,307  |  
|                                                 |  |      |        |   |      |   |       |      |  |   |         |  
|Deferred:                                        |  |      |        |   |      |   |       |      |  |   |         |  
|Federal                                          |  |      | (938   | ) |      |   | 1,050 |      |  |   | (2,476  | )
|State                                            |  |      | (954   | ) |      |   | (640  | )    |  |   | (1,083  | )
|                                                 |  |      |        |   |      |   |       |      |  |   |         |  
|                                                 |  |      | (1,892 | ) |      |   | 410   |      |  |   | (3,559  | )
|                                                 |  |      |        |   |      |   |       |      |  |   |         |  
|Total income taxes                               |  |      | 1,430  |   |      |   | 1,941 |      |  |   | 25,748  |  
|Tax (expense) benefit of discontinued operations |  |      |       |   |      |   | 27    |      |  |   | (29,334 | )
|                                                 |  |      |        |   |      |   |       |      |  |   |         |  
|Income taxes from continuing operations          |  | $    | 1,430  |   |      | $ | 1,968 |      |  | $ | (3,586  | )
|                                                 |  |      |        |   |      |   |       |      |  |   |         |  



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:



|                                                |  |        |    |  |      |   |  |      |  
|----------------------------------------------- |  | ------ | -- |  | ---- | - |  | ---- | -
|                                                |  | 2004   |    |  | 2003 |   |  | 2002 |  
|Federal statutory rate                          |  | 34.0   | %  |  | 34.0 | % |  | 35.0 | %
|Increase (decrease) resulting from:             |  |        |    |  |      |   |  |      |  
|State income taxes, net of federal tax benefits |  | 32.9   |    |  | 1.3  |   |  | (2.7 | )
|Valuation allowance                             |  | (176.3 | )  |  |     |   |  | 3.5  |  
|Prior-period tax                                |  | (6.9   | )  |  | (3.2 | ) |  | (1.4 | )
|Other, net                                      |  | 1.3    |    |  | 1.2  |   |  | (0.7 | )
|                                                |  |        |    |  |      |   |  |      |  
|Effective income tax rate                       |  | (115.0 | )% |  | 33.3 | % |  | 33.7 | %
|                                                |  |        |    |  |      |   |  |      |  



F-32



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



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



|                                      |  |      |         |   |      |   |         |  
|------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                      |  | 2004 |         |   | 2003 |  
|Deferred tax liabilities:             |  |      |         |   |      |   |         |  
|Depreciation                          |  | $    | 27,064  |   |      | $ | 23,989  |  
|Intangible assets                     |  |      | 70,114  |   |      |   | 74,819  |  
|Investments                           |  |      | 45      |   |      |   | 357     |  
|                                      |  |      |         |   |      |   |         |  
|                                      |  |      | 97,223  |   |      |   | 99,165  |  
|Deferred tax assets:                  |  |      |         |   |      |   |         |  
|Employee benefits                     |  |      | 4,576   |   |      |   | 2,134   |  
|Net operating loss carryforwards      |  |      | 13,137  |   |      |   | 11,710  |  
|Equity in net loss of affiliates      |  |      | 2,193   |   |      |   | 277     |  
|Other, net                            |  |      | 6,992   |   |      |   | 7,881   |  
|                                      |  |      |         |   |      |   |         |  
|                                      |  |      | 26,898  |   |      |   | 22,002  |  
|Valuation allowance                   |  |      | (14,752 | ) |      |   | (11,132 | )
|                                      |  |      |         |   |      |   |         |  
|Net deferred tax assets (liabilities) |  | $    | (85,077 | ) |      | $ | (88,295 | )
|                                      |  |      |         |   |      |   |         |  



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



|                                             |  |      |         |   |      |   |         |  
|-------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                             |  | 2004 |         |   | 2003 |  
|Deferred income tax assetcurrent            |  | $    | 1,325   |   |      | $ | 1,663   |  
|Deferred income tax liabilitynon-current    |  |      | (86,402 | ) |      |   | (89,958 | )
|                                             |  |      |         |   |      |   |         |  
|Net deferred income tax assets (liabilities) |  | $    | (85,077 | ) |      | $ | (88,295 | )
|                                             |  |      |         |   |      |   |         |  



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



|                                        |  |      |         |   |      |   |         |  
|--------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                        |  | 2004 |         |   | 2003 |  
|Current assetsother                    |  | $    | 1,325   |   |      | $ | 1,663   |  
|Other liabilitiesdeferred income taxes |  |      | (86,402 | ) |      |   | (89,958 | )



Approximately $190,483
of state net operating loss carryforwards remained at December 31, 2004. These carryforwards are due to the operations of D&Es subsidiaries and will expire in the years 2005 through 2024. The benefit of these carryforwards is dependent on
the taxable income of these subsidiaries during the carryforward period.



The Company has established a combined valuation allowance of $14,752 due to the uncertainty regarding the ability to utilize state net operating loss carryforwards and to realize losses on its investments in EuroTel
and Pilicka for tax purposes. The amount of the deferred tax asset valuation could change if estimates of future taxable income during the carryforward period are revised.



16. Shareholders Equity



D&E has an Employee Stock Purchase Plan (ESPP), which provides D&Es eligible employees the opportunity to purchase shares of
D&Es common stock through payroll deductions. There are 461,168 shares of common stock reserved for issuance pursuant to the ESPP at December 31, 2004. The total number of shares purchased pursuant to the ESPP during 2004, 2003 and 2002
was 24,827, 25,891 and 26,144, respectively.



F-33



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



D&E offers a Dividend Reinvestment and Stock Purchase Plan (DRP) to D&Es
shareholders. The DRP provides all shareholders of D&Es common stock the opportunity to purchase additional shares of common stock by: 1) reinvesting all cash dividends paid on their shares of common stock; 2) making optional cash
purchases of common stock, up to a maximum amount per quarter, while continuing to receive cash dividends; or 3) both reinvesting all cash dividends and making such optional cash purchases. There are 69,408 shares of common stock reserved for
issuance pursuant to the DRP at December 31, 2004. The total number of shares purchased through the DRP during 2004, 2003 and 2002 was 27,534, 33,506 and 41,946, 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. Certain non-employee directors receive common stock in payment for their
services as a director of the company. There are 9,360 shares of common stock reserved for issuance pursuant to the plan at December 31, 2004. The total number of shares issued under this plan during 2004, 2003 and 2002 was 2,000, 1,300 and 1,300,
respectively.



There are 383,418 shares of D&Es
common stock reserved for issuance under the 1999 Long-Term Incentive Plan (LTIP) at December 31, 2004. There were no shares issued or stock options granted in 2004 and 2003. There were 93,082 shares issued and 59,500 stock options granted through
the LTIP in 2002. There are also 647,784 shares of common stock reserved for issuance under the Conestoga Stock Option Plan at December 31, 2004. There were no stock options granted under the Conestoga plan in 2004 and 2003. In 2002, 10,604 stock
options were granted.



At December 31, 2004 and 2003, shares of
D&Es common stock of 2,160,610 and 2,398,724, respectively, were held in a voting trust. Certain of D&Es officers and Directors are trustees of the voting trust.



On August 13, 2004, D&E purchased 1,333,500 shares of its common stock at a total purchase price of $13,335 from
Citizens Communication Company, or approximately 8.56% of the outstanding common stock of D&E. The negotiated repurchase also terminated a 1997 Stock Acquisition Agreement pursuant to which an affiliate of Citizens originally acquired 1,300,000
shares of D&E common stock in consideration for $27,015. Under that agreement, Citizens was required, among other things, to provide D&E with an opportunity to purchase the shares prior to selling those shares generally.



There were no treasury stock purchases in 2003. During 2002, D&E
purchased $178 of treasury stock from a related party at fair market value.



17. Stock Option Plan



The stock options
outstanding under the Conestoga stock option plan were converted to options to purchase D&Es common stock upon the acquisition of Conestoga. The stock options have an expiration term of 10 years. The per share exercise price of a stock
option shall be not less than the fair market value of the underlying common stock on the date the option is granted. Additionally, the Company has shares available to grant as options under its 1999 Long-Term Incentive Plan. There was a combined
total of 1,031,202 options available for grant at December 31, 2004.



F-34



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



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



|                                                     |  |         |   |      |                              |       |         |         |   |                              |   |         |  |         |                              |  |   |      
|---------------------------------------------------- |  | ------- | - | ---- | ---------------------------- | ----- | ------- | ------- | - | ---------------------------- | - | ------- |  | ------- | ---------------------------- |  | - | -----
|                                                     |  | 2004    |   | 2003 |                              | 2002 
|                                                     |  | Options |   |      | AverageWeightedExercisePrice |       | Options |         |   | AverageWeightedExercisePrice |   | Options |  |         | AverageWeightedExercisePrice
|Outstanding options at beginning of year             |  | 256,915 |   |      | $                            | 10.20 |         | 328,432 |   |                              | $ | 9.97    |  |        |                              |  | $ |     
|Conversion of Conestoga stock options at acquisition |  |        |   |      |                              |       |         |        |   |                              |   |         |  | 300,623 |                              |  |   | 9.00 
|Granted                                              |  |        |   |      |                              |       |         |        |   |                              |   |         |  | 70,104  |                              |  |   | 13.67
|Exercised                                            |  |        |   |      |                              |       |         | (71,517 | ) |                              |   | 9.14    |  | (42,295 | )                            |  |   | 9.22 
|Cancelled                                            |  | (35,557 | ) |      |                              | 11.39 |         |        |   |                              |   |         |  |        |                              |  |   |      
|                                                     |  |         |   |      |                              |       |         |         |   |                              |   |         |  |         |                              |  |   |      
|Outstanding options at end of year                   |  | 221,358 |   |      | $                            | 10.01 |         | 256,915 |   |                              | $ | 10.20   |  | 328,432 |                              |  | $ | 9.97 
|                                                     |  |         |   |      |                              |       |         |         |   |                              |   |         |  |         |                              |  |   |      



The following table
summarized information about stock options outstanding at December 31, 2004:



|                        |  |                                        |  |                                |       |                                           |           |                                         |         |                                |   |     
|----------------------- |  | -------------------------------------- |  | ------------------------------ | ----- | ----------------------------------------- | --------- | --------------------------------------- | ------- | ------------------------------ | - | ----
|Range ofExercise Prices |  | OptionsOutstanding AtDecember 31, 2004 |  | Weighted AverageExercise Price |       | Weighted AverageContractualRemaining Life |           | Options Exercisableat December 31, 2004 |         | Weighted AverageExercise Price
|$8.24-$14.50            |  | 221,358                                |  | $                              | 10.01 |                                           | 5.9 years |                                         | 188,296 |                                | $ | 9.41



D&E applies APB
Opinion 25 and related interpretations in accounting for the stock option plan. All options are issued with an exercise price equal to the fair market value of the stock at the date of grant; accordingly, no compensation cost has been recognized.
See Note 2, Stock Compensation, for the pro forma effect of applying the fair value provisions of SFAS 123.



18. Employee Benefit Plans



Employees Retirement Plan and Postretirement Health Care Benefits



D&Es pension plans are noncontributory defined benefit plans computed on an actuarial basis covering all eligible employees. Pension benefits are based upon length of service and the employees average
pensionable compensation as defined by the plans. Accrued benefits are vested after five years of participation in the plan. On December 31, 2003, the Conestoga Telephone & Telegraph Company Pension Plan and the Pension Plan for Employees of
Buffalo Valley were merged into the D&E Communications, Inc. Employees Retirement Plan to unify future benefit accruals for existing employees to the extent that no participants were negatively impacted. D&E does not expect a material
impact in future contributions in the near term as a result of the merger of the pension plans. Since December 31, 2003, the Company sponsors two pension plans: the D&E Communications, Inc. Employees Retirement Plan and the Conestoga
Telephone & Telegraph Company Pension Plan for Members of Local 1671.



D&E also provides certain basic health care benefits to eligible individuals who retired under the D&E Communications, Inc. Employees Retirement Plan between the period of December 31, 1972, and July 1,
1992. 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



F-35



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



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 participating in the D&E Communications, Inc. Employees Retirement Plan.



D&E provides an opportunity for grandfathered retiring members of the Pension Plan for Employees of Buffalo Valley and the Conestoga Telephone & Telegraph Company Pension Plan for Members of Local 1671 to
purchase health care benefits under the Companys fully-insured plan. Members of these Plans who elect to continue their coverage at retirement pay 100% of the applicable premiums. D&E also provides an opportunity for grandfathered retiring
members of the Conestoga Telephone & Telegraph Company Pension Plan to purchase health care benefits under the Companys fully-insured plan. The Company pays 50% of the premium for members of this Plan who elect to continue coverage at
retirement. On July 21, 2004 the Company decided to discontinue offering these benefits for non-union grandfathered employees who will not be eligible to retire with an unreduced pension benefit by June 30, 2005. As a result of this amendment to the
postretirement plans, the Companys accumulated postretirement benefit obligation decreased by approximately $1,310 and the annual postretirement benefits expense decreased by $130 in 2004.



The applicable annual accruals represent the estimated cost of providing
these benefits to current and future retirees and is determined on an actuarial basis.



The accrued postretirement benefit liability of $2,803 is included in other long-term liabilities in the accompanying consolidated balance sheets.



In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (The Act) was
enacted into law. The Act provides a voluntary prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care plans that provide at least an actuarially equivalent benefit. In May 2004, the FASB issued Staff
Position No. FSP FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FAS 106-2). FAS 106-2 provides guidance on accounting for the effects of
the new Medicare prescription drug benefit and the related federal subsidy available to employers whose prescription drug benefits are at least actuarially equivalent to the drug benefit provided under Medicare Part D. Based upon this guidance, the
Company did not believe its postretirement health care plans were actuarially equivalent. In January 2005, the Centers for Medicare and Medicaid Services issued final guidelines to define actuarial equivalence under the regulations. The Company is
evaluating the January 2005 guidelines to determine if the benefits provided by the Companys plan are at least actuarially equivalent to benefits available though Medicare Part D under these new guidelines. Accordingly, the accumulated
postretirement benefit obligation and the net periodic postretirement benefit cost reported in the financial statements and the accompanying notes do not reflect any effect of the federal subsidy provided by the Act.



F-36



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



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



|                                                           |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------- |  | ---------------- | ------- | - | ---------------------- | - | ------- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                           |  | Pension Benefits |         |   | PostretirementBenefits |  
|                                                           |  | 2004             |         |   | 2003                   |   |         | 2004 |  |   | 2003   |  
|Change in Benefit Obligation:                              |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  
|Projected benefit obligation at beginning of year          |  | $                | 56,920  |   |                        | $ | 52,201  |      |  | $ | 4,667  |   |  | $ | 3,206  |  
|Service cost                                               |  |                  | 2,265   |   |                        |   | 2,086   |      |  |   | 112    |   |  |   | 141    |  
|Interest cost                                              |  |                  | 3,526   |   |                        |   | 3,351   |      |  |   | 268    |   |  |   | 270    |  
|Actuarial loss                                             |  |                  | 2,109   |   |                        |   | 2,008   |      |  |   | 284    |   |  |   | 1,157  |  
|Changes in assumption                                      |  |                  | 4,505   |   |                        |   |        |      |  |   | 233    |   |  |   |       |  
|Amendments                                                 |  |                  | (888    | ) |                        |   |        |      |  |   | (1,310 | ) |  |   |       |  
|Benefits paid                                              |  |                  | (3,047  | ) |                        |   | (2,726  | )    |  |   | (233   | ) |  |   | (107   | )
|                                                           |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  
|Projected benefit obligation at end of year                |  | $                | 65,390  |   |                        | $ | 56,920  |      |  | $ | 4,021  |   |  | $ | 4,667  |  
|                                                           |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  
|Change in Plan Assets:                                     |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  
|Fair value of assets at beginning of year                  |  | $                | 41,801  |   |                        | $ | 34,292  |      |  | $ | 579    |   |  | $ | 525    |  
|Actual return on plan assets                               |  |                  | 2,629   |   |                        |   | 7,839   |      |  |   | 19     |   |  |   | 54     |  
|Employer contributions                                     |  |                  | 2,163   |   |                        |   | 2,396   |      |  |   | 102    |   |  |   |       |  
|Benefits paid                                              |  |                  | (3,047  | ) |                        |   | (2,726  | )    |  |   | (205   | ) |  |   |       |  
|                                                           |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  
|Fair value of assets at end of year                        |  | $                | 43,546  |   |                        | $ | 41,801  |      |  | $ | 495    |   |  | $ | 579    |  
|                                                           |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  
|Recognition of Funded Status of the Plan:                  |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  
|Funded status at end of year                               |  | $                | (21,844 | ) |                        | $ | (15,119 | )    |  | $ | (3,526 | ) |  | $ | (4,088 | )
|Unrecognized net actuarial loss                            |  |                  | 20,103  |   |                        |   | 13,667  |      |  |   | 1,925  |   |  |   | 1,472  |  
|Unrecognized prior service cost                            |  |                  | (687    | ) |                        |   | 133     |      |  |   | (1,268 | ) |  |   |       |  
|Unrecognized initial obligation                            |  |                  |        |   |                        |   |        |      |  |   | 83     |   |  |   | 104    |  
|                                                           |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  
|Net amount recognized at end of year                       |  | $                | (2,428  | ) |                        | $ | (1,319  | )    |  | $ | (2,786 | ) |  | $ | (2,512 | )
|                                                           |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  
|Amounts Recognized in the Financial Statements Consist of: |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  
|Prepaid benefit cost                                       |  | $                | 937     |   |                        | $ | 975     |      |  | $ | 17     |   |  | $ | 48     |  
|Accrued benefit cost                                       |  |                  | (14,141 | ) |                        |   | (8,583  | )    |  |   | (2,803 | ) |  |   | (2,560 | )
|Intangible assets                                          |  |                  |        |   |                        |   | 133     |      |  |   |       |   |  |   |       |  
|Accumulated other comprehensive income                     |  |                  | 10,776  |   |                        |   | 6,156   |      |  |   |       |   |  |   |       |  
|                                                           |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  
|Net amount recognized at end of year                       |  | $                | (2,428  | ) |                        | $ | (1,319  | )    |  | $ | (2,786 | ) |  | $ | (2,512 | )
|                                                           |  |                  |         |   |                        |   |         |      |  |   |        |   |  |   |        |  



The accumulated
benefit obligation for all defined benefit pension plans was $56,949 and $48,571 at December 31, 2004, and 2003, respectively.



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



|                               |  |      |        |      |   |       
|------------------------------ |  | ---- | ------ | ---- | - | ------
|                               |  | 2004 |        | 2003
|Projected benefit obligation   |  | $    | 54,383 |      | $ | 47,206
|Accumulated benefit obligation |  |      | 48,144 |      |   | 40,926
|Fair value of plan assets      |  |      | 34,003 |      |   | 32,343



F-37



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



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



|                                         |  |                  |        |   |                        |   |        |      |  |   |        |   |  |      |     |   |      |   |     |   |  |   |     |  
|---------------------------------------- |  | ---------------- | ------ | - | ---------------------- | - | ------ | ---- |  | - | ------ | - |  | ---- | --- | - | ---- | - | --- | - |  | - | --- | -
|                                         |  | Pension Benefits |        |   | PostretirementBenefits |  
|                                         |  | 2004             |        |   | 2003                   |   |        | 2002 |  |   | 2004   |   |  | 2003 |     |   | 2002 |  
|Components of Net Periodic Benefit Cost: |  |                  |        |   |                        |   |        |      |  |   |        |   |  |      |     |   |      |   |     |   |  |   |     |  
|Service cost                             |  | $                | 2,265  |   |                        | $ | 2,086  |      |  | $ | 1,691  |   |  | $    | 112 |   |      | $ | 141 |   |  | $ | 78  |  
|Interest cost                            |  |                  | 3,526  |   |                        |   | 3,352  |      |  |   | 2,685  |   |  |      | 268 |   |      |   | 270 |   |  |   | 140 |  
|Expected loss (return) on assets         |  |                  | (3,476 | ) |                        |   | (3,398 | )    |  |   | (2,885 | ) |  |      | (41 | ) |      |   | (42 | ) |  |   | (58 | )
|Amortization of:                         |  |                  |        |   |                        |   |        |      |  |   |        |   |  |      |     |   |      |   |     |   |  |   |     |  
|Initial obligation                       |  |                  |       |   |                        |   |       |      |  |   |       |   |  |      | 21  |   |      |   | 89  |   |  |   | 21  |  
|Prior service cost                       |  |                  | (68    | ) |                        |   | 15     |      |  |   | 33     |   |  |      | (42 | ) |      |   |    |   |  |   |    |  
|Actuarial loss                           |  |                  | 1,024  |   |                        |   | 700    |      |  |   | 323    |   |  |      | 86  |   |      |   | 13  |   |  |   | 5   |  
|SFAS No. 88 special termination benefit  |  |                  |       |   |                        |   |       |      |  |   | 274    |   |  |      |    |   |      |   |    |   |  |   |    |  
|                                         |  |                  |        |   |                        |   |        |      |  |   |        |   |  |      |     |   |      |   |     |   |  |   |     |  
|Total net periodic benefit cost          |  | $                | 3,271  |   |                        | $ | 2,755  |      |  | $ | 2,121  |   |  | $    | 404 |   |      | $ | 471 |   |  | $ | 186 |  
|                                         |  |                  |        |   |                        |   |        |      |  |   |        |   |  |      |     |   |      |   |     |   |  |   |     |  



Additional information
regarding the minimum pension liability follows:



|                                                                                        |  |                 |       |      |                        |        |      |  |      |  |    
|--------------------------------------------------------------------------------------- |  | --------------- | ----- | ---- | ---------------------- | ------ | ---- |  | ---- |  | ---
|                                                                                        |  | PensionBenefits |       |      | PostretirementBenefits
|                                                                                        |  | 2004            |       | 2003 |                        |        | 2004 |  | 2003
|Increase/(Decrease) in minimum pension liability included in other comprehensive income |  | $               | 4,620 |      | $                      | (2,991 | )    |  | N/A  |  | N/A
|                                                                                        |  |                 |       |      |                        |        |      |  |      |  |    



The increase in
minimum pension liability between December 31, 2003 and December 31, 2004 was attributed mainly to the change in the Companys discount rate assumption and lower than expected asset returns.



Key pension and postretirement assumptions



The Company reviews the appropriateness of the assumptions used to develop
the pension and postretirement obligations on a regular basis. Management develops each assumption using relevant company experience and market-related data to ensure that each assumption is individually reasonable. For example, the company enlists
the services of its plan actuaries, who have developed an interest rate yield curve to assist their clients in evaluating discount rates. Under this approach, the Companys projected benefit cash flows are analyzed using this yield curve to
develop a single-point discount rate matching the plans characteristics. Similarly, the Company determines its expected return on plan assets assumption by evaluating both historical returns, as well as estimates of future returns.



Based on the approaches outlined above, the Company lowered its expected rate
of return on assets at December 31, 2004 from 8.75% to 8.50% and lowered the discount rate assumption from 6.25% to 5.75% at December 31, 2004.



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



|                               |  |                 |   |  |               |   |  |      |   |  |      |  
|------------------------------ |  | --------------- | - |  | ------------- | - |  | ---- | - |  | ---- | -
|                               |  | PensionBenefits |   |  | OtherBenefits |  
|                               |  | 2004            |   |  | 2003          |   |  | 2004 |   |  | 2003 |  
|Discount rate                  |  | 5.75            | % |  | 6.25          | % |  | 5.75 | % |  | 6.25 | %
|Rates of compensation increase |  | 4.50            | % |  | 4.50          | % |  | N/A  |   |  | N/A  |  



F-38



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



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



|                                         |  |                 |   |  |               |   |  |      |   |  |      |  
|---------------------------------------- |  | --------------- | - |  | ------------- | - |  | ---- | - |  | ---- | -
|                                         |  | PensionBenefits |   |  | OtherBenefits |  
|                                         |  | 2004            |   |  | 2003          |   |  | 2004 |   |  | 2003 |  
|Discount rate                            |  | 6.25            | % |  | 6.50          | % |  | 6.25 | % |  | 6.50 | %
|Expected long-term return on plan assets |  | 8.75            | % |  | 8.75          | % |  | 8.75 | % |  | 8.75 | %
|Rate of compensation increase            |  | 4.50            | % |  | 4.50          | % |  | N/A  |   |  | N/A  |  



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



|                                                        |  |       |   |  |      |  
|------------------------------------------------------- |  | ----- | - |  | ---- | -
|                                                        |  | 2004  |   |  | 2003 |  
|Health care cost trend rate assumed for next year       |  | 10.00 | % |  | 9.00 | %
|Rate to which the cost trend rate is assumed to decline |  | 4.50  | % |  | 5.00 | %
|Year that the rate reaches the ultimate trend rate      |  | 2011  |   |  | 2008 |  



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



|                                             |  |                            |     |                            |   |      |  
|-------------------------------------------- |  | -------------------------- | --- | -------------------------- | - | ---- | -
|                                             |  | 1-PercentagePoint Increase |     | 1-PercentagePoint Decrease |  
|Effect on total of service and interest cost |  | $                          | 58  |                            | $ | (48  | )
|Effect on postretirement benefit obligation  |  |                            | 374 |                            |   | (322 | )



Plan Assets



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



The Companys pension plan
weighted-average asset allocations at December 31, 2004 and 2003, by asset category are as follows:



|                  |  |      |   |  |      |  
|----------------- |  | ---- | - |  | ---- | -
|                  |  | 2004 |   |  | 2003 |  
|Asset Category:   |  |      |   |  |      |  
|Equity securities |  | 65   | % |  | 69   | %
|Debt securities   |  | 35   | % |  | 30   | %
|Other             |  |     |   |  | 1    | %
|                  |  |      |   |  |      |  
|Total             |  | 100  | % |  | 100  | %
|                  |  |      |   |  |      |  



Equity securities
include D&E common stock in the amounts of $0 (0% of total plan assets) and $384 (1% of total plan assets) at December 31, 2004 and December 31, 2003, respectively.



F-39



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



The Companys other postretirement benefit plan weighted-average asset allocations at December
31, 2004 and 2003, by asset category are as follows:



|                  |  |      |   |  |      |  
|----------------- |  | ---- | - |  | ---- | -
|                  |  | 2004 |   |  | 2003 |  
|Asset Category:   |  |      |   |  |      |  
|Equity securities |  | 51   | % |  | 36   | %
|Debt securities   |  | 49   | % |  | 54   | %
|Other             |  |     |   |  | 10   | %
|                  |  |      |   |  |      |  
|Total             |  | 100  | % |  | 100  | %
|                  |  |      |   |  |      |  



D&E expects to
contribute $2,750 to its pension plan and $0 to its other postretirement benefit plan in 2005.



The estimated future benefit payments are as follows:



|             |  |                 |        |               |   |      
|------------ |  | --------------- | ------ | ------------- | - | -----
|Year         |  | PensionBenefits |        | OtherBenefits
|2005         |  | $               | 2,740  |               | $ | 258  
|2006         |  |                 | 2,792  |               |   | 267  
|2007         |  |                 | 2,847  |               |   | 289  
|2008         |  |                 | 3,076  |               |   | 297  
|2009         |  |                 | 3,256  |               |   | 313  
|2010 to 2014 |  |                 | 19,866 |               |   | 1,423



Employees 401(k) Savings Plan



D&E has employee savings plans available to all
eligible employees (Savings Plans). Participating employees may contribute a portion of their compensation, up to a maximum percentage, to the Savings Plans, and the Company makes matching contributions based upon the employees contribution.
D&E may also make discretionary profit-sharing contributions.



On October 1, 2002, the Conestoga Telephone & Telegraph Company 401(k) Plan, the Buffalo Valley Telephone Co. 401(k) Plan, the Telebeam, Inc. 401(k) Plan, the Infocore, Inc. 401(k) Plan and the D&E Communications, Inc. Employee
Stock Ownership Plan were merged into the D&E Communications, Inc. Employees 401(k) Savings Plan. Since that time, the Company sponsors two Savings Plans: the D&E Communications, Inc. Employees 401(k) Savings Plan and the
Conestoga Telephone & Telegraph Co. Local 1671 Tax Deferred Retirement Plan.



Company contributions amounted to $1,275 in 2004, $1,099 in 2003 and $1,124 in 2002. As of January 1, 2004, the D&E Communications, Inc. Employees 401(k) Savings Plan was amended to provide the same match to
all eligible participants.



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 were eligible for participation in the Plan. Awards under the Plan were 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.



F-40



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



Awards granted under the Plan were in the form of Performance Restricted Shares of common stock and
cash, which 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. If the minimum goals were not met, no
performance-restricted shares were earned by the participant. If the performance goals were fully achieved, 100% of the performance-restricted shares were earned by the participant. During the performance period, each performance-restricted share
was considered equal to one share of common stock for dividend (but not voting) purposes and the participant was entitled to dividend equivalents that were reinvested in additional performance-restricted shares. At the end of the performance period,
any performance-restricted shares that had been earned were converted to shares of common stock.



There were no grants of performance-restricted shares in 2004, 2003 and 2002. All shares granted in 2001 and 2000 became fully vested and payable on May
24, 2002 as a result of the Conestoga acquisition.



19. Disclosures about
Fair Value of Financial Instruments



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



a. Cash and temporary cash investments  The carrying amount approximates fair value because of the short maturity
of these instruments.



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



c. Debt  The fair value of fixed rate
long-term debt was estimated based on our current incremental borrowing rate for debt of the similar remaining maturities. The fair value of floating rate debt approximates carrying value since the debt has been repriced no less frequently than
every three months during 2004 and 2003.



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



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



|                              |  |               |         |   |            |   |         |               |  |   |            |   |  |   |         |  
|----------------------------- |  | ------------- | ------- | - | ---------- | - | ------- | ------------- |  | - | ---------- | - |  | - | ------- | -
|                              |  | December 31,  |        
|                              |  | 2004          |         |   | 2003       |  
|                              |  | CarryingValue |         |   | Fair Value |   |         | CarryingValue |  |   | Fair Value |  
|Financial assets:             |  |               |         |   |            |   |         |               |  |   |            |   |  |   |         |  
|Cash & cash equivalents       |  | $             | 8,517   |   |            | $ | 8,517   |               |  | $ | 12,446     |   |  | $ | 12,446  |  
|Financial liabilities:        |  |               |         |   |            |   |         |               |  |   |            |   |  |   |         |  
|Fixed rate long-term debt:    |  |               |         |   |            |   |         |               |  |   |            |   |  |   |         |  
|Secured term loans            |  |               | 35,000  |   |            |   | 41,583  |               |  |   | 35,000     |   |  |   | 40,865  |  
|Variable rate long-term debt: |  |               |         |   |            |   |         |               |  |   |            |   |  |   |         |  
|Revolving Loan                |  |               | 10,000  |   |            |   | 10,000  |               |  |   | 29,550     |   |  |   | 29,550  |  
|Term Loan A                   |  |               | 36,561  |   |            |   | 36,561  |               |  |   | 47,500     |   |  |   | 47,500  |  
|Term Loan B                   |  |               | 146,939 |   |            |   | 146,939 |               |  |   | 119,000    |   |  |   | 119,000 |  
|Capital lease obligations     |  |               |        |   |            |   |        |               |  |   | 2,716      |   |  |   | 3,050   |  
|Interest rate swaps           |  |               | (290    | ) |            |   | (290    | )             |  |   | (1,935     | ) |  |   | (1,935  | )



F-41



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



20. Subsequent Event



On February 28, 2005, D&E sold its interest in PenTeleData Limited Partnership I for $2,900 resulting in a gain of $2,100 before taxes.



21. Segment Reporting



D&Es business segments are as follows: incumbent rural local
exchange carrier (RLEC), competitive local exchange carrier (CLEC), internet services and systems integration. Conestoga Wireless results previously reported as a separate segment are included with the Corporate and Other amounts. The segments are
more fully described in Note 1. In 2003, D&E moved responsibility for some products to different segment managers. Certain amounts from prior years have been reclassified to conform to the current presentation. For more information on
significant noncash items, see Note 3. Intersegment revenues are recorded at the same rates charged to external customers.



|                                       |  |      |         |      |   |        |                   |  |   |                     |   |  |                   |        |   |              |   |         |               |  |   |          |   |  |   |         |  
|-------------------------------------- |  | ---- | ------- | ---- | - | ------ | ----------------- |  | - | ------------------- | - |  | ----------------- | ------ | - | ------------ | - | ------- | ------------- |  | - | -------- | - |  | - | ------- | -
|                                       |  | RLEC |         | CLEC |   |        | Internet Services |  |   | Systems Integration |   |  | Corporate & Other |        |   | Eliminations |   |         | Total Company | 
|2004                                   |  |      |         |      |   |        |                   |  |   |                     |   |  |                   |        |   |              |   |         |               |  |   |          |   |  |   |         |  
|External customer revenues             |  | $    | 101,647 |      | $ | 36,183 |                   |  | $ | 10,337              |   |  | $                 | 24,771 |   |              | $ | 3,333   |               |  | $ |         |   |  | $ | 176,271 |  
|Intersegment revenues                  |  |      | 9,314   |      |   | 1,409  |                   |  |   | 21                  |   |  |                   | 54     |   |              |   |        |               |  |   | (10,798  | ) |  |   |        |  
|Depreciation & amortization            |  |      | 30,776  |      |   | 4,394  |                   |  |   | 1,083               |   |  |                   | 1,899  |   |              |   | 967     |               |  |   |         |   |  |   | 39,119  |  
|Operating income (loss)                |  |      | 29,162  |      |   | (2,695 | )                 |  |   | 327                 |   |  |                   | (4,580 | ) |              |   | (1,267  | )             |  |   |         |   |  |   | 20,947  |  
|Equity in net loss of affiliates       |  |      |        |      |   |       |                   |  |   |                    |   |  |                   |       |   |              |   | (3,172  | )             |  |   |         |   |  |   | (3,172  | )
|Gain (loss) on investments             |  |      |        |      |   |       |                   |  |   |                    |   |  |                   |       |   |              |   | (1,057  | )             |  |   |         |   |  |   | (1,057  | )
|Segment assets                         |  |      | 477,714 |      |   | 67,128 |                   |  |   | 3,009               |   |  |                   | 19,064 |   |              |   | 479,101 |               |  |   | (499,231 | ) |  |   | 546,785 |  
|Investment in equity method affiliates |  |      |        |      |   |       |                   |  |   |                    |   |  |                   |       |   |              |   | 52      |               |  |   |         |   |  |   | 52      |  
|Capital expenditures                   |  |      | 18,910  |      |   | 5,041  |                   |  |   | 1,073               |   |  |                   | 1,065  |   |              |   | 922     |               |  |   |         |   |  |   | 27,011  |  
|2003                                   |  |      |         |      |   |        |                   |  |   |                     |   |  |                   |        |   |              |   |         |               |  |   |          |   |  |   |         |  
|External customer revenues             |  | $    | 105,087 |      | $ | 34,830 |                   |  | $ | 6,862               |   |  | $                 | 23,378 |   |              | $ | 2,968   |               |  | $ |         |   |  | $ | 173,125 |  
|Intersegment revenues                  |  |      | 8,207   |      |   | 923    |                   |  |   | 479                 |   |  |                   | 31     |   |              |   | 22      |               |  |   | (9,662   | ) |  |   |        |  
|Depreciation & amortization            |  |      | 31,591  |      |   | 4,036  |                   |  |   | 794                 |   |  |                   | 1,734  |   |              |   | 471     |               |  |   |         |   |  |   | 38,626  |  
|Operating income (loss)                |  |      | 33,663  |      |   | (3,837 | )                 |  |   | (109                | ) |  |                   | (4,322 | ) |              |   | (1,628  | )             |  |   |         |   |  |   | 23,767  |  
|Equity in net loss of affiliates       |  |      |        |      |   |       |                   |  |   |                    |   |  |                   |       |   |              |   | (2,537  | )             |  |   |         |   |  |   | (2,537  | )
|Gain (loss) on investments             |  |      |        |      |   |       |                   |  |   |                    |   |  |                   |       |   |              |   | 790     |               |  |   |         |   |  |   | 790     |  
|Segment assets                         |  |      | 483,208 |      |   | 64,559 |                   |  |   | 3,086               |   |  |                   | 20,932 |   |              |   | 476,406 |               |  |   | (472,280 | ) |  |   | 575,911 |  
|Investment in equity method affiliates |  |      |        |      |   |       |                   |  |   |                    |   |  |                   |       |   |              |   | 3,611   |               |  |   |         |   |  |   | 3,611   |  
|Capital expenditures                   |  |      | 13,900  |      |   | 4,014  |                   |  |   | 1,300               |   |  |                   | 914    |   |              |   | 1,704   |               |  |   |         |   |  |   | 21,832  |  
|2002                                   |  |      |         |      |   |        |                   |  |   |                     |   |  |                   |        |   |              |   |         |               |  |   |          |   |  |   |         |  
|External customer revenues             |  | $    | 77,091  |      | $ | 21,626 |                   |  | $ | 4,748               |   |  | $                 | 23,582 |   |              | $ | 10,287  |               |  | $ |         |   |  | $ | 137,334 |  
|Intersegment revenues                  |  |      | 6,915   |      |   | 478    |                   |  |   | 282                 |   |  |                   | 37     |   |              |   | 240     |               |  |   | (7,952   | ) |  |   |        |  
|Depreciation & amortization            |  |      | 23,497  |      |   | 2,775  |                   |  |   | 476                 |   |  |                   | 1,592  |   |              |   | 350     |               |  |   |         |   |  |   | 28,690  |  
|Operating income (loss)                |  |      | 17,658  |      |   | (4,203 | )                 |  |   | (496                | ) |  |                   | (3,142 | ) |              |   | (2,542  | )             |  |   |         |   |  |   | 7,275   |  
|Equity in net loss of affiliates       |  |      |        |      |   |       |                   |  |   |                    |   |  |                   |       |   |              |   | (3,429  | )             |  |   |         |   |  |   | (3,429  | )
|Gain (loss) on investments             |  |      |        |      |   |       |                   |  |   |                    |   |  |                   |       |   |              |   | (2,999  | )             |  |   |         |   |  |   | (2,999  | )
|Significant noncash items              |  |      | 2,013   |      |   |       |                   |  |   |                    |   |  |                   |       |   |              |   | 118,276 |               |  |   |         |   |  |   | 120,289 |  
|Segment assets                         |  |      | 494,876 |      |   | 62,973 |                   |  |   | 9,271               |   |  |                   | 20,358 |   |              |   | 476,169 |               |  |   | (461,829 | ) |  |   | 601,818 |  
|Investment in equity method affiliates |  |      |        |      |   |       |                   |  |   |                    |   |  |                   |       |   |              |   | 5,142   |               |  |   |         |   |  |   | 5,142   |  
|Capital expenditures                   |  |      | 12,681  |      |   | 5,051  |                   |  |   | 693                 |   |  |                   | 703    |   |              |   | 335     |               |  |   |         |   |  |   | 19,463  |  





F-42



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



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:



|                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                      |  | 2004 |         |   | 2003 |   |         | 2002 | 
|Operating income from reportable segments                                                             |  | $    | 22,214  |   |      | $ | 25,395  |      |  | $ | 9,817   |  
|Corporate and other                                                                                   |  |      | (1,267  | ) |      |   | (1,628  | )    |  |   | (2,542  | )
|Equity in net losses of affiliates                                                                    |  |      | (3,172  | ) |      |   | (2,537  | )    |  |   | (3,429  | )
|Interest expense                                                                                      |  |      | (14,389 | ) |      |   | (18,074 | )    |  |   | (11,895 | )
|Gain (loss) on investments                                                                            |  |      | (1,057  | ) |      |   | 790     |      |  |   | (2,999  | )
|Loss on early extinguishment of debt                                                                  |  |      | (5,252  | ) |      |   |        |      |  |   |        |  
|Other, net                                                                                            |  |      | 1,679   |   |      |   | 1,964   |      |  |   | 422     |  
|                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Income (loss) from continuing operations before income taxes and dividends on utility preferred stock |  | $    | (1,244  | ) |      | $ | 5,910   |      |  | $ | (10,626 | )
|                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  



22. Quarterly Results of Operations
(unaudited)



The following table summarizes D&Es
quarterly financial data for the years ended December 31, 2004 and December 31, 2003.



|                                                                         |  |                                       |        |   |                    |   |               |  |                |        |  |   |        |  
|------------------------------------------------------------------------ |  | ------------------------------------- | ------ | - | ------------------ | - | ------------- |  | -------------- | ------ |  | - | ------ | -
|                                                                         |  | First (1) Quarter                     |        |   | Second (1) Quarter |   | Third Quarter |  | Fourth Quarter |       
|                                                                         |  | (In thousands, except per share data) |       
|2004                                                                     |  |                                       |        |   |                    |   |               |  |                |        |  |   |        |  
|Total operating revenues                                                 |  | $                                     | 43,765 |   |                    | $ | 44,135        |  | $              | 43,692 |  | $ | 44,679 |  
|                                                                         |  |                                       |        |  
|Depreciation and amortization                                            |  |                                       | 9,701  |   |                    |   | 9,918         |  |                | 9,724  |  |   | 9,776  |  
|Other operating expenses                                                 |  |                                       | 29,050 |   |                    |   | 29,026        |  |                | 29,508 |  |   | 28,621 |  
|                                                                         |  |                                       |        |   |                    |   |               |  |                |        |  |   |        |  
|Total operating expenses                                                 |  |                                       | 38,751 |   |                    |   | 38,944        |  |                | 39,232 |  |   | 38,397 |  
|                                                                         |  |                                       |        |   |                    |   |               |  |                |        |  |   |        |  
|Operating income                                                         |  |                                       | 5,014  |   |                    |   | 5,191         |  |                | 4,460  |  |   | 6,282  |  
|Income (loss) before cumulative effect of change in accounting principle |  |                                       | (2,256 | ) |                    |   | 1,233         |  |                | 719    |  |   | (2,435 | )
|Net income (loss)                                                        |  |                                       | (2,256 | ) |                    |   | 1,233         |  |                | 719    |  |   | (2,435 | )
|Earnings (loss) per common share  basic and diluted:                    |  |                                       |        |   |                    |   |               |  |                |        |  |   |        |  
|Income (loss) before cumulative effect of change in accounting principle |  | $                                     | (0.15  | ) |                    | $ | 0.08          |  | $              | 0.05   |  | $ | (0.17  | )
|Net income (loss)                                                        |  |                                       | (0.15  | ) |                    |   | 0.08          |  |                | 0.05   |  |   | (0.17  | )
|2003                                                                     |  |                                       |        |   |                    |   |               |  |                |        |  |   |        |  
|Total operating revenues                                                 |  | $                                     | 42,085 |   |                    | $ | 43,287        |  | $              | 43,031 |  | $ | 44,722 |  
|                                                                         |  |                                       |        |  
|Depreciation and amortization                                            |  |                                       | 9,551  |   |                    |   | 9,576         |  |                | 9,645  |  |   | 9,854  |  
|Other operating expenses                                                 |  |                                       | 27,331 |   |                    |   | 27,244        |  |                | 28,088 |  |   | 28,069 |  
|                                                                         |  |                                       |        |   |                    |   |               |  |                |        |  |   |        |  
|Total operating expenses                                                 |  |                                       | 36,882 |   |                    |   | 36,820        |  |                | 37,733 |  |   | 37,923 |  
|                                                                         |  |                                       |        |   |                    |   |               |  |                |        |  |   |        |  
|Operating income                                                         |  |                                       | 5,203  |   |                    |   | 6,467         |  |                | 5,298  |  |   | 6,799  |  
|Income before cumulative effect of change in accounting principle        |  |                                       | 448    |   |                    |   | 764           |  |                | 155    |  |   | 2,457  |  
|Net income                                                               |  |                                       | 708    |   |                    |   | 764           |  |                | 155    |  |   | 2,457  |  
|Earnings per common share  basic and diluted:                           |  |                                       |        |   |                    |   |               |  |                |        |  |   |        |  
|Income before cumulative effect of change in accounting principle        |  | $                                     | 0.03   |   |                    | $ | 0.05          |  | $              | 0.01   |  | $ | 0.16   |  
|Net income                                                               |  |                                       | 0.05   |   |                    |   | 0.05          |  |                | 0.01   |  |   | 0.16   |  

---

|(1) | The quarterly results of the first and second quarter of 2004 have been restated as a result of a misapplication of the guidance related to loss on extinguishment of
debt. The impact of the restatement was additional income, which decreased the first quarter loss by $1,858 or $0.11 per share. The second quarter impact was additional expense, which decreased the net income by $79 with no rounding effect on the
earnings per share.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-43



---

##### Table of Contents

D&E COMMUNICATIONS, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Dollars in thousands, except per-share amounts)



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



The net loss in the first quarter of 2004 included $4,841 ($2,871, or $0.18
per common share after tax) loss on early extinguishment of debt related to a syndicated senior debt financing completed on March 5, 2004.



The net loss in the fourth quarter of 2004 included $2,125 ($2,125, or $0.14 per common share after tax) loss for D&Es share of an impairment of
assets at Pilicka and an impairment of our investment in EuroTel.



The net income in the fourth quarter of 2003 included approximately $994 increased revenue from a favorable change in the NECA average schedule settlement formula for interstate access. Other income (expense) included $790 gain related to
the sale of investments and $400 interest income collected on the note receivable from the sale of Conestoga Wireless. These combined transactions added approximately $2,184 ($1,353, or $0.09 per common share after tax) to the income for the
quarter.



The following tables summarizes D&Es
operating results for the three months ended December 31, 2004:



|                              |  |      |        |      |   |       |                   |  |                     |       |  |                   |        |   |              |   |       |               |  |   |        |   |  |   |       
|----------------------------- |  | ---- | ------ | ---- | - | ----- | ----------------- |  | ------------------- | ----- |  | ----------------- | ------ | - | ------------ | - | ----- | ------------- |  | - | ------ | - |  | - | ------
|                              |  | RLEC |        | CLEC |   |       | Internet Services |  | Systems Integration |       |  | Corporate & Other |        |   | Eliminations |   |       | Total Company
|External customer revenues    |  | $    | 25,801 |      | $ | 9,185 |                   |  | $                   | 2,736 |  | $                 | 6,176  |   |              | $ | 781   |               |  | $ |       |   |  | $ | 44,679
|Intersegment revenues         |  |      | 2,245  |      |   | 394   |                   |  |                     | 6     |  |                   | 12     |   |              |   |      |               |  |   | (2,657 | ) |  |   |      
|                              |  |      |        |      |   |       |                   |  |                     |       |  |                   |        |   |              |   |       |               |  |   |        |   |  |   |       
|Total revenues                |  |      | 28,046 |      |   | 9,579 |                   |  |                     | 2,742 |  |                   | 6,188  |   |              |   | 781   |               |  |   | (2,657 | ) |  |   | 44,679
|                              |  |      |        |      |   |       |                  
|Depreciation and amortization |  |      | 7,518  |      |   | 1,226 |                   |  |                     | 299   |  |                   | 471    |   |              |   | 262   |               |  |   |       |   |  |   | 9,776 
|Other operating expenses      |  |      | 12,566 |      |   | 8,580 |                   |  |                     | 2,314 |  |                   | 6,881  |   |              |   | 937   |               |  |   | (2,657 | ) |  |   | 28,621
|                              |  |      |        |      |   |       |                   |  |                     |       |  |                   |        |   |              |   |       |               |  |   |        |   |  |   |       
|Total operating expenses      |  |      | 20,084 |      |   | 9,806 |                   |  |                     | 2,613 |  |                   | 7,352  |   |              |   | 1,199 |               |  |   | (2,657 | ) |  |   | 38,397
|                              |  |      |        |      |   |       |                   |  |                     |       |  |                   |        |   |              |   |       |               |  |   |        |   |  |   |       
|Operating income (loss)       |  | $    | 7,962  |      | $ | (227  | )                 |  | $                   | 129   |  | $                 | (1,164 | ) |              | $ | (418  | )             |  | $ |       |   |  | $ | 6,282 
|                              |  |      |        |      |   |       |                   |  |                     |       |  |                   |        |   |              |   |       |               |  |   |        |   |  |   |       



F-44



---

##### Table of Contents

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



D&E COMMUNICATIONS, INC.



SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS



|                                             |  |                              |        |                                        |   |                                           |  |                        |     |  |   |       
|-------------------------------------------- |  | ---------------------------- | ------ | -------------------------------------- | - | ----------------------------------------- |  | ---------------------- | --- |  | - | ------
|                                             |  | Balance at Beginning of Year |        | Additions Charged to Cost and Expenses |   | Deductions Credited to Costs and Expenses |  | Balance at End of Year
|Allowance for doubtful accounts:             |  |                              |        |                                        |   |                                           |  |                        |     |  |   |       
|Year ended December 31, 2004                 |  | $                            | 1,410  |                                        | $ | 551                                       |  | $                      | 937 |  | $ | 1,024 
|Year ended December 31, 2003                 |  |                              | 1,416  |                                        |   | 745                                       |  |                        | 751 |  |   | 1,410 
|Year ended December 31, 2002                 |  |                              | 547    |                                        |   | 1,406                                     |  |                        | 537 |  |   | 1,416 
|Allowance for inventory obsolescence:        |  |                              |        |                                        |   |                                           |  |                        |     |  |   |       
|Year ended December 31, 2004                 |  |                              |       |                                        |   | 288                                       |  |                        | 173 |  |   | 115   
|Year ended December 31, 2003                 |  |                              |       |                                        |   |                                          |  |                        |    |  |   |      
|Year ended December 31, 2002                 |  |                              |       |                                        |   |                                          |  |                        |    |  |   |      
|Valuation Allowance for Deferred Tax Assets: |  |                              |        |                                        |   |                                           |  |                        |     |  |   |       
|Year ended December 31, 2004                 |  |                              | 11,132 |                                        |   | 3,715                                     |  |                        | 95  |  |   | 14,752
|Year ended December 31, 2003                 |  |                              | 11,969 |                                        |   |                                          |  |                        | 837 |  |   | 11,132
|Year ended December 31, 2002                 |  |                              | 4,261  |                                        |   | 7,708                                     |  |                        |    |  |   | 11,969



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-45



---

##### Table of Contents

EUROTEL, L.L.C.

LINCOLN, NEBRASKA



CONSOLIDATED FINANCIAL STATEMENTS WITH INDEPENDENT AUDITORS REPORTS

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



F-46



---

##### Table of Contents

EUROTEL, L.L.C.

LINCOLN, NEBRASKA



Contents



|                                           |  |     
|------------------------------------------ |  | ----
|                                           |  | Page
|Independent Auditors Report               |  | F-48
|                                           | 
|Consolidated Financial Statements:         |  |     
|                                           | 
|Consolidated Balance Sheets                |  | F-49
|                                           | 
|Consolidated Statements of Operations      |  | F-51
|                                           | 
|Consolidated Statements of Members Equity |  | F-52
|                                           | 
|Consolidated Statements of Cash Flows      |  | F-53
|                                           | 
|Notes to Consolidated Financial Statements |  | F-54



F-47



---

##### Table of Contents



INDEPENDENT AUDITORS REPORT



To the Members
of

EuroTel, L.L.C.

Lincoln, Nebraska



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



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



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



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



/S/    KIESLING ASSOCIATES LLP



Colorado Springs, Colorado

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

is March 1, 2005



F-48



---

##### Table of Contents

EUROTEL, L.L.C.

LINCOLN, NEBRASKA



CONSOLIDATED BALANCE SHEETS

December 31, 2004 and 2003



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





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



F-49



---

##### Table of Contents

EUROTEL, L.L.C.

LINCOLN, NEBRASKA



CONSOLIDATED BALANCE SHEETS

December 31, 2004 and 2003



|                                       |  |      |             |   |      |   |             |  
|-------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                       |  | 2004 |             |   | 2003 |  
|LIABILITIES AND MEMBERS EOUITY        |  |      |             |   |      |   |             |  
|CURRENT LIABILITIES                    |  |      |             |   |      |   |             |  
|Due to Founders                        |  | $    | 33,708,380  |   |      | $ | 31,740.304  |  
|Accounts payable                       |  |      | 44,886      |   |      |   | 70,464      |  
|                                       |  |      |             |   |      |   |             |  
|                                       |  |      | 33,753,266  |   |      |   | 31,810,768  |  
|                                       |  |      |             |   |      |   |             |  
|MEMBERS EQUITY                        |  |      |             |   |      |   |             |  
|Members capital                       |  |      | (33,553,310 | ) |      |   | (29,127,157 | )
|Cumulative other comprehensive loss    |  |      |            |   |      |   | (173,748    | )
|                                       |  |      |             |   |      |   |             |  
|                                       |  |      | (33,553,310 | ) |      |   | (29,300,905 | )
|                                       |  |      |             |   |      |   |             |  
|TOTAL. LIABILITIES AND MEMBERS EQUITY |  | $    | 199,956     |   |      | $ | 2,509,863   |  
|                                       |  |      |             |   |      |   |             |  







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



F-50



---

##### Table of Contents

EUROTEL, L.L.C.

LINCOLN, NEBRASKA



CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2004, 2003 and 2002



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



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



F-51



---

##### Table of Contents

EUROTEL, L.L.C.

LINCOLN, NEBRASKA



CONSOLIDATED STATEMENTS OF MEMBERS EQUITY

Years Ended December 31, 2004, 2003 and 2002



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







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



F-52



---

##### Table of Contents

EUROTEL, L.L.C.

LINCOLN, NEBRASKA



CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2004, 2003 and 2002



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



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



F-53



---

##### Table of Contents

EUROTEL, L.L.C.

LINCOLN, NEBRASKA



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002



NOTE 1. ORGANIZATION



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



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



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



NOTE 2. LIQUIDITY



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



NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES



Principles of Consolidation



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



Cash and Cash Equivalents



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



Investment in Affiliate



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



F-54



---

##### Table of Contents

EUROTEL, L.L.C.

LINCOLN, NEBRASKA



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2004, 2003 and 2002



Comprehensive Income (Loss)



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



Income Taxes



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



Use of Estimates



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



Foreign
Currency Translation



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



Property, Plant and Equipment



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



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



F-55



---

##### Table of Contents

EUROTEL, L.L.C.

LINCOLN, NEBRASKA



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2004, 2003 and 2002



Concentration of Risk



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



Reclassifications



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



NOTE 4. EXCHANGE OF PILICKA INVESTMENT



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



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



NOTE 5. INVESTMENT IN AFFILIATE



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



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



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



F-56



---

##### Table of Contents

EUROTEL, L.L.C.

LINCOLN, NEBRASKA



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2004, 2003 and 2002



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



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



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



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



NOTE 6. LOAN RECEIVABLE



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



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



NOTE 7. DUE TO FOUNDERS



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



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



F-57



---

##### Table of Contents

EUROTEL, L.L.C.

LINCOLN, NEBRASKA



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2004, 2003 and 2002



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



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



NOTE 8.
FAIR VALUE OF FINANCIAL INSTRUMENTS



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



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



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



NOTE 9. LOSS ON INVESTMENT IN AFFILIATE



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



NOTE 10. INCOME TAXES



United States



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



Netherlands



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



F-58



---

##### Table of Contents

EUROTEL, L.L.C.

LINCOLN, NEBRASKA



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

December 31, 2004, 2003 and 2002



NOTE 11. RELATED PARTY TRANSACTIONS



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



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



NOTE 12. GAIN CONTINGENCY



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



F-59



---

##### Table of Contents

Pilicka Telefonia Sp. z o.o.



Financial Statements

December 31, 2004



F-60



---

##### Table of Contents

Pilicka Telefonia Sp. z o.o.



Index to Financial Statements



|                                                        |  |     
|------------------------------------------------------- |  | ----
|                                                        |  | Page
|Report of Independent Registered Public Accounting Firm |  | F-62
|                                                        | 
|Balance Sheets                                          |  | F-63
|                                                        | 
|Statements of Operations                                |  | F-64
|                                                        | 
|Statements of Changes in Shareholders Equity           |  | F-65
|                                                        | 
|Statements of Cash Flows                                |  | F-66
|                                                        | 
|Notes to Financial Statements                           |  | F-68



F-61



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



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



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



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



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



PRICEWATERHOUSECOOPERS SP. Z O.O.



Warsaw, Poland

March 1, 2005



F-62



---

##### Table of Contents

Pilicka Telefonia Sp. z o.o.



Balance Sheets

(All amounts in thousands)



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



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





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



F-63



---

##### Table of Contents

Pilicka Telefonia Sp. z o.o.



Statements of Operations

(All amounts in thousands)



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



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



F-64



---

##### Table of Contents

Pilicka Telefonia Sp. z o.o.



Statements of Changes in Shareholders Equity

(All amounts in thousands)



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







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



F-65



---

##### Table of Contents

Pilicka Telefonia Sp. z o.o.



Statements of Cash Flows

(All amounts in thousands)



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



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



F-66



---

##### Table of Contents

Pilicka Telefonia Sp. z o.o.



Statements of Cash Flows

(All amounts in thousands)



Supplementary disclosure of cash flow information:



Non-cash investing and financing activities:



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









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



F-67



---

##### Table of Contents

Pilicka Telefonia Sp. z o.o.



Notes to the Financial Statements

(All amounts in thousands)



1. The Company and Business



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



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



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



2. Summary of Significant Accounting Policies



(a) Basis of presentation



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



(b) US Dollar convenience
translation (Unaudited)



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



(c) Cash and cash equivalents



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



F-68



---

##### Table of Contents

Pilicka Telefonia Sp. z o.o.



Notes to the Financial Statements(Continued)

(All amounts in thousands)



(d) Embedded derivatives instruments



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



(e) Property, equipment and construction in progress



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



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



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



(f) Telecommunication licenses



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



(g) Computer software



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



F-69



---

##### Table of Contents

Pilicka Telefonia Sp. z o.o.



Notes to the Financial Statements(Continued)

(All amounts in thousands)



(h) Impairment of long-lived assets



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



(i) Retirement benefits



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



(j) Accounting for leases



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



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



(k) Revenues



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



(l) Advertising costs



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



(m) Foreign currency translation



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



(n) Comparative financial information



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



F-70



---

##### Table of Contents

Pilicka Telefonia Sp. z o.o.



Notes to the Financial Statements(Continued)

(All amounts in thousands)



(o) Financial Instruments



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



(p) Income taxes



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



(q) Use of estimates



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



3. Other Current Assets



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



4. Impairment of Long-Lived Assets



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



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



F-71



---

##### Table of Contents

Pilicka Telefonia Sp. z o.o.



Notes to the Financial Statements(Continued)

(All amounts in thousands)



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



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



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



5. Property and Equipment



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



F-72



---

##### Table of Contents

Pilicka Telefonia Sp. z o.o.



Notes to the Financial Statements(Continued)

(All amounts in thousands)



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



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



6. Intangible Assets



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



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



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



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



F-73



---

##### Table of Contents

Pilicka Telefonia Sp. z o.o.



Notes to the Financial Statements(Continued)

(All amounts in thousands)



7. Accounts Payable



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



8. Embedded Derivative Instruments



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



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



9. Deferred Revenue



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



10. Bank Loan



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



F-74



---

##### Table of Contents

Pilicka Telefonia Sp. z o.o.



Notes to the Financial Statements(Continued)

(All amounts in thousands)



11. Share Capital



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



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



12. Financial Income/(Expenses),
net



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



F-75



---

##### Table of Contents

Pilicka Telefonia Sp. z o.o.



Notes to the Financial Statements(Continued)

(All amounts in thousands)



13. Income Taxes



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



Below is the analysis of deferred income taxes:



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



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



F-76



---

##### Table of Contents

Pilicka Telefonia Sp. z o.o.



Notes to the Financial Statements(Continued)

(All amounts in thousands)



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



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



14. Contingencies and Commitments



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



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



15. Tax contingent liability



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



F-77



---

##### Table of Contents

Pilicka Telefonia Sp. z o.o.



Notes to the Financial Statements(Continued)

(All amounts in thousands)



16. Related Party Transactions



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



17. Non-cash transactions



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



F-78