<PAGE>


================================================================================
                       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, 2001

                                       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                   (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                   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. [X]

    The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $73,629,434. Such aggregate market value was
computed by reference to the closing price of the registrant's Common Stock as
reported on the Nasdaq National Market on March 22, 2002. For purposes of making
this calculation only, the registrant has defined affiliates to include all
directors, executive officers and beneficial owners of more than ten percent of
the Common Stock of the registrant.

    The number of shares of the registrant's Common Stock outstanding as of
March 22, 2002 was 7,369,709.

                       DOCUMENTS INCORPORATED BY REFERENCE

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

================================================================================
<PAGE>
                                TABLE OF CONTENTS

<TABLE>
<S>       <C>                                                                 <C>
                                     PART I

Item 1.   Business ........................................................    3
Item 2.   Properties ......................................................   21
Item 3.   Legal Proceedings ...............................................   21
Item 4.   Submission of Matters to a Vote of Security Holders .............   22

                                     PART II

Item 5.   Market for Registrant's Common Equity and Related Stockholder
          Matters .........................................................   22
Item 6.   Selected Financial Data .........................................   23
Item 7.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations ...........................................   24
Item 7A.  Quantitative and Qualitative Disclosure About Market Risks ......   37
Item 8.   Financial Statements and Supplementary Data .....................   37
Item 9.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure ............................................   37

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant ..............   37
Item 11.  Executive Compensation ..........................................   37
Item 12.  Security Ownership of Certain Beneficial Owners and Management ..   37
Item 13.  Certain Relationships and Related Transactions ..................   38

                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K    39
</TABLE>



                                       2
<PAGE>
                                     PART I

FORWARD LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY

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

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


ITEM 1. BUSINESS

OVERVIEW

We are a provider of integrated communications services to residential and
business customers in markets throughout south central Pennsylvania. We operate
an incumbent rural local exchange carrier, or RLEC, in parts of Berks, Lancaster
and Lebanon counties in Pennsylvania, and a competitive local exchange carrier,
or CLEC, in the Lancaster and Harrisburg, Pennsylvania metropolitan areas, which
we refer to as our "edge-out" markets. Our goal is to be a leading single-source
provider of voice and data communications services in our markets. To achieve
this goal, we have developed a comprehensive package of communications services
including local and long distance telephone services, high speed data services
and Internet access services. We also provide business customers with integrated
voice and data network solutions.

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

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



                                       3
<PAGE>
As part of our strategy to provide a range of data services to our customers, we
offer dial-up and high speed Internet access services and web hosting services.
We believe that customers in our markets historically have been underserved by
national Internet providers and that we can provide technologically advanced
Internet services with a superior level of customer service and support due to
our local presence. As of December 31, 2001, we served 10,161 dial-up Internet
access subscribers, 2,209 digital subscriber line, or DSL, subscribers and 447
web-hosting customers.

To augment our core voice and data communications services and enhance our
position as 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. In 2000,
we significantly expanded our systems integration business through the strategic
acquisitions of CompuSpirit, Inc. and Alternate Solutions, Inc., both of which
were based in Harrisburg, Pennsylvania.

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

Our principal offices are located at 124 E. Main Street, Ephrata, Pennsylvania
17522, and we can be reached by telephone by calling (717) 733-4101 or through
our website at www.decommunications.com. We are a Pennsylvania corporation.

RECENT DEVELOPMENTS

Pending Sale of PCS ONE Interest

In connection with our strategy to focus on wireline communications, on October
17, 2001, we entered into a definitive agreement for the sale of our 50%
ownership interest in PCS ONE, a joint venture with VoiceStream Wireless
Corporation that offers mobile wireless communications service, to VoiceStream
Wireless, our joint venture partner. Under the agreement, we expect to receive
cash consideration of approximately $75.0 million, after working capital and
long-term debt adjustments of approximately $42.0 million.

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

Pending Merger with Conestoga Enterprises, Inc.

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

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



                                       4
<PAGE>
The completion of the merger is subject to approval by both our and Conestoga's
shareholders, certain regulatory approvals and other customary closing
conditions and is expected to close during the second quarter of 2002. In
January 2002, the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 was terminated. In February 2002, the Borough
of State College, Pennsylvania consented to the transfer of control of
Conestoga's State College, Pennsylvania cable television franchise. In March
2002, the merger received the required approvals of the Pennsylvania Public
Utility Commission with respect to the change of control of Conestoga's
telephone operations and of the New York State Department of Public Service with
respect to Conestoga's interexchange carrier operations. Completion of the
merger should not require any additional public service or utility commission
regulatory approvals. Finally, on March 18, 2002 the FCC granted its consent to
the merger, subject to a 40-day reconsideration period that will expire on April
29, 2002, at which time the FCC approval will become final and non-appealable.
Subsequent to April 29, 2002, we expect that the only material approval still
outstanding will be the shareholder approvals.

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

THE TELECOMMUNICATIONS INDUSTRY

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

Over the past several years, the telecommunications industry has undergone
significant change. The passage of the Telecommunications Act of 1996, with its
stated goal of encouraging the rapid deployment of new telecommunications
technologies and promoting competition to ensure lower prices and higher quality
services for U.S. telecommunications customers, substantially changed the
telecommunications industry. This change permitted newly created CLECs to
compete with ILECs. As a result, ILEC and CLEC operators increasingly are
seeking to differentiate themselves by bundling their communications service
offerings and providing better customer service. Despite recent turmoil in the
financial markets for telecommunications companies, CLECs continue to gain
market share from ILECs by primarily focusing on business customers in densely
populated regions.

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

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




                                       5
<PAGE>
COMPETITIVE ADVANTAGES

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

Local Market Presence

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

Favorable Rural Demographics

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

Modern Network

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

Superior Customer Service

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

Experienced Management Team

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



                                       6
<PAGE>
BUSINESS STRATEGY

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

Increase Sales of Enhanced Telephone Services

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

Leverage Our Core Assets

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

Increase Sales of Internet Services

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

Capitalize on the Convergence of Voice and Data Communications Technologies

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

Continue to Focus on Customer Service

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



                                       7
<PAGE>
Selectively Pursue Strategic Acquisitions

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

OPERATIONS

RLEC Operations

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

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

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

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

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


<TABLE>
<CAPTION>
                                 At Or For The Years Ended December 31,
                                ----------------------------------------

                                  1999            2000            2001
                                --------        --------        --------
<S>                             <C>             <C>             <C>
ACCESS LINES:
   Residential ..........         42,882          43,917          44,145
   Business .............         16,103          17,181          17,816
                                --------        --------        --------
      Total RLEC ........         58,985          61,098          61,961
                                ========        ========        ========

PERCENT OF TOTAL:
   Residential ..........           72.7%           71.9%           71.2%
   Business .............           27.3%           28.1%           28.8%

PERCENTAGE GROWTH
   Residential ..........            4.2%            2.4%            0.5%
   Business .............            4.5%            6.7%            3.7%
      Total RLEC ........            4.3%            3.6%            1.4%
</TABLE>


                                       8
<PAGE>
CLEC Operations

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

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


<TABLE>
<CAPTION>
                                         At December 31,
                                         ---------------

                                 1999         2000         2001
                                ------       ------       ------
<S>                             <C>          <C>          <C>
ACCESS LINES
   Business .............          598        3,895        7,535
</TABLE>


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

Internet Service Operations

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

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

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



                                       9
<PAGE>
Systems Integration Operations

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

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

CUSTOMER SERVICE

We believe there is a high correlation between service quality and the
likelihood that our customers will remain with us when presented with a
competitive alternative. We use multiple customer retention measures, especially
for our larger RLEC business customers and throughout our CLEC customer base,
which is more likely to be targeted by competitors. These customer retention
measures include performance and satisfaction measures such as monthly customer
surveys to ensure customer satisfaction and loyalty. This focus on service
resulted in 98% of survey responses indicating a good or excellent rating of our
overall service in 2001. Additionally, in areas such as average answer time,
customer out-of-service reports, and service order completion, our performance
consistently exceeds guidelines established by the Pennsylvania Public Utility
Commission.

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

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

SALES AND MARKETING

We employ a relationship-based sales and marketing approach. We believe this
approach and our commitment to customer service builds brand loyalty and
increases the effectiveness of our sales efforts. We also grow our general brand
awareness through corporate and product awareness campaigns that utilize local
television, billboard and print ads as well as sponsorship of community events.
With respect to our non-RLEC businesses, we support an aggressive integrated
marketing communications strategy with targeted direct sales efforts. Our
customer service representatives are centrally located and supported by local
sales efforts throughout our service territory.

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

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

NETWORK ARCHITECTURE AND OPERATIONS SUPPORT SYSTEMS

We were one of the first local exchange carriers in the nation to deploy a 100%
digitally switched network. We continue to utilize a technologically advanced,
fiber-rich network based on digital switching, fiber optic transport


                                       10
<PAGE>
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. During 2001,
we completed our new network operations center, which monitors network
performance 24 hours a day, 365 days a year and allows us to maintain high
network performance standards.

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

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

Our network is supported by computer systems called operations support systems
that provide the ability to install service for customers on a short interval
basis and to analyze network problems in many instances before the customers are
affected. These systems include databases of all RLEC and CLEC customers and the
associated facilities such as the fiber and copper cable and the associated
central office switching connections that serve them. We also use geographic
information systems to map our outside plant cable and associated structure of
poles and underground conduit. These same systems allow us to verify quickly the
capability of our plant for high speed data service. We have a system that
stores the inventory of central office and transmission equipment that is
accessed for the automatic provisioning customized services for customers. These
systems also have monitoring and troubleshooting capabilities to insure the
reliability of our network. Finally, we have recently established the capability
to interface with the operations support systems of Verizon and Sprint to insure
fast and accurate provisions for our CLEC customers.

COMPETITIVE ENVIRONMENT

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

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



                                       11
<PAGE>
We believe that our RLEC has competitive advantages based on several factors,
including the lack of concentration of any large business customers, low basic
service rates, our customer service record and high level of customer
satisfaction, and our service territory's high cost of facilities-based entry
due to low population density and other regulatory factors. See the section
titled "-Regulatory Environment" on page 12 for a description of those
regulatory factors. Wireless operators, which serve as an alternative service to
wireline local and long-distance services, also pose a competitive threat to our
RLEC.

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

Our systems integration business competes with large, regional and national
companies that provide a wide variety of services to their customers. Many of
these large competitors may accept lower profit margins in an effort to capture
market share. We also compete with numerous smaller service providers that may
have lower overhead costs, enabling them to provide their services at lower
rates than we can. As a result of this competition, we may lose customers or
have difficulty acquiring new customers. Barriers to entry to the markets for
these services are generally low. As a result, new competitors may enter this
market. The existing and new sources of competition place pressure on the
pricing of these services which may cause our revenues or margins to decline.

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

REGULATORY ENVIRONMENT

Overview

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

Pursuant to the Telecommunications Act of 1996, or TA-96, state and federal
regulators share responsibility for implementing and enforcing the domestic
pro-competitive policies introduced by that legislation. In particular, state
regulatory agencies have substantial oversight in the provision by ILECs of
interconnection and non-discriminatory network access to competitive
communications providers. Local governments often regulate the public
rights-of-way necessary to install and operate networks, and may require
communications services providers to obtain licenses or franchises regulating
their use of public rights-of-way.

Federal Regulation

We must comply with the Communications Act of 1934, as amended, which requires,
among other things, that communications carriers offer services at just and
reasonable rates and on non-discriminatory terms and conditions.


                                       12
<PAGE>
TA-96 brought changes in regulation at both the federal and state levels that
affect virtually every segment of the telecommunications industry. TA-96 is
intended to promote competition in all areas of telecommunications and to reduce
regulation. TA-96 is described further below under "Telecommunications Act of
1996."

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

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

Pennsylvania Regulation

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

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

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

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

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:



                                       13
<PAGE>
      Resale. ILECs are required to permit new communications service providers
      to purchase their services for resale to the public at a retail rate or a
      wholesale rate that is less than the rate charged by the ILEC to their
      retail customers.

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

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

To facilitate new communications service providers' entry into local telephone
markets using one or more of the above three methods, TA-96 imposes on non-rural
ILECs the obligation to open their networks and markets to competition. When
requested by competitors, non-rural ILECs are required to negotiate in good
faith agreements that lay out terms governing interconnection to their network,
access to unbundled network elements and discounted resale. Non-rural ILECs also
must allow competing carriers to "co-locate", or place their own equipment in
the non-rural ILECs' central offices. Rural local exchange carriers, including
our RLEC, have a rural exemption from the interconnection requirements of TA-96.
This exemption may only be terminated by the Pennsylvania PUC following a bona
fide request for interconnection to our RLEC and a finding that such
interconnection request is not unduly economically burdensome, is technically
feasible, and is consistent with the universal service provisions in TA-96.

As a result of the passage of TA-96, local exchange carriers, including our
RLEC, face the prospect of being subject to competition for the first time in
the provision of local telephone and regional long distance services. TA-96 also
provides for the codification of the principles of "universal service" and
establishes safeguards to foster the provision of communications services in the
areas served by ILECs by adopting a federal universal service support fund, or
USSF. See "--Promotion of Universal Service."

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

Promotion of Local Service Competition

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

Pursuant to TA-96, local telephone companies, including both ILECs and CLECs,
are required to: (i) allow others to resell their services at retail rates; (ii)
ensure that customers can keep their telephone 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.



                                       14
<PAGE>
TA-96, with certain exceptions described below, requires ILECs to: (i)
interconnect their facilities and equipment with any requesting
telecommunications carrier at any technically feasible point; (ii) unbundle and
provide nondiscriminatory access to network elements, such as local loops,
switches and transport facilities, at nondiscriminatory rates and on
nondiscriminatory terms and conditions; (iii) offer their retail services for
resale at wholesale rates; (iv) provide reasonable notice of changes in the
information necessary for transmission and routing of services over the ILEC's
facilities or in the information necessary for interoperability; and (v)
provide, at rates, terms and conditions that are just, reasonable and
nondiscriminatory, for the physical co-location of equipment necessary for
interconnection or access to unbundled network elements at the premises of the
ILEC. Competitors are required to compensate the ILEC for the cost of providing
these interconnection services.

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

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

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

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

Even if an ILEC in a territory we wished to enter was not entitled to such
protections, we could nonetheless be unable to obtain interconnection on
favorable terms. The FCC has issued rules implementing the interconnection and
resale provisions of TA-96, but those rules have been, and continue to be,
subject to 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.



                                       15
<PAGE>
Promotion of Universal Service

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

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

Access Charge Reform

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

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

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

Potential Internet Regulatory Obligations

In connection with our Internet access offerings, we could become subject to
laws and regulations as they are adopted or applied to the Internet. There is
currently only a small body of laws and regulations applicable to access to or
commerce on the Internet. As the significance of the Internet expands, federal,
state and local governments may adopt rules and regulations, or apply existing
laws and regulations to the Internet. We cannot predict the nature of these
regulations or their impact on our business.



                                       16
<PAGE>
EMPLOYEES

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

FACTORS AFFECTING OUR PROSPECTS

THE COMMUNICATIONS INDUSTRY IS INCREASINGLY COMPETITIVE, AND THIS COMPETITION
HAS RESULTED IN PRICING PRESSURE ON OUR SERVICE OFFERINGS. WE MAY EXPERIENCE
INCREASED COMPETITIVE PRESSURES WHICH COULD HAVE A NEGATIVE EFFECT ON OUR
REVENUES AND EARNINGS.

    As an integrated communications provider, we face competition from:

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

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

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

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

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

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

WE MUST SECURE UNBUNDLED NETWORK ELEMENTS AT REASONABLE RATES OR OUR CLEC
EXPANSION MAY BE DELAYED AND THE QUALITY OF SERVICE MAY DECLINE.

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

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

SUCCESSFUL EXPANSION OF OUR CLEC OPERATIONS INTO NEW MARKETS IS DEPENDENT ON
INTERCONNECTION AGREEMENTS, PERMITS AND RIGHTS-OF-WAY AND THE FAILURE TO OBTAIN
THESE AGREEMENTS AND PERMITS COULD HAMPER ITS EXPANSION.



                                       17
<PAGE>
    The successful expansion of our CLEC operations will depend, in part, on our
ability to implement existing interconnection agreements and to enter into and
implement new interconnection agreements as we seek to expand into new markets.
Our failure to obtain these agreements and permits could hamper this expansion.
Interconnection agreements are subject to negotiation and interpretation by the
parties to the agreements and are subject to state regulatory commission, FCC
and judicial oversight. If the terms of these interconnection agreements need to
be renegotiated, we may not be able to renegotiate existing or enter into new
interconnection agreements in a timely manner or on favorable terms. We must
also maintain existing, and obtain new, local permits, including rights to
utilize underground conduit and pole space and other rights-of-way. We may not
be able to maintain our existing permits and rights or obtain and maintain other
required permits and rights on acceptable terms. Cancellation or nonrenewal of
interconnection agreements, permits, rights-of-way or other arrangements could
significantly harm our business.

WE WILL BE SUBJECT TO A COMPLEX AND UNCERTAIN REGULATORY ENVIRONMENT THAT MAY
REQUIRE US TO ALTER OUR BUSINESS PLANS AND FACE INCREASED COMPETITION.

    The United States communications industry is subject to federal, state and
other regulations that are continually evolving. As new communications laws and
regulations are issued, we may be required to modify our business plans or
operations. We may not be able to do so in a cost-effective manner. Federal and
state regulatory trends in favor of reduced regulation are likely to have
negative effects on our business and our ability to compete. The regulatory
environment governing ILEC operations has been and will likely continue to be
very liberal in its approach to promoting competition and network access, which
may increase the likelihood of new competitors offering similar services to our
service area. The introduction of new competitors could have a negative effect
on our revenues and earnings. See "-- Regulatory Environment" on page 12.

WE HAVE RECEIVED A LIMITED SUSPENSION FROM CERTAIN INTERCONNECTION REQUIREMENTS
OF THE TELECOMMUNICATIONS ACT OF 1996. UPON EXPIRATION OF THE SUSPENSION, WE MAY
BE SUBJECT TO ADDITIONAL COMPETITION FOR TELECOMMUNICATIONS SERVICES.

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

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

THE COMBINED COMPANY MAY BE UNABLE TO INTEGRATE SUCCESSFULLY THE BUSINESS
OPERATIONS OF D&E AND CONESTOGA AND SUCH INABILITY COULD HAVE AN ADVERSE IMPACT
ON ITS PROFITABILITY.

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

D&E'S INCREASED INDEBTEDNESS AS A RESULT OF THE MERGER COULD RESTRICT ITS
OPERATIONS.

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



                                       18
<PAGE>
    -   the combined company will use a substantial portion of its cash flow
        from operations, if any, to pay principal and interest on its
        indebtedness, which would reduce the funds available for working
        capital, capital expenditures, acquisitions and other general corporate
        purposes;

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

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

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

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

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

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

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

THE FAILURE TO SELL THE WIRELESS BUSINESSES OF CONESTOGA WOULD RESULT IN A
REDUCTION IN THE COMBINED COMPANY'S EXPECTED RESOURCES AVAILABLE FOR THE
OPERATION OF ITS BUSINESS, AND MAY ADVERSELY AFFECT THE CONTINUING OPERATIONS OF
THE BUSINESS.

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



                                       19
<PAGE>
EXECUTIVE OFFICERS

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

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

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

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

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

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

        THOMAS E. MORELL, age 41, has been our Chief Financial Officer and
Treasurer since 1995 and a Vice President since 1996. Mr. Morell has been
employed by the Company since 1984, serving as Assistant Controller from 1984 to
1990 and Controller from 1990 to 1995. From 1982 to 1984, he was employed by
Coopers & Lybrand L.L.P. as an auditor. Mr. Morell is Managing Director of
PenneCom B.V., a Supervisory Board member of Pilicka Telephone


                                       20
<PAGE>
Company, and is a member of the Campaign Cabinet of the United Way of Lancaster
County. Mr. Morell is a Certified Public Accountant and is a member of the
Pennsylvania Institute of Certified Public Accountants.

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

ITEM 2.     PROPERTIES.

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

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

ITEM 3.     LEGAL PROCEEDINGS.

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

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

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

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



                                       21
<PAGE>
    On September 4, 2001, Elektrim paid to PenneCom $38,655,000 which was the
amount of the amended award and fees. PenneCom used most of the funds to reduce
outstanding loans under its credit facility with a domestic bank. PenneCom
applied for a second correction to the amended award but was notified in
December 2001 that this correction was denied.

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

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

    There were no matters submitted to a vote of the shareholders during the
fourth quarter of 2001.


                                     PART II

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

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

<TABLE>
<CAPTION>
                         2000                   Low           High
                         ----                   ---           ----
<S>                                            <C>           <C>

                    First Quarter              $16.38        $25.00
                    Second Quarter             $14.00        $20.69
                    Third Quarter              $18.00        $27.25
                    Fourth Quarter             $20.50        $27.94
</TABLE>

<TABLE>
<CAPTION>
                         2001                   Low           High
                         ----                   ---           ----
<S>                                            <C>           <C>

                    First Quarter              $16.50        $21.94
                    Second Quarter             $17.00        $19.75
                    Third Quarter              $18.00        $25.75
                    Fourth Quarter             $15.70        $23.75
</TABLE>

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

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

    During the two most recent fiscal years, cash dividends on our common stock
have been declared quarterly in the annual amount per share of $0.50 in 2001 and
$0.45 in 2000. Dividends are paid as and when declared by our Board of
Directors and in accordance with restrictions set forth in covenants contained
in our debt agreements.



                                       22
<PAGE>
ITEM 6.     SELECTED FINANCIAL DATA.

The following table sets forth selected consolidated summary financial
information as of December 31 and for each of the last five fiscal years ended
December 31, 2001. This information should be read in conjunction with our
consolidated financial statements, including the notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations, both
of which are included in this annual report. Certain amounts have been
reclassified for comparative purposes.

<TABLE>
<CAPTION>
                                                At or for the Year Ended December 31,
                                       1997         1998         1999         2000         2001
                                     --------     --------     --------     --------     --------
                                                 (in thousands, except per share data)
<S>                                  <C>          <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA
Operating revenues ..............    $ 48,115     $ 49,657     $ 57,047     $ 65,092     $ 76,286
Depreciation and amortization ...       8,466        9,372        9,771       12,129       15,296
Operating income (loss) .........       9,882        7,866        8,764     $  5,134         (503)
Income from continuing operations      10,722        1,245       15,503       (5,041)       4,042
Discontinued operations, net of
  tax(1) ........................      (1,157)      (5,348)      (6,652)      (5,653)      (5,985)
Extraordinary loss, net of tax ..          --       (7,901)          --           --       (2,109)
Cumulative effect of accounting
  change, net of tax ............          --         (251)          --         (912)          --
Net income (loss) ...............       9,565      (12,255)       8,851      (11,606)      (4,052)
PER-SHARE DATA - BASIC AND
  DILUTED(2)
Income (loss) from continuing
  operations ....................    $   1.78     $   0.17     $   2.10     $  (0.68)    $   0.55
Discontinued operations .........       (0.20)       (0.72)       (0.90)       (0.77)       (0.81)
Extraordinary items .............          --        (1.07)          --           --        (0.29)
Cumulative effect of accounting
  change ........................          --        (0.03)          --        (0.12)          --
Net income (loss) per common
  share .........................        1.58        (1.65)        1.20        (1.57)       (0.55)
Cash dividends declared per
  common share ..................        0.39         0.39         0.39         0.45         0.50

BALANCE SHEET DATA
Total assets ....................    $112,492     $105,490     $115,803     $124,221     $142,878
Long-term debt ..................      41,657       22,657       21,582       20,907       58,124
Preferred stock of subsidiary ...       1,446        1,446        1,446        1,446        1,446

OTHER DATA
Adjusted EBITDA (3) .............    $ 18,348     $ 17,238     $ 18,535     $ 17,263     $ 14,793
Net cash provided by continuing
  operating activities ..........      11,583       13,758       17,776       14,760       12,770
Net cash provided by/used in
  continuing investing
  activities.....................       5,383      (21,932)     (12,718)      (5,436)     (35,319)
 Net cash provided by/used in
  continuing financing
  activities ....................      (3,961)      16,258       (5,287)      (5,372)      26,904
</TABLE>


(1) Reflects the results of our wireless services operations including our
    interest in the PCS ONE joint venture as discontinued operations.
(2) The per-share data is based upon the weighted average common shares
    outstanding. Computations of earnings for all years are in accordance with
    Statement of Financial Accounting Standards No. 128, "Earnings per Share."
(3) We compute Adjusted EBITDA by adding depreciation and amortization expense
    to operating income. Adjusted EBITDA is presented because we believe it is
    frequently used by securities analysts, investors and other interested
    parties in the evaluation of companies in our industry. However, other
    companies in our industry may calculate Adjusted EBITDA differently than we
    do. Adjusted EBITDA is not a measurement of financial performance under
    generally accepted accounting principles and should not be considered as a
    substitute for cash flow from operating activities as a measure of liquidity
    or a substitute for net income as an indicator of operating performance or
    any other measure of performance derived in accordance with generally
    accepted accounting principles.


                                       23
<PAGE>
ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS.

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

OVERVIEW

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

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

Our RLEC revenue is derived primarily from network access charges, local
telephone service, enhanced telephone services and regional toll service.
Network access revenue consists primarily of charges paid by long distance
companies for access to our network in connection with the completion of long
distance telephone calls. Local telephone service revenue consists of charges
for local telephone services, including monthly charges for basic local service.
Enhanced telephone services revenue is derived from providing special calling
features, such as caller ID, call waiting and PhoneGuard(TM), a telemarketer
call-blocking service. Regional long distance revenue is derived from providing
regional long distance services to our RLEC customers.

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

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

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


                                       24
<PAGE>
In addition, we sell data and voice communications equipment and provide custom
computer programming service. We market these products and services primarily in
our RLEC and CLEC service areas.

Our operating costs and expenses primarily include wages and related employee
benefit costs, depreciation and amortization, selling and advertising, software
and information system services and general and administrative expenses. Our
RLEC segment incurs costs related to network access charges, directory expense,
and other operations expenses such as digital electronic switch expense,
engineering and testing costs. Our CLEC incurs costs related to leased network
facilities associated with providing local telephone service to customers,
engineering costs, and network access costs for local calls and long distance
expense. Our Internet Services segment incurs leased network facilities costs
for our dial-up Internet service and for our DSL service. Our Systems
Integration business incurs expenses primarily related to equipment and
materials used in the course of the installation and provision of service.

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

PENDING SALE OF PCS ONE INTEREST

On October 17, 2001, we entered into a definitive agreement to sell our 50%
interest in PCS ONE to VoiceStream Wireless Corporation for approximately
$117,000. We estimate that we will receive approximately $75,000 in cash after
working capital and long-term debt adjustments of approximately $42,000, and
recognize a gain on the sale of approximately $50,000, net of tax. We also
estimate that approximately $34,000 of the cash received will be used to pay
taxes with the remainder used to pay down debt and to finance, in part, our
pending acquisition of Conestoga Enterprises, Inc. This sale, which is expected
to close in April 2002, will result in our exit of the mobile wireless personal
communications service business. Accordingly, we have reflected our wireless
business as discontinued operations in our financial statements. Our losses from
discontinued operations, net of taxes, were $6,652 in 1999, $5,653 in 2000 and
$5,985 in 2001.

PENDING MERGER WITH CONESTOGA ENTERPRISES, INC.

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

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



                                       25
<PAGE>
RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                                   CORPORATE,
                                                    INTERNET        SYSTEMS        OTHER AND      TOTAL
                              RLEC       CLEC(1)   SERVICES(2)   INTEGRATION(3)   ELIMINATIONS   COMPANY
                              ----       -------   -----------   --------------   ------------   -------
<S>                         <C>         <C>        <C>           <C>              <C>            <C>

         1999
Revenues - External ....    $ 38,308    $  2,815     $     --       $ 12,199        $  3,725     $ 57,047
Revenues - Intercompany        1,502          56           --             69          (1,627)          --
                            --------    --------     --------       --------        --------     --------
Total Revenues .........      39,810       2,871           --         12,268           2,098       57,047
                            --------    --------     --------       --------        --------     --------
Depreciation and
Amortization ...........       8,395         189           --            399             788        9,771
Other Operating Expenses      20,391       3,717           --         11,955           2,449       38,512
                            --------    --------     --------       --------        --------     --------

Total Operating Expenses      28,786       3,906           --         12,354           3,237       48,283
                            --------    --------     --------       --------        --------     --------

Operating Income (Loss)       11,024      (1,035)          --            (86)         (1,139)       8,764
                            --------    --------     --------       --------        --------     --------

         2000
Revenues - External ....    $ 39,374    $  4,177     $     90       $ 17,890        $  3,561     $ 65,092
Revenues - Intercompany        2,466          99           --            119          (2,684)          --
                            --------    --------     --------       --------        --------     --------
Total Revenues .........      41,840       4,276           90         18,009             877       65,092
                            --------    --------     --------       --------        --------     --------

Depreciation and
Amortization ...........       9,380         478           42          1,587             642       12,129
Other Operating Expense       21,634       5,990        1,203         17,999           1,003       47,829
                            --------    --------     --------       --------        --------     --------
Total Operating Expenses      31,014       6,468        1,245         19,586           1,645       59,958
                            --------    --------     --------       --------        --------     --------

Operating Income (Loss)       10,826      (2,192)      (1,155)        (1,577)           (768)       5,134
                            --------    --------     --------       --------        --------     --------

         2001
Revenues - External ....    $ 41,766    $  6,203     $  1,922       $ 23,177        $  3,218     $ 76,286
Revenues - Intercompany        3,892         296           23             96          (4,307)          --
                            --------    --------     --------       --------        --------     --------
Total Revenues .........      45,568       6,499        1,945         23,273          (1,089)      76,286
                            --------    --------     --------       --------        --------     --------

Depreciation and
Amortization ...........      11,315         575          259          2,751             396       15,296
Other Operating Expenses      25,821       8,899        3,791         24,059          (1,077)      61,493
                            --------    --------     --------       --------        --------     --------
Total Operating Expenses      37,136       9,474        4,050         26,810            (681)      76,789
                            --------    --------     --------       --------        --------     --------

Operating Income (Loss)        8,522      (2,975)      (2,105)        (3,537)           (408)        (503)
                            --------    --------     --------       --------        --------     --------
</TABLE>

----------
(1)  We commenced our CLEC operations in 1999.
(2)  We commenced our Internet Services operations on October 1, 2000.
(3)  We acquired two Systems Integration businesses in 2000.



                                       26
<PAGE>
CONSOLIDATED OPERATIONS

        Overview of 2001 Compared to 2000

Consolidated operating revenues from continuing operations in 2001 increased
$11,194, or 17.2%, to $76,286 in 2001 from $65,092 in 2000. This increase
consisted of revenue increases in all of our operating segments, but primarily
was due to increases in our customer bases in our CLEC and Internet Services
segments and the inclusion of a full year of results for two Systems Integration
businesses acquired in 2000. Before corporate eliminations, CLEC revenues
increased $2,223 or 52.0%, Internet Services revenue increased $1,832, from $90
in 2000, and Systems Integration revenues increased $5,264, or 29.2%.


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

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

        Overview of 2000 Compared to 1999

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

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

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



                                       27
<PAGE>
RLEC Segment Results

                    SUMMARY OPERATING RESULTS - RLEC SEGMENT

<TABLE>
<CAPTION>
                                   1999          2000          2001
                                 --------      --------      --------
<S>                              <C>           <C>           <C>
Revenues:
  Local Telephone Service        $ 11,477      $ 11,951      $ 12,219
  Network Access                   19,250        20,935        24,826
  Other                             9,083         8,954         8,613
                                 --------      --------      --------
Total Revenues                     39,810        41,840        45,658
                                 --------      --------      --------

Depreciation and                    8,395         9,380        11,315
Amortization
Other Operating Expenses           20,391        21,634        25,821
                                 --------      --------      --------
Total Operating Expenses           28,786        31,014        37,136
                                 --------      --------      --------

Operating Income                   11,024        10,826         8,522
                                 --------      --------      --------

Access Lines at December 31        58,985        61,098        61,961
                                 --------      --------      --------
</TABLE>


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

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



                                       28
<PAGE>
CLEC Segment Results

                    SUMMARY OPERATING RESULTS - CLEC SEGMENT

<TABLE>
<CAPTION>
                                    1999          2000          2001
                                   -------       -------       -------
<S>                                <C>           <C>           <C>
Revenues:
    Local Telephone Service        $    42       $   577       $ 1,586
    Network Access                      18           613         1,355
    Long Distance                    2,802         2,999         3,355
    Other                                9            87           203
                                   -------       -------       -------
Total Revenues                       2,871         4,276         6,499
                                   -------       -------       -------

Depreciation and Amortization          189           478           575
Other Operating Expenses             3,717         5,990         8,899
                                   -------       -------       -------
Total Operating Expenses             3,906         6,468         9,474
                                   -------       -------       -------

Operating Loss                      (1,035)       (2,192)       (2,975)
                                   -------       -------       -------

Access Lines at December 31            598         3,895         7,535
</TABLE>

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

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

                                       29
<PAGE>
Internet Services Segment Results

              SUMMARY OPERATING RESULTS - INTERNET SERVICES SEGMENT

<TABLE>
<CAPTION>
                                     1999          2000           2001
                                   --------      --------       --------
<S>                                <C>           <C>            <C>
Revenues                           $      0      $     90       $  1,945

Depreciation and Amortization            --            42            259
Other Operating Expenses                 --         1,203          3,791
                                   --------      --------       --------
Total Operating Expenses                 --         1,245          4,050
                                   --------      --------       --------

Operating Loss                           --        (1,155)        (2,105)
                                   --------      --------       --------

Customers at December 31
     DSL                                 --           477          2,209
     Dial-up Access                      --         2,161         10,161
     Web-hosting Services                --            50            447
</TABLE>

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


Systems Integration Segment Results

             SUMMARY OPERATING RESULTS - SYSTEMS INTEGRATION SEGMENT

<TABLE>
<CAPTION>
                                     1999           2000           2001
                                   --------       --------       --------
<S>                                <C>            <C>            <C>
Revenues                           $ 12,268       $ 18,009       $ 23,273

Depreciation and Amortization           399          1,587          2,751
Other Operating Expenses             11,955         17,999         24,059
                                   --------       --------       --------
Total Operating Expenses             12,354         19,586         26,810
                                   --------       --------       --------

Operating Loss                          (86)        (1,577)        (3,537)
                                   --------       --------       --------
</TABLE>

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

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


                                       30
<PAGE>
Other Income (Expense)

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

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

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

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

         -    Our share in the equity of EuroTel was a loss of $5,528 in 2000
              compared with income $5,267 in 1999. The decrease was primarily
              the result of our share of a gain in 1999 related to EuroTel's
              sale of MTT, a telecommunications company located in Hungary. This
              gain was offset by reduced EuroTel losses in 2000 due to reduced
              operating expenses and interest expense.

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

Income Taxes

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

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

Discontinued Operations, Extraordinary Items and Accounting Changes

In 2001, our discontinued wireless segment operations incurred a loss of $5,985,
net of $2,605 in taxes. The pre-tax loss is primarily comprised of our equity
losses from PCS ONE of $9,914, offset by $1,231 of income for providing support
services to PCS ONE. The loss from discontinued operations in 2001 was fairly
consistent with the 2000 loss. In 2000, our discontinued wireless segment
operations incurred a loss of $5,653, net of $2,766 in taxes. The pre-tax loss
is primarily comprised of our equity losses from PCS ONE of $9,214, offset by
$625 of income for providing support services to PCS ONE. The loss from
discontinued operations in 2000 is $999 lower than the 1999 loss. In 1999, our
discontinued wireless segment operations incurred a loss of $6,652, net of
$3,213 in taxes. The pre-tax loss is primarily comprised of our equity losses
from PCS ONE of $10,243, offset by $363 of income for providing support services
to PCS ONE.

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

In the fourth quarter of 2000, we adopted Securities and Exchange Commission
Staff Accounting Bulletin No. 101,


                                       31
<PAGE>
"Revenue Recognition in Financial Statements" (SAB 101), retroactive to January
1, 2000, as required by the SEC. SAB 101 provides guidance on recognition of
certain non-recurring fees and associated incremental direct expenses over the
expected term of the customer relationship. As of January 1, 2000, the total
cumulative effect of the adoption, which was recorded as a change in accounting
principle, was $391, net of income taxes of $267. Our share of EuroTel's
cumulative effect of the adoption of SAB 101 was $521.

Effects of Inflation

It is the opinion of management that the effects of inflation on operating
expenses over the past three years have been immaterial and have been partially
offset by growth in operating and other revenues. Management anticipates that
this trend will continue in 2002.

FINANCIAL CONDITION

Liquidity and Capital Resources

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

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

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

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

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

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

Net cash used in investing activities was $5,436 in 2000 and $12,718 in 1999.
Capital expenditures in those years were significantly less than in 2001 and
were $16,812 in 2000 and $13,923 in 1999. The major capital additions in both
years were for digital switching and circuit equipment, computers and software,
and poles and cable purchases to continually upgrade the telephone operating
system. The 2000 capital additions also included the final 10% of the cost to
complete construction of a building addition used by the Lancaster County 911
emergency control center and the beginning of construction of a new office
building to accommodate employee growth. During 2000, two businesses were
acquired for a combination of stock and cash. The cash portion of the payments
made in 2000 was $5,955. Net cash provided by temporary investments was $3,056
in 2000 and $3,080 in 1999. In 2000, net cash of $12,202 was provided from
affiliates primarily from the distribution of EuroTel proceeds on the sale of
its Hungarian telephone business. In 1999, transactions with affiliates resulted
in net investments and advances of $4,351.

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


                                       32
<PAGE>
common stock pursuant to the open market purchase program.

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

         External Sources of Capital at December 31, 2001

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

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

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

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

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

<TABLE>
<S>                                    <C>
Long-term loan                         $ 50,000
Revolving credit facility                50,000
Lines of credit                          27,500
                                       --------
Total capacity                          127,500

Total debt at December 31, 2001        $ 59,933
Maximum leverage ratio limitation        62,143
                                       --------
Effective availability                 $  2,210
</TABLE>

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

         Commitments, Contingencies and Projected Uses of Capital

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


                                       33
<PAGE>
We currently intend to fund the cash portion of the merger consideration with
approximately $41,000 of proceeds that we expect from the sale of our interest
in PCS ONE, a new $100,000 term loan from a syndicate of banks, and borrowings
under our existing $50,000 revolving credit facility. On October 15, 2001, we
received a commitment letter from CoBank, ACB with respect to a $100,000,
8.5-year variable-rate senior secured term loan. In the commitment letter,
CoBank agreed to amend certain financial covenants applicable to our existing
revolving credit facility which will result in an increase in the availability
under that facility. In addition, on March 21, 2002, we received from CoBank,
ACB a proposed amendment to its commitment letter that would amend those same
covenants and increase the principal amount of both the senior secured term loan
and revolving credit facility to provide a further increase in borrowing
capacity for operations subsequent to the closing of the merger.

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

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

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

In December 1999, we became party to a loan agreement between a domestic bank
and PenneCom, a wholly-owned subsidiary of EuroTel. As an inducement to the bank
to lend up to $50,000 to PenneCom, we pledged $8,667 of investments as security
on the loan, along with similar amounts by the other investors in EuroTel.
PenneCom used the loan primarily to refinance higher interest debt. The loan was
repaid in September 2001 with a part of the proceeds from the arbitration award
and from a portion of the amounts pledged by us and the other investors in
EuroTel.


                                       34
<PAGE>
The following table sets forth our obligations and commitments, including debt
maturities, to make future payments under contracts, as of December 31, 2001:

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

Total                                          $61,394      $ 2,127      $ 8,648      $10,119      $40,500
</TABLE>


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

Revenue Recognition

Revenues for all of our business segments are generally recorded when services
are provided or products are delivered. Our RLEC and CLEC pricing is subject to
oversight by both state and federal regulatory commissions. Such regulation also
covers services, competition and other public policy issues. Different
interpretations by regulatory bodies may result in adjustments in future periods
to revenues derived from our RLEC and CLEC operations. We monitor these
proceedings closely and make adjustments to revenue accordingly.

We receive a portion of our interstate access revenues in our RLEC and CLEC
segments from settlement pools in which we participate with other telephone
companies through the National Exchange Carrier Association, Inc. (NECA). These
pools were established at the direction of the FCC and are funded by interstate
access service revenues, which the FCC regulates. Revenues earned through this
pooling process are initially recognized based on estimates and are subject to
adjustments that may either increase or decrease the amount of interstate access
revenues. If the actual amounts that we receive from the settlement pools differ
from the amounts that we have recorded as accounts receivables on our balance
sheets, we would be required to record the amount of such a reduction or
increase as an adjustment to our earnings. Historically, we have not experienced
significant adjustments to our revenues as a result of our participation in
these pools.

Regulated Asset Depreciation

We use a composite group remaining life method and straight-line composite rates
to depreciate the regulated property assets of our RLEC and CLEC segments. Under
this method, when we replace or retire such assets, we deduct the net book value
of these assets and charge it to accumulated depreciation. The effect of this
accounting is


                                       35
<PAGE>
to amortize any gains or losses on dispositions over the service lives of the
remaining regulated telephone property assets rather than recognizing such gain
or loss in the period of retirement.

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

Impairment of Long-Lived Assets

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

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

Investment in Unconsolidated Affiliates

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

Retirement Benefits

Retirement benefits are a significant cost of doing business and yet represent
obligations that will be settled in the future. Retirement benefit accounting
is intended to reflect the recognition of future benefit costs over the
employee's approximate service period based on the terms of the plans and the
investment and funding decisions made by a company. We record the costs of
providing retirement benefits in accordance with SFAS No. 87 "Employers'
Accounting for Pensions". Our estimates include assumptions regarding the
discount rate to value the future obligation and the expected return on our plan
assets. We use discount rates in line with current market interest rates on high
quality fixed rate debt securities. Our return on assets is based on our current
expectation of the long-term returns on assets held by the plan. Changes in
these key assumptions can have a significant impact on the projected benefit
obligations, funding requirements and periodic benefit costs that we incur.

Income Taxes

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

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


                                       36
<PAGE>
established for any deferred tax asset that we may not be able to use in the
preparation and filing of our future tax returns. We have recorded a valuation
allowance due to uncertainties related to the ability to utilize some of the
deferred tax assets, consisting primarily of equity income losses carried
forward before they expire.

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

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


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

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

ITEM 11. EXECUTIVE COMPENSATION.

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required under this Item is incorporated by reference from the
material captioned "Security Ownership of Officers, Directors and Principal
Stockholders" in our definitive proxy statement for our annual


                                       37
<PAGE>
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.


                                       38
<PAGE>
                                     PART IV

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

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

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

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

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

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

         (c) Exhibits. See Index to Exhibits.

         (d) Financial statement schedules of subsidiaries not consolidated and
50% or less owned. The information called for by this Item (14) is set forth on
pages F - 1 through F - 57. See Index to Financial Statements.


                                       39
<PAGE>
                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit                              Identification
  No.                                  of Exhibit                                             Reference
  ---                                  ----------                                             ---------
<S>          <C>                                                                    <C>
2.           Plan of acquisition, reorganization, arrangement,
             liquidation or succession:

2.1          Agreement and Plan of Exchange Between Denver and Ephrata Telephone    Incorporated herein by reference
             and Telegraph Company (a Pennsylvania corporation) and D&E, Inc. (a    from Exhibit 2.1 to Amendment No.
             Pennsylvania corporation).                                             2 to the Registration Statement on
                                                                                    Form S-4 (registration No.
                                                                                    333-2960 filed by D&E on April 23,
                                                                                    1996.

2.2          D&E Shareholder Agreement, dated as of March 21, 1997, by and          Incorporated herein by reference
             between D&E and various shareholders of D&E.                           from Exhibit 99.01 to the Form 8-K
                                                                                    Current Report filed by D&E on April
                                                                                    7, 1997.

2.3          Amended and Restated Agreement and Plan of Merger, by and among D&E,   Incorporated herein by reference
             Inc., D&E Acquisition Corp. and Conestoga Enterprises, Inc. dated as   from Exhibit 2.1 to the Current
             of January 9, 2002.                                                    Report on Form 8-K filed by D&E on
                                                                                    January 9, 2002.

3.           Articles of Incorporation and By-laws:

3.1          Amended and Restated Articles of Incorporation                         Incorporated herein by reference
                                                                                    from Exhibit A to D&E's definitive
                                                                                    proxy statement for its 1997
                                                                                    Annual Meeting of Shareholders
                                                                                    filed April 2, 1997.

3.2          By-laws                                                                Incorporated herein by reference
                                                                                    from Exhibit 3.2 to D&E's
                                                                                    Registration Statement on Form 10
                                                                                    filed by D&E on April 30, 1993.

4.           Instruments defining the rights of security holders, including
             debentures:

9.           Voting Trust Agreement.

9.1          Voting Trust Agreement Among Shareholders of Denver and Ephrata        Incorporated herein by reference
             Telephone and Telegraph Company and Kay William Shober, Anne           from Exhibit 9.1 to D&E's 1995
             Brossman Sweigart, W. Garth Sprecher, Ronald E. Frisbie and John       Report on Form 10-K.
             Amos as Voting Trustees, dated as of November 19, 1992. ("Voting
             Trust Agreement")

9.2          Amendment to the Voting Trust Agreement dated as of December 31,       Incorporated herein by reference
             1995.                                                                  from Exhibit 9.2 to D&E's 1995
                                                                                    Annual Report on Form 10-K.
</TABLE>


                                       40
<PAGE>
<TABLE>
<CAPTION>
Exhibit                              Identification
  No.                                  of Exhibit                                             Reference
  ---                                  ----------                                             ---------
<S>          <C>                                                                    <C>


10.          Material Contracts

10.1         Denver and Ephrata Telephone and Telegraph Company Executive           Incorporated herein by reference
             Incentive Plan as revised January 1998.  *                             from Exhibit 10.1 to D&E's 1997
                                                                                    Annual Report of Form 10-K.

10.2         AT&T Communications Standard Agreement for the Provision of            Incorporated herein by reference
             Telecommunications Services and Facilities between AT&T                from Exhibit 10.2 to D&E's
             Communications of Pennsylvania, Inc. and Denver and Ephrata            Registration Statement on Form 10
             Telephone and Telegraph Company;                                       filed by D&E on April 30, 1993.

                     Article 1 General Provisions, effective
                                  May 25, 1984;
                   Article 8-2 Billing and Collection Services
                            effective April 1, 1992;

10.3         Telecommunications Services and Facilities                             Incorporated herein by reference
             Agreement between the Bell Telephone Company of                        from Exhibit 10.3 to D&E's
             Pennsylvania and Denver and Ephrata Telephone and                      Registration Statement on Form 10
             Telegraph Company, effective January 1, 1986; and                      filed by D&E on April 30, 1993.
             Amendment to Telecommunications Services and
             Facilities Agreement and the IntraLATA Compensation
             Agreement, dated May 7, 1992;
                        Appendix 1 IntraLATA Telecommunications
                                   Services, effective January 1, 1986;
                        Appendix 2 Ancillary Services, effective January 1, 1986;
                        Appendix 5 Jointly Provided Feature Group A
                                   Compensation effective July 24, 1986; and
                        Appendix 7 Extended Area Service, effective
                                   October 1, 1988.

10.4         IntraLATA Compensation Agreement between the Pennsylvania Non-Bell     Incorporated herein by reference
             Telephone Companies and Denver and Ephrata Telephone and Telegraph     from Exhibit 10.4 to D&E's
             Company, effective January 1, 1986; and Amendment to                   Registration Statement on Form 10
             Telecommunications Services and Facilities Agreement and the           filed by D&E on April 30, 1993.
             IntraLATA Compensation Agreement, dated May 7, 1992.

10.5         Agreement between Donnelley Directory, a division of The Reuben H.     Incorporated herein by reference
             Donnelley Corporation Statement and Denver and Ephrata Telephone       from Exhibit 10.5 to D&E's
             and Telegraph Company, dated April 19, 1991. Portions of this          Registration Statement on Form 10
             exhibit have been omitted pursuant to a request for confidential       filed by D&E on April 30, 1993.
             treatment and have been separately filed with the Commission.

10.6         Agreement for the Distribution of Interstate Access Revenues between   Incorporated herein by reference
             the National Exchange Carrier Association, Inc. and Denver and         from Exhibit 10.6 to D&E's
             Ephrata Telephone and Telegraph Company, effective May 25, 1984.       Registration Statement on Form 10
                                                                                    filed by D&E on April 30, 1993.

10.7         Agreement for the Provision of Enhanced                                Incorporated herein by reference
             9-1-1 Services between the County of                                   from Exhibit 10.7 to D&E's Annual
             Lancaster and Denver and Ephrata                                       Report on Form 10-K for the year
             Telephone and Telegraph Company,                                       ended December 31, 1999.
             effective upon approval of the
             Pennsylvania Public Utility Commission
             which occurred May 18, 1994
                         Attachment #1 Request for Proposal
</TABLE>


                                       41
<PAGE>
<TABLE>
<CAPTION>
Exhibit                              Identification
  No.                                  of Exhibit                                             Reference
  ---                                  ----------                                             ---------
<S>          <C>                                                                    <C>
                                   as Amended;
                         Attachment #2 Best and Final Offer,
                                   April 28, 1994;
                         Attachment #3 Clarifications to RFP;
                         Attachment #4 Lancaster County
                         Resolution #74, September 22, 1993;
                         Attachment #5 Lancaster County
                         Resolution #32, May 5, 1994;
                         Attachment #6 Addenda, Errata,
                             Bulletins to Contract Documents;
                         Attachment #7 Facility Lease; and
                         Attachment #8 Tariffed Local Exchange
                                   Carrier Services.


10.8         Modification #2 to the Agreement for the Provision of Enhanced         Incorporated herein by reference
             9-1-1 Services between the County of Lancaster and D&E Telephone       from Exhibit 10.1 to D&E's
             Company, signed July 14, 1999.                                         Quarterly Report on Form 10-Q for
                                                                                    the quarter ended September 30,
                                                                                    1999.

10.9         D&E Shareholder Agreement, Exhibit D to the Agreement and Plan of      Incorporated herein by reference
             Merger by and between D&E, Inc. and PCS One, Inc.                      from Exhibit B to Amendment No. 1
                                                                                    to the Registration Statement on
                                                                                    Form S-4 (Registration No.
                                                                                    333-18659) filed by D&E on January
                                                                                    21, 1997.

10.10        D&E, Inc. Officer Incentive Plan as revised January 1998.  *           Incorporated herein by reference
                                                                                    from Exhibit 10.16 to D&E's Quarterly
                                                                                    Report on Form 10-Q for the quarter
                                                                                    ended September 30, 1997.

10.11        Stock Acquisition Agreement between D&E, Inc. and Southwestern         Incorporated herein by reference
             Investments, Inc., a subsidiary of Citizens Utilities                  from Exhibit 10.1 to D&E's
             Company, dated November 3, 1997.                                       Quarterly Report on Form 10-Q for
                                                                                    the quarter ended September 30,
                                                                                    1997.

10.12        Limited Partnership Agreement by and among D&E Wireless, Inc.,         Incorporated herein by reference
             Omnipoint Venture Partner I, L.L.C. and Omnipoint Holdings, Inc.       from Exhibit 20.1 to the Form 8-K
                                                                                    Current Report filed by D&E on
                                                                                    December 2, 1997.

10.13        Partnership Interest Purchase Agreement among D&E Wireless, Inc.,      Filed herewith.
             D&E Communications, Inc., VoiceStream PA II, LLC, and VoiceStream
             PA I, LLC dated as of October 17, 2001

10.14        Credit Agreement Dated as of November 1, 2001 by and among D&E         Filed Herewith.
             Communications, Inc. as borrower and COBANK, ACB as Administrative
             Agent and a Lender and the other Lenders referred to therein

21.          Subsidiaries of the Registrant
</TABLE>


                                       42
<PAGE>
<TABLE>
<CAPTION>
Exhibit                              Identification
  No.                                  of Exhibit                                             Reference
  ---                                  ----------                                             ---------
<S>          <C>                                                                    <C>
21.1         List of all subsidiaries of D&E Communications, Inc.                   Filed herewith.

23           Consents

23.1         Consent of PricewaterhouseCoopers LLP, Philadelphia, PA                Filed herewith.

23.2         Consent of PricewaterhouseCoopers SpA, Rome, Italy                     Filed herewith.
</TABLE>

-------------
* Indicates a plan or agreement relating to executive compensation.


                                       43
<PAGE>
                                   SIGNATURES

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

Date: March 25, 2002

                                       D&E COMMUNICATIONS, INC.


                                       By:   /s/ Anne B. Sweigart
                                           ------------------------------------
                                           Anne B. Sweigart
                                           President and Chairman of the Board

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

<TABLE>
<CAPTION>
           SIGNATURE                               TITLE                        DATE
           ---------                               -----                        ----
<S>                                     <C>                                 <C>

/s/ Anne B. Sweigart                    President and Chairman of the       March 25, 2002
----------------------------------      Board
        ANNE B. SWEIGART                (Principal executive officer)



/s/ Thomas E. Morell                    Vice President, Chief Financial     March 25, 2002
----------------------------------      Officer and Treasurer
        THOMAS E. MORELL                (Principal financial and
                                        accounting officer)


/s/ Robert M. Lauman                    Senior Executive Vice President     March 25, 2002
----------------------------------      and Vice Chairman of the Board
        ROBERT M. LAUMAN


/s/ G. William Ruhl                     Chief Executive Officer and         March 25, 2002
----------------------------------      Director
        G. WILLIAM RUHL


/s/ W. Garth Sprecher                   Vice President, Secretary and       March 25, 2002
----------------------------------      Director
       W. GARTH SPRECHER

/s/ Thomas H. Bamford                   Director                            March 25, 2002
----------------------------------
       THOMAS H. BAMFORD
</TABLE>


                                       44
<PAGE>
<TABLE>
<S>                                     <C>                                 <C>
/s/ Paul W. Brubaker                    Director                            March 25, 2002
----------------------------------
        PAUL W. BRUBAKER



/s/ Ronald E. Frisbie                   Director                            March 25, 2002
----------------------------------
       RONALD E. FRISBIE



/s/ Robert A. Kinsley                   Director                            March 25,  2002
----------------------------------
       ROBERT A. KINSLEY



/s/ Steven B. Silverman                 Director                            March 25, 2002
----------------------------------
      STEVEN B. SILVERMAN



/s/ D. Mark Thomas                      Director                            March 25, 2002
----------------------------------
         D. MARK THOMAS
</TABLE>


                                       45
<PAGE>
                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                     Page
<S>                <C>                                                                               <C>
Item 8.            D&E Communications, Inc. and Subsidiaries.

                       Report of Independent Accountants.                                             F-3

                       Consolidated Statements of
                       Operations for the years ended
                       December 31, 1999, 2000 and 2001.                                              F-4

                       Consolidated Balance Sheets
                       as of December 31, 2000 and 2001.                                              F-5

                       Consolidated Statements of
                       Cash Flows for the years ended
                       December 31, 1999, 2000 and 2001.                                              F-6

                       Consolidated Statements of
                       Stockholders' Equity for the years ended
                       December 31, 1999, 2000 and 2001.                                              F-7

                       Notes to Consolidated Financial Statements.                                    F-8

Item 14(a)(2)          Financial Schedule II -  Valuation
                       and Qualifying Accounts                                                       F-25

Item 14(d)(1)      D&E/Omnipoint Wireless Joint Venture,  L.P.

                       Cover Page.                                                                   F-26

                       Table of Contents.                                                            F-27

                       Report of Independent Accountants.                                            F-28

                       Balance Sheets as of December 31, 2001 and 2000.                              F-29

                       Statements of Operations
                       For the Years Ended December 31, 2001, 2000 and 1999.                         F-30

                       Statement of Changes in Partners' Capital (Deficit)
                       For the Years Ended December 31, 2001, 2000 and 1999.                         F-31

                       Statements of Cash Flows
                       For the Years Ended December 31, 2001, 2000 and 1999.                         F-32

                       Notes to Financial Statements.                                                F-33

Item 14(d)(1)      EuroTel L.L.C.

                       Cover Page.                                                                   F-42
</TABLE>


                                      F-1
<PAGE>
<TABLE>
<S>                <C>                                                                               <C>
                       Report of Independent Accountants.                                            F-43

                       Consolidated Balance Sheets as of December 31, 2001 and
                       2000.                                                                         F-44

                       Consolidated Statements of Operations For the Years Ended
                       December 31, 2001, 2000 and 1999.                                             F-45

                       Consolidated Statements of Members' Equity (Deficit)
                       and Comprehensive Income (Loss) For the Years Ended
                       December 31, 2001, 2000 and 1999.                                             F-46

                       Consolidated Statements of Cash Flows For the Years Ended
                       December 31, 2001, 2000 and 1999.                                             F-47

                       Notes to Consolidated Financial Statements.                                   F-48
</TABLE>


                                      F-2
<PAGE>
                        REPORT OF INDEPENDENT ACCOUNTANTS


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

In our opinion, the consolidated financial statements listed in the index
appearing under Item 8 on page F-1 of this Form 10-K present fairly, in all
material respects, the financial position of D&E Communications, Inc. and its
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14(a)(2) on page F-1 of this
Form 10-K, presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As discussed in Note 2, the Company changed its method of accounting for the
recognition of certain non-recurring fees and associated incremental direct
expenses in 2000.

/s/ PricewaterhouseCoopers LLP

Philadelphia, PA
March 15, 2002


                                      F-3
<PAGE>
                   D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per-share amounts)

<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                                      1999         2000         2001
                                                                                    --------     --------     --------
<S>                                                                                 <C>          <C>          <C>
OPERATING REVENUES
      Communication service revenues ...........................................    $ 44,094     $ 51,838     $ 61,904
      Communication products sold ..............................................      11,668       11,798       12,859
      Other ....................................................................       1,285        1,456        1,523
                                                                                    --------     --------     --------
           Total operating revenues ............................................      57,047       65,092       76,286
                                                                                    --------     --------     --------

OPERATING EXPENSES
      Communication service expenses (exclusive of depreciation and
      amortization below) ......................................................      15,475       20,158       28,146
      Cost of communication products sold ......................................       8,445        9,005       10,216
      Depreciation and amortization ............................................       9,771       12,129       15,296
      Marketing and customer services ..........................................       4,850        6,753        8,990
      General and administrative services ......................................       9,742       11,913       14,141
                                                                                    --------     --------     --------
           Total operating expenses ............................................      48,283       59,958       76,789
                                                                                    --------     --------     --------

                Operating income (loss) ........................................       8,764        5,134         (503)

OTHER INCOME (EXPENSE)
      Equity in net income (losses) of affiliates ..............................       5,287       (5,528)          91
      Interest expense .........................................................      (1,818)      (1,779)      (2,242)
      Gain (loss) on investments ...............................................       9,093       (3,378)       3,036
      Other, net ...............................................................       1,498        1,725        1,546
                                                                                    --------     --------     --------
           Total other income (expense) ........................................      14,060       (8,960)       2,431
                                                                                    --------     --------     --------

               Income (loss) from continuing operations before income
               taxes and dividends on utility preferred stock ..................      22,824       (3,826)       1,928

INCOME TAXES AND DIVIDENDS ON UTILITY PREFERRED STOCK
      Income taxes .............................................................       7,256        1,150       (2,179)
      Dividends on utility preferred stock .....................................          65           65           65
                                                                                    --------     --------     --------

           Total income taxes and dividends on utility preferred stock .........       7,321        1,215       (2,114)
                                                                                    --------     --------     --------

               Income (loss) from continuing operations ........................      15,503       (5,041)       4,042

Discontinued operations:
   Loss from operations of discontinued segment to December 31, 2001, net
   of income tax benefit of $3,213, $2,766 and $2,605 ..........................      (6,652)      (5,653)      (5,985)
                                                                                    --------     --------     --------

        Income (loss) before extraordinary item and cumulative effect of
        change in accounting principle .........................................       8,851      (10,694)      (1,943)

Extraordinary loss, net of income tax benefit of $1,514 ........................          --           --       (2,109)
Cumulative effect of change in accounting principle, net of income
tax benefit of $267 ............................................................          --         (912)          --
                                                                                    --------     --------     --------

NET INCOME (LOSS) ..............................................................    $  8,851     ($11,606)    ($ 4,052)
                                                                                    ========     ========     ========

      Weighted average common shares outstanding (basic and diluted) ...........       7,385        7,371        7,376

BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
      Income (loss) from continuing operations .................................    $   2.10     ($  0.68)    $   0.55
      Loss from discontinued operations ........................................       (0.90)       (0.77)       (0.81)
      Extraordinary items ......................................................          --           --        (0.29)
      Cumulative effect of accounting change ...................................          --        (0.12)          --
                                                                                    --------     --------     --------
           Net income (loss) per common share ..................................    $   1.20     ($  1.57)    ($  0.55)
                                                                                    ========     ========     ========

      Dividends per common share ...............................................    $   0.39     $   0.45     $   0.50
                                                                                    ========     ========     ========
</TABLE>

                 See notes to consolidated financial statements.


                                      F-4
<PAGE>
                   D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except share amounts)


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

                 See notes to consolidated financial statements.


                                      F-5
<PAGE>
                   D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                                                     YEAR ENDED DECEMBER 31,
                                                                                               1999           2000           2001
                                                                                             --------       --------       --------
<S>                                                                                          <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
      Net income (loss) ...............................................................      $  8,851       $(11,606)      $ (4,052)
      Add: Loss from discontinued operations ..........................................         6,652          5,653          5,985
           Extraordinary items ........................................................            --             --          2,109
           Cumulative effect of accounting change .....................................            --            912             --
                                                                                             --------       --------       --------
      Income (loss) from continuing operations ........................................        15,503         (5,041)         4,042
      Adjustments to reconcile net income (loss) from continuing operations to net
      cash provided by operating activities:
        Depreciation and amortization .................................................         9,771         12,129         15,296
        Deferred income taxes .........................................................         1,286         (3,821)        (3,112)
        Equity in net (income) losses of affiliates ...................................        (5,287)         5,528            (91)
        Tax benefits applicable to ESOP ...............................................             8              3             --
        (Gain) loss on investments ....................................................        (9,093)         3,378         (3,036)
        Loss on retirement of property, plant and equipment ...........................            24             12            166
      Changes in operating assets and liabilities net of effects of business
      acquisitions:
        Accounts receivable ...........................................................          (348)        (1,939)         2,148
        Inventories ...................................................................          (274)          (599)           299
        Prepaid expenses ..............................................................         6,806          1,747            357
        Accounts payable and accrued liabilities ......................................         1,738          1,862           (775)
        Accrued taxes and accrued interest ............................................          (177)            44           (132)
        Advance billings, customer deposits and other .................................        (2,200)         1,533             (4)
        Other, net ....................................................................            19            (76)        (2,388)
                                                                                             --------       --------       --------
            Net Cash Provided by Operating Activities from
            Continuing Operations .....................................................        17,776         14,760         12,770
                                                                                             --------       --------       --------

CASH FLOWS FROM INVESTING ACTIVITIES
      Capital expenditures, net of proceeds from sales and removal costs ..............       (13,923)       (16,812)       (34,068)
      Proceeds from sale of temporary investments .....................................        38,321         54,001         34,671
      Purchase of temporary investments ...............................................       (35,241)       (50,945)       (26,002)
      Acquisition of businesses, net of cash acquired of $18 ..........................            --         (5,955)            --
      Proceeds from sale of investments ...............................................         2,476          2,073             --
      Investments in and advances to affiliates .......................................        (5,668)        (3,195)       (10,769)
      Investment returns and repayments from affiliates ...............................         1,317         15,397            849
                                                                                             --------       --------       --------
           Net Cash Used in Investing Activities from
           Continuing Operations ......................................................       (12,718)        (5,436)       (35,319)
                                                                                             --------       --------       --------

CASH FLOWS FROM FINANCING ACTIVITIES
      Dividends on common stock .......................................................        (2,690)        (3,094)        (3,433)
      Proceeds from long term debt financing ..........................................            --             --         58,000
      Payment of debt issuance costs ..................................................            --             --         (2,546)
      Payments on long-term debt ......................................................          (854)        (1,005)       (25,378)
      Payments on notes payable for acquired businesses ...............................            --             --           (859)
      Net proceeds from revolving lines of credit .....................................            --             --          1,757
      Proceeds from issuance of common stock ..........................................           303            301            343
      Purchase of treasury stock ......................................................        (2,046)        (1,574)        (1,082)
      Proceeds from sale of treasury stock ............................................            --             --            102
                                                                                             --------       --------       --------
           Net Cash Provided By (Used in) Financing Activities
           from Continuing Operations .................................................        (5,287)        (5,372)        26,904
                                                                                             --------       --------       --------

CASH PROVIDED BY CONTINUING OPERATIONS ................................................          (229)         3,952          4,355

CASH USED IN DISCONTINUED OPERATIONS ..................................................        (5,289)        (2,099)        (7,267)
                                                                                             --------       --------       --------

INCREASE (DECREASE) IN CASH
      AND CASH EQUIVALENTS ............................................................        (5,518)         1,853         (2,912)

CASH AND CASH EQUIVALENTS
      BEGINNING OF YEAR ...............................................................         7,192          1,674          3,527
                                                                                             --------       --------       --------

      END OF YEAR .....................................................................      $  1,674       $  3,527       $    615
                                                                                             ========       ========       ========
</TABLE>

                 See notes to consolidated financial statements.


                                      F-6
<PAGE>
                   D & E COMMUNICATIONS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                      YEAR ENDED DECEMBER 31,
                                                                       1999                   2000                    2001
                                                                       ----                   ----                    ----
                                                                SHARES      AMOUNT      SHARES      AMOUNT      SHARES      AMOUNT
                                                               --------    --------    --------    --------   ---------    --------
COMMON STOCK
<S>                                                            <C>         <C>         <C>         <C>        <C>          <C>
   Balance at beginning of year ............................      7,460    $  1,190       7,485    $  1,194       7,608    $  1,214
     Common stock issued for acquisitions ..................         --          --          93          15          --          --
     Common stock issued for Employee Stock Purchase,
     Long-Term Incentive and Dividend Reinvestment Plans ...         25           4          30           5          31           5
                                                               --------    --------    --------    --------   ---------    --------
   Balance at end of year ..................................      7,485       1,194       7,608       1,214       7,639       1,219
                                                               --------    --------    --------    --------   ---------    --------

ADDITIONAL PAID-IN CAPITAL
     Balance at beginning of year ..........................                 36,546                  37,026                  39,374
     Common stock issued for acquisitions ..................                     --                   1,753                      --
     Common stock issued for Employees Stock Purchase,
        Long-Term Incentive and Dividend Reinvestment
        Plans ..............................................                    480                     595                     582
                                                                           --------                --------                --------
     Balance at end of year ................................                 37,026                  39,374                  39,956
                                                                           --------                --------                --------

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
   Balance at beginning of year ............................                     --                    (539)                    467
   Unrealized gain (loss) on investments ...................                   (539)                 (1,269)                  1,189
   Reclassification adjustment for (income) loss included
   in net loss .............................................                     --                   2,275                  (1,802)
   Equity adjustment for minimum pension liability, net of
       taxes ...............................................                     --                      --                  (2,010)
   Currency translation adjustment from EuroTel ............                     --                      --                    (677)
                                                                           --------                --------                --------
   Balance at end of year ..................................                   (539)                    467                  (2,833)
                                                                           --------                --------                --------

UNEARNED ESOP COMPENSATION
   Balance at beginning of year ............................                   (429)                   (153)                     --
   Reduction of ESOP trust loan ............................                    276                     153                      --
                                                                           --------                --------                --------
   Balance at end of year ..................................                   (153)                     --                      --
                                                                           --------                --------                --------

RETAINED EARNINGS
   Balance at beginning of year ............................                 27,294                  33,281                  18,366
   Net income (loss) .......................................                  8,851                 (11,606)                 (4,052)
   Tax benefits from dividends paid to ESOP ................                      8                       3                      --
   Dividends on common stock: $.39, $.45, $.50 per share ...                 (2,872)                 (3,312)                 (3,677)
                                                                           --------                --------                --------
   Balance at end of year ..................................                 33,281                  18,366                  10,637
                                                                           --------                --------                --------

TREASURY STOCK
   Balance at beginning of year ............................        (38)       (439)       (146)     (2,485)       (226)     (4,059)
   Treasury stock acquired .................................       (108)     (2,046)        (80)     (1,574)        (56)     (1,147)
   Treasury stock sold .....................................         --          --          --          --           5         102
                                                               --------    --------    --------    --------   ---------    --------
   Balance at end of year ..................................       (146)     (2,485)       (226)     (4,059)       (277)     (5,104)
                                                               --------    --------    --------    --------   ---------    --------

TOTAL SHAREHOLDERS' EQUITY .................................      7,339    $ 68,324       7,382    $ 55,362       7,362    $ 43,875
                                                               ========    ========    ========    ========   =========    ========

COMPREHENSIVE INCOME (LOSS)
   Net income (loss) .......................................               $  8,851                $(11,606)               $( 4,052)
   Unrealized gain/(loss) on investments, net of income
      taxes of ($184), ($581) and $715 .....................                   (539)                 (1,269)                  1,189
   Reclassification adjustment for (income) loss included
    in net loss, net of income taxes of $1,172 and ($1,232)                      --                   2,275                  (1,802)
   Equity adjustment for minimum pension liability, net of
    income taxes of ($1,368) .................................                   --                      --                  (2,010)
   Currency translation adjustment from EuroTel ............                     --                      --                    (677)
                                                                           --------                --------                --------
   Total comprehensive income (loss) .......................               $  8,312                $(10,600)               $ (7,352)
                                                                           ========                ========                ========
</TABLE>

                 See notes to consolidated financial statements.


                                      F-7
<PAGE>
                   Notes to Consolidated Financial Statements
                (Dollars in thousands, except per-share amounts)

1. Nature of Business

Description and Principles of Consolidation

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

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

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

Regulatory Environment and Competition

D&E's RLEC and CLEC operations are subject to regulation at both the federal and
state levels by the Federal Communications Commission (FCC) and the Pennsylvania
Public Utility Commission (PUC). The passage of the Telecommunications Act of
1996 (the 1996 Act) provided comprehensive changes to federal and state
regulations that govern telecommunications. D&E's RLEC operation currently
qualifies as a rural telephone company and is exempt until July 2002 from
certain interconnection provisions of the 1996 Act which would allow
non-facilities based competitive local exchange carriers to operate in D&E's
franchised territory.

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

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


                                      F-8
<PAGE>
Concentrations of Credit Risk

Financial instruments that subject D&E to concentrations of credit risk consist
primarily of trade receivables. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of residential and
business customers in D&E's customer base.

2. Significant Accounting Policies

Use of Estimates

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

Recent Accounting Pronouncements

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

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

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

Revenue Recognition

Revenues for all business segments are generally recognized when services are
rendered or products are delivered to customers. Certain non-recurring fees,
such as service activation and installation fees, and associated incremental
direct costs up to the amount of fees are deferred and recognized over the
expected term of the customer relationship which is deemed to be 3 to 5 years.
Any direct costs in excess of fees deferred are expensed immediately.

The RLEC business segment receives a portion of its interstate access revenues
from settlement pools in which it participates with other telephone companies
through the National Exchange Carrier Association, Inc. (NECA). These pools were
established at the direction of the FCC and are funded by access service
charges, which the FCC regulates. Revenues earned through this pooling process
are initially recognized based on estimates and are subject to adjustments that
may either increase or decrease the amount of interstate access revenues.

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


                                      F-9
<PAGE>
Cash and Short-Term Investments

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

Investments Available-for-Sale

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

Prepaid Directory

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

Property, Plant and Equipment

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

When depreciable regulated telephone property is retired, the original cost of
the asset, net of salvage, is charged to accumulated depreciation. Any gains or
losses on disposition are amortized over the service lives of the remaining
assets. When other depreciable property is retired, the gain or loss is
recognized as an element of other income. The costs of maintenance and repairs
are charged to operating expense.

Intangible Assets

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

Impairment of Long-Lived Assets

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

Advertising

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

Capitalized Interest


                                      F-10
<PAGE>
The cost of funds used to finance construction projects is reflected as part of
the construction costs and a reduction of interest expense. Capitalized interest
on regulated telephone construction projects prior to January 2001 was recorded
as Allowance for Funds Used During Construction (AFUDC), a noncash element of
other income. Interest costs capitalized on assets were $46 for 1999, $265 for
2000 and $509 for 2001.

Income Taxes

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

Earnings per Common Share

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

Comprehensive Income

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

Foreign Currency Translations and Transactions

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

Reclassifications

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


3. Cash Flow Information

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

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


                                      F-11
<PAGE>
D&E recorded noncash transactions in connection with its investing and financing
activities. At December 31, 2001, accounts payable included capital expenditures
of $2,517 and advances to PCS ONE of $1,499. During 2001, D&E issued common
stock of $244 for dividends reinvested and exchanged $2,800 of accounts
receivable from PCS ONE to an investment in PCS ONE. Also during 2001, D&E
recognized a non-cash realized gain on investments of $3,036 as a result of the
exchange of shares of an available for sale investment.

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

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


4. Acquisitions

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

5. Investments Available-for-Sale

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

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

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


6. Discontinued Operations

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

On October 17, 2001, D&E entered into a definitive agreement to sell its 50%
interest in PCS ONE to VoiceStream Wireless Corporation for approximately
$117,000. D&E estimates that it will receive approximately $75,000 in cash


                                      F-12
<PAGE>
after working capital and long-term debt adjustments of approximately $42,000.
Management also estimates that approximately $34,000 of the cash received will
be used to pay taxes with the remainder used to pay down debt or to help finance
the acquisition of Conestoga Enterprises, Inc. (see Note 12).

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

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

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

Summarized financial information for discontinued operations is presented as
follows:

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


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


                                      F-13
<PAGE>
Summarized financial information for PCS ONE is presented as follows:

<TABLE>
<CAPTION>
                                              1999         2000          2001
                                            --------     --------      --------
<S>                                         <C>          <C>           <C>
Years ended December 31:
   Net sales............................    $ 17,081     $ 30,947      $ 43,357
   Net loss.............................     (20,404)     (18,475)      (19,777)

At December 31:
   Current assets.......................                 $  6,448      $  8,020
   Noncurrent assets....................                   43,917        58,487
   Current liabilities..................                   12,798        10,065
   Noncurrent liabilities...............                   61,429        84,214
   Partners' capital (deficit)..........                  (23,862)      (27,772)
</TABLE>

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

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

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

7. Investment in Affiliated Company

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

In April 1999, PenneCom entered into an agreement to sell its entire investment
in Pilicka to Elektrim S.A. (Elektrim) for $140,000 in cash and notes. In July
1999, Elektrim issued written notice to PenneCom that it was repudiating the
purchase agreement. In August 1999, PenneCom filed an arbitration request with
the International Court of Arbitration seeking specific performance of the
agreement as well as compensatory and punitive damages. In 2001, an award of
approximately $40,000 plus interest at 10% per annum from August 1999 and
reimbursement of arbitration costs was granted in favor of PenneCom. PenneCom
used a portion of the proceeds to reduce outstanding loans with a domestic bank
(see Note 11). D&E's share of the gain on the award settlement is included in
the equity in net income or losses of affiliates in the consolidated statements
of operations.

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


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

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

Summarized financial information for EuroTel is presented as follows:

<TABLE>
<CAPTION>
                                                   1999       2000       2001
                                                 --------   --------   --------
<S>                                              <C>        <C>        <C>
Years ended December 31:
   Net sales ..................................  $  3,413   $  4,930   $  8,065
   Gain from joint venture ....................     1,524         --         --
   Gain (loss) on foreign currency transactions      (824)        60        313
   Net income (loss) ..........................    13,853    (18,385)       907

At December 31:
   Current assets .............................             $  3,026   $  3,339
   Noncurrent assets ..........................               43,832     15,026
   Current liabilities ........................               71,474     41,191
   Noncurrent liabilities .....................                2,123      1,751
   Members' equity (deficit) ..................              (26,739)   (24,577)
</TABLE>

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

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

Investments in and advances to affiliate (Equity in net
   losses in excess of investments and advances) ...........      $ 15,339       $ (2,903)      $  6,431
                                                                  ========       ========       ========
</TABLE>

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


8. Property, Plant and Equipment

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


                                      F-15
<PAGE>
<TABLE>
<CAPTION>
                                            2000            2001
                                         ---------       ---------
<S>                                      <C>             <C>
Land and buildings ................      $  33,513       $  43,382
Digital switching equipment .......         48,721          58,873
Outside plant facilities ..........         44,953          48,851
Other equipment ...................         20,076          27,168
Plant under construction ..........          7,913           5,034
                                         ---------       ---------
Total property, plant and equipment        155,176         183,308
   Less accumulated depreciation ..        (79,321)        (88,163)
                                         ---------       ---------
Property, plant and equipment, net       $  75,855       $  95,145
                                         =========       =========
</TABLE>

9. Notes Payable and Long-Term Debt

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

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

<TABLE>
<CAPTION>
                                                 2000         2001
                                               -------      -------
<S>                                            <C>          <C>
Senior Term Note due 2011 ...............      $    --      $50,000
Senior Revolving Credit Facility due 2009           --        8,000
6.49% Senior Notes due 2004 .............       10,000           --
7.55% Senior Notes due 2007 .............        3,182           --
9.18% Senior Notes due 2021 .............        8,400           --
Other ...................................          242          176
                                               -------      -------
                                                21,824       58,176
Less current maturities .................          917           52
                                               -------      -------

Total long-term debt ....................      $20,907      $58,124
                                               =======      =======
</TABLE>

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

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

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


                                      F-16
<PAGE>
Other debt consists of equipment capital leases assumed in the business
acquisitions during 2000. Payments are due monthly with interest rates from 9.9%
to 15.5%. Final due dates range from January 2002 to October 2004.

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

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

<TABLE>
<CAPTION>
                            Year          Aggregate Amount
                            ----          ----------------
<S>                                       <C>
                            2002             $    52
                            2003                  56
                            2004               2,568
                            2005               5,000
                            2006               5,000
</TABLE>

10. Accounts Payable and Accrued Liabilities

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

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

11. Commitments and Contingencies

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

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

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

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

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


12.  Proposed D&E - Conestoga Enterprises, Inc. Merger


                                      F-17
<PAGE>
D&E and Conestoga Enterprises, Inc. (Conestoga) have announced a proposed merger
under a conditional merger agreement dated as of November 21, 2001(the
Agreement). The Agreement became definitive on December 3, 2001, when NTELOS,
Inc., agreed to terminate its merger agreement with Conestoga. Under the terms
of the Agreement, structured as a "cash election" merger, each Conestoga
shareholder will have the option to receive cash and/or D&E common stock. As
long as D&E's stock price under the calculation in the Agreement is between
$13.00 and $23.00 per share, the value of the consideration for each Conestoga
share will be $33.00 (for a total transaction value of approximately $272.0
million). D&E shareholders will continue to own their existing shares after the
merger.

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

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


13. Income Taxes

The provision for income taxes consists of the following:

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

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

<TABLE>
<CAPTION>
                                                       1999     2000      2001
                                                       ----    -----    ------
<S>                                                    <C>     <C>      <C>
Federal statutory rate ..............................  34.0%    34.0%     34.0%

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

Approximately $58,969 of state net operating loss carryforwards remained at
December 31, 2001. These carryforwards are due to the operations of D&E's
subsidiaries and will expire in the years 2007 through 2011. The benefit of
these carryforwards is dependent on the taxable income of these subsidiaries
during the carryforward period. A valuation allowance has been provided because
realization of tax carryforwards is not likely.

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


                                      F-18
<PAGE>
<TABLE>
<CAPTION>
                                                                                    2000              2001
                                                                                    ----              ----
<S>                                                                              <C>              <C>
Deferred tax liabilities:
   Depreciation..............................................................    $    4,337       $    4,169
   Depreciation - affiliated companies.......................................         2,722            2,822
   Investments...............................................................           407            1,139
                                                                                  ---------        ---------
                                                                                      7,466            8,130
Deferred tax assets:
   Employee benefits.........................................................           401            1,240
   Net operating loss carryforwards..........................................         2,590           11,481
    Equity in net loss of affiliates.........................................         3,662              373
    Other, net...............................................................           369              202
                                                                                  ---------        ---------
                                                                                      7,022           13,296

Valuation allowance..........................................................        (6,252)          (4,261)
                                                                                  ----------       ----------

Net deferred tax assets (liabilities)........................................    $   (6,696)      $      905
                                                                                  ==========       =========
</TABLE>

D&E has decreased its valuation allowance on the deferred tax assets related to
the equity loss of affiliates as a result of changes in estimates of the
realizability of loss carryforwards. The amount of the deferred tax asset could
change if estimates of future taxable income during the carryforward period are
revised.


14. Shareholders' Equity

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

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

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

D&E offers a Dividend Reinvestment and Stock Purchase Plan (DRP) to its
shareholders. The DRP provides all shareholders of D&E common stock the
opportunity to purchase additional shares of common stock by: 1) reinvesting all
cash dividends paid on their shares of common stock; 2) making optional cash
purchases of common stock, up to a maximum amount per quarter, while continuing
to receive cash dividends; or 3) both reinvesting all cash dividends and making
such optional cash purchases. There are 172,394 shares of common stock reserved
for issuance pursuant to the DRP. The total number of shares purchased through
the DRP during 2000 and 2001 was 15,980 and 16,868, respectively.

Shares for the DRP are purchased by participants at fair market value, which is
defined as the average of the highest and lowest per-share sale prices as
reported by the NASDAQ National Market on the day of the purchase. Shares for


                                      F-19
<PAGE>
the ESPP may be purchased at a 10% discount from fair market value as approved
by the shareholders on April 27, 2000. If no shares were traded on the day of
purchase, then the prices on the previous day are used to compute the per-share
price.

D&E has a Stock Compensation Plan and Policy for Non-Employee Directors as
approved by the shareholders on April 26, 2001. Certain non-employee directors
receive common stock in payment for their services as a director of the company.
There are 13,960 shares of common stock reserved for issuance pursuant to the
plan. The total number of shares issued in the first year of this plan during
2001 was 1,040.

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


15. Employee Benefit Plans

Employees' Retirement Plan

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

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

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

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

Benefit obligation at end of year.................              $ 23,070       $ 26,591
                                                                ========       ========
</TABLE>

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

Fair value of assets at end of year...............              $ 19,887       $ 19,559
                                                                ========       ========
</TABLE>

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

Net amount recognized at end of year..............              $ (1,033)      $   (184)
                                                                ========       ========
</TABLE>


                                      F-20
<PAGE>
<TABLE>
<CAPTION>

                                                                    2000           2001
                                                                --------       --------
<S>                                                             <C>            <C>
Amounts Recognized in the Financial Statements Consist of:
Accrued benefit liability.................................      $ (1,033)      $ (3,700)
Other asset...............................................            --            138
Accumulated other comprehensive loss......................            --          3,378
                                                                --------       --------

Net amount recognized at end of year......................      $ (1,033)      $   (184)
                                                                ========       ========
</TABLE>

<TABLE>
<CAPTION>
                                                       1999          2000          2001
                                                    -------       -------       -------
<S>                                                 <C>           <C>           <C>
Components of Net Periodic Benefit Cost:
Service cost............................            $   831       $   754       $ 1,093
Interest cost...........................              1,362         1,591         1,759
Expected return on assets...............             (1,284)       (1,528)       (1,745)
Amortization of:
   Prior service cost...................                55            55            29
   Actuarial loss.......................               414           116           275
                                                    -------       -------       -------

Total net periodic benefit cost.........            $ 1,378       $   988       $ 1,411
                                                    =======       =======       =======
</TABLE>

Employees' 401(k) Savings Plan

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

Employee Stock Ownership Plan

In July 1992, D&E established the Employee Stock Ownership Plan (ESOP), covering
all eligible employees. Unallocated shares were held in a "suspense account" in
the ESOP's trust fund until allocated to participants' accounts. D&E made
quarterly contributions to the ESOP, which, along with the dividends on
unallocated shares, were used to repay the ESOP Note. As principal payments on
the ESOP Note were made, unallocated shares held in the suspense account were
released and allocated among the participants' accounts. The ESOP Note was paid
in full in December 2000. Due to the Board of Directors' decision to discontinue
contributions to the ESOP, all non-vested participants became fully vested in
their accrued benefits effective January 1, 2001. As of December 31, 2000, all
shares were allocated to participants. Dividends on shares allocated to
participants' accounts are reinvested in D&E common stock through the purchase
of treasury shares.

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

Information related to the ESOP is summarized as follows:

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

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


                                      F-21
<PAGE>
Postretirement Health Care Benefits

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

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

1999 Long-Term Incentive Plan

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

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

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


                                      F-22
<PAGE>
16. Segment Reporting

D&E's business segments are as follows: incumbent rural local exchange carrier
(RLEC), competitive local exchange carrier (CLEC), internet services and systems
integration. The segments are more fully described in Note 1. For more
information on significant noncash items, see Note 3. Intersegment revenues are
recorded at the same rates charged to external customers.

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

<TABLE>
<CAPTION>
                                                                                               Corporate,
                                                                      Internet     Systems      Other &       Total
                                               RLEC        CLEC       Services   Integration  Eliminations   Company
                                               ----        ----       --------   -----------  ------------   -------
<S>                                         <C>         <C>          <C>         <C>          <C>           <C>
             1999
External customer revenues................. $  38,308   $   2,815    $      --    $  12,199    $   3,725    $  57,047
Intersegment revenues......................     1,502          56           --           69       (1,627)          --
Depreciation & amortization................     8,395         189           --          399          788        9,771
Operating income (loss)....................    11,024      (1,035)          --          (86)      (1,139)       8,764
Equity in net income (loss) of affiliates..        --          --           --           --        5,287        5,287
Gain (loss) on investments.................        --          --           --           --        9,093        9,093
Significant noncash items..................       941          --           --           --        5,206        6,147
Segment assets.............................    97,470       2,075           --        4,817       11,441      115,803
Investments in and advances to affiliated
  companies................................        --          --           --           --       15,339       15,339
Capital expenditures.......................    11,748       1,069           --          632          449       13,898

             2000
External customer revenues................. $  39,374   $   4,177    $      90    $  17,890    $   3,561    $  65,092
Intersegment revenues......................     2,466          99           --          119       (2,684)          --
Depreciation & amortization................     9,380         478           42        1,587          642       12,129
Operating income (loss)....................    10,826      (2,192)      (1,155)      (1,577)        (768)       5,134
Equity in net income (loss) of affiliates..        --          --           --           --       (5,528)      (5,528)
Gain (loss) on investments.................        --          --           --           --       (3,378)      (3,378)
Significant noncash items..................     3,580          --           --        3,341           --        6,921
Segment assets.............................   117,939       5,530          967       19,730      (17,945)     124,221
Equity in losses of affiliates in excess
  of investments and advances..............        --          --           --           --       (2,903)      (2,903)
Capital expenditures.......................    14,616       3,724          993          914          494       20,741

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


                                      F-23
<PAGE>
17.  Quarterly Results of Operations (unaudited)

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

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


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

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


                                      F-24
<PAGE>
ITEM 14(a)(2).  FINANCIAL STATEMENT SCHEDULES.

                            D&E COMMUNICATIONS, INC.
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)


<TABLE>
<CAPTION>
                                                      Additions   Deductions
                                        Balance at   Charged to   Credited to                      Balance
                                        Beginning     Cost and     Costs and      Businesses       at end
                                         of Year      Expenses      Expenses       Acquired        of Year
                                        ----------   ----------   -----------      --------        -------
<S>                                     <C>          <C>          <C>              <C>             <C>
Allowance for doubtful accounts:
      Year ended December 31, 1999           --           303           283             --              20
      Year ended December 31, 2000           20           318           267            766             837
      Year ended December 31, 2001          837           532           592           (230)            547


Valuation Allowance for Deferred Tax
Assets:
      Year ended December 31, 1999        4,182            --           967             --           3,215
      Year ended December 31, 2000        3,215         3,037            --             --           6,252
      Year ended December 31, 2001        6,252            --         1,991             --           4,261
</TABLE>

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



                                      F-25


<PAGE>
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000 AND FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000
AND 1999

























                                      F-26
<PAGE>
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
TABLE OF CONTENTS
------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                PAGE(S)
<S>                                                                             <C>
Report of Independent Accountants                                                  1

Financial Statements:
  Balance Sheets as of December 31, 2001 and 2000                                  2

  Statements of Operations for the years ended December 31, 2001, 2000 and
  1999                                                                             3

  Statements of Changes in Partners' Capital (Deficit) for the years ended
  December 31, 2001, 2000 and 1999                                                 4

  Statements of Cash Flows for the years ended December 31, 2001, 2000, and
  1999                                                                             5

  Notes to Financial Statements                                                   6-14
</TABLE>







                                      F-27
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


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


In our opinion, the accompanying balance sheets and the related statements of
operations, changes in partners' capital (deficit) and cash flows present
fairly, in all material respects, the financial position of D&E/Omnipoint
Wireless Joint Venture, L.P. at December 31, 2001 and 2000, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Partnership's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.



/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 15, 2002





                                      F-28
<PAGE>
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                          ASSETS                                       2001                     2000
<S>                                                               <C>                      <C>
Current assets:
  Cash and cash equivalents                                         $2,701,244             $  1,585,977
  Accounts receivable, net of reserve for
    bad debts of $343,090 and $330,339 at
    December 31, 2001 and 2000, respectively                         4,398,072                3,532,844
  Inventories                                                          792,016                1,284,149
  Prepaid expenses                                                     128,673                   44,712
                                                                  ------------             ------------
                                                                     8,020,005                6,447,682
                                                                  ------------             ------------
Property and equipment:
  In service                                                        69,305,235               52,796,615
  Under construction                                                 1,319,342                3,845,599
                                                                  ------------             ------------
                                                                    70,624,577               56,642,214
  Less: Accumulated depreciation                                    25,738,995               16,574,501
                                                                  ------------             ------------
                                                                    44,885,582               40,067,713
                                                                  ------------             ------------
Other assets:
  Unamortized debt issuance expense                                  1,904,747                1,809,717
  FCC Licenses, net                                                 11,643,201                1,986,683
  Other long-term assets                                                53,579                   53,579
                                                                  ------------             ------------
                                                                    13,601,527                3,849,979
                                                                  ------------             ------------
    Total assets                                                  $ 66,507,114             $ 50,365,374
                                                                  ============             ============

           LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)

Current liabilities:
  Due to Partners                                                 $  6,469,113             $  9,338,775
  Current portion of long-term debt                                    800,000                       --
  Accounts payable                                                     371,996                1,011,238
  Accrued interest                                                     277,596                  737,286
  Other accrued liabilities                                          1,473,023                1,302,816
  Unearned revenue                                                     636,309                  372,173
  Customer deposits                                                     37,200                   36,066
                                                                  ------------             ------------
    Total current liabilities                                       10,065,237               12,798,354
                                                                  ------------             ------------
Long-term liabilities:
  Long-term debt                                                    77,700,000               57,500,000
  Due to Partners                                                    5,157,656                3,929,464
  Fair value of derivative instruments                               1,356,346                       --
                                                                  ------------             ------------
    Total long-term liabilities                                     84,214,002               61,429,464
                                                                  ------------             ------------

Commitments and contingencies (Note 8)

Partners' capital (deficit):
  Capital contributions                                             49,946,164               32,722,038
  Accumulated net loss                                             (76,361,943)             (56,584,482)
  Accumulated other comprehensive loss                              (1,356,346)                      --
                                                                  ------------             ------------
    Total partners' capital (deficit)                              (27,772,125)             (23,862,444)
                                                                  ------------             ------------
    Total liabilities and partners' capital (deficit)             $ 66,507,114             $ 50,365,374
                                                                  ============             ============
</TABLE>




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





                                      F-29
<PAGE>
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                          2001               2000              1999
<S>                                                  <C>                <C>                <C>
Operating revenues:
  Communication service revenues and
    equipment sales                                  $ 45,893,777       $ 33,742,296       $ 19,000,310
  Less: Allowances for discounts                       (2,537,203)        (2,795,711)        (1,919,672)
                                                     ------------       ------------       ------------

      Net operating revenues                           43,356,574         30,946,585         17,080,638

Operating expenses:
  Cost of communications service revenue and
    equipment sales (excluding depreciation and
    amortization below)                                21,501,645         17,757,003         15,060,115
  Depreciation and amortization                         9,377,156          7,219,788          6,112,395
  Selling, general and administrative
    services                                           25,689,632         18,340,154         12,955,410
                                                     ------------       ------------       ------------
      Total operating expenses                         56,568,433         43,316,945         34,127,920
                                                     ------------       ------------       ------------
      Loss from operations                            (13,211,859)       (12,370,360)       (17,047,282)
                                                     ------------       ------------       ------------
Other income (expense):
  Interest expense                                     (6,620,193)        (5,617,896)        (3,364,038)
  Interest income                                          54,591             53,514              6,992
                                                     ------------       ------------       ------------
      Total other income (expense)                     (6,565,602)        (5,564,382)        (3,357,046)
                                                     ------------       ------------       ------------
Loss before extraordinary item                        (19,777,461)       (17,934,742)       (20,404,328)

Extraordinary loss on early extinguishment
  of debt                                                      --           (540,284)                --
                                                     ------------       ------------       ------------
      Net loss                                       $(19,777,461)      $(18,475,026)      $(20,404,328)
                                                     ============       ============       ============
</TABLE>




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




                                      F-30
<PAGE>
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
------------------------------------------------------------------------------

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





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



                                       F-31
<PAGE>
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                              2001              2000               1999
<S>                                                       <C>                <C>                <C>
Cash flows from operating activities:
  Net loss                                                $(19,777,461)      $(18,475,026)      $(20,404,328)

  Adjustments to reconcile net loss to net cash
      (used in) operating activities:
    Depreciation and amortization                            9,377,156          7,219,788          6,112,395
    Amortization of debt issuance costs                        306,911            222,315            121,776
    License use fees                                           156,304            267,192            442,804
    Bad debt expense                                         1,487,000          1,060,080            876,692
    Extraordinary loss on early extinguishment
      of debt                                                       --            540,284                 --
    Changes in operating assets and liabilities:
      Accounts receivable                                   (2,352,228)        (3,518,479)        (1,404,045)
      Inventories                                              492,133           (497,471)          (449,402)
      Prepaid expenses                                         (83,961)          (200,468)           298,964
      Accounts payable                                        (697,615)           596,075         (1,914,287)
      Other accrued liabilities                               (289,484)           884,017            539,017
      Deferred revenue and customer deposits                   265,270            167,703            154,909
      Other                                                         --             (7,295)           (26,432)
                                                          ------------       ------------       ------------
          Net cash used in operating activities            (11,115,974)       (11,741,285)       (15,651,937)
                                                          ------------       ------------       ------------
Cash flows from investing activities:
  Purchase of property and equipment                       (15,911,387)        (7,846,301)        (1,291,254)
  Payment to VoiceStream for wireless license               (6,763,843)                --                 --
                                                          ------------       ------------       ------------

          Net cash used in investing activities            (22,675,230)        (7,846,301)        (1,291,254)
                                                          ------------       ------------       ------------
Cash flows from financing activities:
  Partners' contributions                                   13,300,389          1,800,000          5,259,000
  Proceeds from long-term debt                              21,000,000         57,500,000          8,557,363
  Repayments of long-term debt                                      --        (39,989,585)                --
  Debt issuance costs                                         (401,941)        (1,912,614)          (575,111)
  Due to Partners                                            1,008,024          3,774,262          2,871,786
                                                          ------------       ------------       ------------
          Net cash provided by financing activities         34,906,472         21,172,063         16,113,038
                                                          ------------       ------------       ------------

Increase (decrease) in cash and cash equivalents             1,115,267          1,584,477           (830,153)

Cash and cash equivalents at beginning of the period         1,585,977              1,500            831,653
                                                          ------------       ------------       ------------

Cash and cash equivalents at the end of the period        $  2,701,244       $  1,585,977       $      1,500
                                                          ============       ============       ============
</TABLE>




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



                                      F-32
<PAGE>
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
------------------------------------------------------------------------------

1.   BUSINESS

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

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

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



                                      F-33
<PAGE>
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
------------------------------------------------------------------------------

     CAPITAL CONTRIBUTIONS

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

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

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

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

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

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



                                      F-34
<PAGE>
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
------------------------------------------------------------------------------

2.   NEW ACCOUNTING PRONOUNCEMENTS

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

     The Partnership was required to adopt the provisions of SFAS No. 133,
     "Accounting for Derivative Instruments and Hedging Activities," as amended
     by SFAS No. 137 and SFAS No. 138 ("SFAS No. 133"), beginning in the first
     quarter of fiscal 2001. This standard, as amended, requires that all
     derivative instruments be recorded on the balance sheet at their fair value
     and changes in the fair value be recorded each period in earnings or
     comprehensive income. The adoption of SFAS No. 133 did not result in
     recording a cumulative adjustment as of the beginning of 2001. However, the
     Partnership entered into an interest rate collar on long-term debt in 2001
     and has recorded the derivative at fair value (see Note 8).

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

3.   SIGNIFICANT ACCOUNTING POLICIES

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

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



                                      F-35
<PAGE>
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
------------------------------------------------------------------------------

     ADVERTISING COSTS

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

     DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

     The Partnership recognizes all derivatives on the balance sheet at fair
     value. Changes in the fair value for the effective portion of the gain or
     loss on a derivative that is designated as, and meets all the required
     criteria for, a cash flow hedge are recorded in Accumulated Other
     Comprehensive Income and reclassified into earnings as the underlying
     hedged item affects earnings. Amounts reclassified into earnings related to
     cash flow hedges of interest payments are included in interest expense. Any
     ineffective portion of the gain or loss on a derivative is recognized in
     earnings within other income or expense.

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

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

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

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


                                      F-36
<PAGE>
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
------------------------------------------------------------------------------

     license in Reading. The Partnership paid $6,763,843 to VoiceStream Wireless
     Corporation in connection with the receipt of the Reading C-Block license.

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

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

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

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

     CAPITALIZED INTEREST
     The cost of funds used to finance construction projects is capitalized as
     part of the construction costs. Interest costs related to construction
     projects are reflected as a cost of the assets and reduction of interest
     expense. Interest costs capitalized were $191,104 in 2001, $127,424 in 2000
     and $47,692 in 1999.

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

     FAIR VALUE OF FINANCIAL INSTRUMENTS
     Financial instruments subject to fair value disclosure requirements are
     carried in the financial statements at amounts that approximate fair value.



                                      F-37
<PAGE>
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
------------------------------------------------------------------------------

4.   SUPPLEMENTAL CASH FLOW INFORMATION

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


5.   INVENTORY

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

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

6.   PROPERTY AND EQUIPMENT

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

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

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


                                      F-38
<PAGE>
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
------------------------------------------------------------------------------

7.   LONG-TERM DEBT

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

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

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

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


          2002                           $   800,000
          2003                             5,980,000
          2004                            14,800,000
          2005                            17,200,000
          2006                            17,840,000
          Thereafter                      21,880,000



                                      F-39
<PAGE>
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
------------------------------------------------------------------------------

8.   INTEREST RATE COLLAR

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

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

9.   COMMITMENTS AND CONTINGENCIES

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

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

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

10.  PARTNERS' EQUITY

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

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


                                      F-40
<PAGE>
D&E/OMNIPOINT WIRELESS JOINT VENTURE, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
------------------------------------------------------------------------------

11.  RELATED PARTY TRANSACTIONS NOT DISCLOSED ELSEWHERE

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

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


                                      F-41
<PAGE>
EUROTEL L.L.C.

CONSOLIDATED FINANCIAL STATEMENTS

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


                                      F-42
<PAGE>

To the Members of
EuroTel L.L.C.

                        REPORT OF INDEPENDENT ACCOUNTANTS

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, members' equity (deficit) and
comprehensive income (loss) and cash flows present fairly, in all material
respects, the financial position of EuroTel L.L.C. and its subsidiaries at
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As described in Note 2, the Company is dependent upon the Founders to meet its
cash flow requirements for the year 2002.

PricewaterhouseCoopers SpA

Nicola Di Benedetto

(Partner)




Rome, February 25, 2002


                                      F-43
<PAGE>

EUROTEL L.L.C.
CONSOLIDATED BALANCE SHEETS
as of December 31, 2001 and 2000
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                               ASSETS                     2001                    2000
<S>                                                                   <C>                      <C>
Current assets:
    Cash and cash equivalents                                         $  1,009,137             $    811,097
    Receivables, net of allowance for doubtful accounts of
        $761,494 and $245,607 respectively                               1,732,518                2,215,056
    Loan receivable                                                        596,849                       --
                                                                      ------------             ------------
              Total current assets                                       3,338,504                3,026,153
                                                                      ============             ============
Property, plant and equipment, net                                      13,278,029               37,848,775
Other long-term assets                                                     185,415                       --
Intangible assets, net                                                   1,563,054                5,459,226
Loan receivable                                                                 --                  523,425
                                                                      ------------             ------------
                                                                      $ 18,365,002             $ 46,857,579
                                                                      ============             ============

                                               LIABILITIES AND MEMBERS' EQUITY

Current liabilities:
    Due to Founders                                                   $ 36,750,658             $  8,500,431
    Accounts payable                                                     3,779,442                5,052,796
    Accrued liabilities                                                    143,512                  795,810
    Deferred revenue                                                       517,825               10,504,430
    Current portion of long-term debt                                           --               46,620,447
                                                                      ------------             ------------
              Total current liabilities                                 41,191,437               71,473,914
                                                                      ============             ============

Deferred revenue                                                           891,625                1,309,141
License obligation                                                         465,265                  451,527
Other liabilities                                                          394,023                  362,417
                                                                      ------------             ------------
              Total liabilities                                         42,942,350               73,596,999
                                                                      ============             ============

Commitments and contingencies (Note 18)

Members' equity (deficit):
    Members' capital                                                   (22,543,956)             (23,451,142)
    Cumulative other comprehensive loss                                 (2,033,392)              (3,288,278)
                                                                       -----------             ------------

              Total members' equity (deficit)                          (24,577,348)             (26,739,420)
                                                                       -----------             ------------

                                                                      $ 18,365,002             $ 46,857,579
                                                                      ============             ============

</TABLE>
   The accompanying notes are an integral part of these financial statements.


                                      F-44
<PAGE>


EUROTEL L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                           2001                 2000                 1999
Operating revenue:
<S>                                                                   <C>                  <C>                  <C>
    Telecommunication revenue                                         $  7,483,764         $  4,506,642         $  1,934,149
    Installation and equipment sales                                       581,615              423,597            1,478,445
                                                                      ------------         ------------         ------------

             Total operating revenue                                     8,065,379            4,930,239            3,412,594

Operating expenses:
    Wages and benefits                                                   3,841,618            4,164,906            3,038,360
    Interconnection charges                                              1,928,942            1,125,737              553,889
    Depreciation and amortization                                        4,791,795            3,907,570            2,755,619
    General and administrative                                           5,231,197            4,596,294            3,926,608
    Loss related to assets held for sale                                31,517,480                   --                   --
                                                                      ------------         ------------         ------------

             Total operating expenses                                   47,311,032           13,794,507           10,274,476
                                                                      ------------         ------------         ------------

             Operating loss                                            (39,245,653)          (8,864,268)          (6,861,882)
                                                                      ============         ============         ============

Other income (expenses):
    Equity in income (loss) of affiliate                                        --                   --            1,524,684
    Interest income                                                      6,445,472              236,643              444,632
    Interest expense                                                    (5,512,867)          (4,770,048)          (8,724,828)
    Litigation costs related to sale of subsidiary and affiliate        (1,208,688)          (3,403,623)            (951,651)
    Gain on sale of affiliate                                                   --                   --           35,410,444
    Gain from arbitration award                                         40,000,000                   --                   --
    Foreign exchange gains                                                 392,297              685,307              742,989
    Foreign exchange losses                                                (78,990)            (625,064)          (1,566,602)
    Dutch withholding tax expense                                               --                   --           (2,202,917)
    Fair value gains on embedded derivatives                               266,456
    Other                                                                  (98,425)             (79,685)            (161,295)
                                                                      ------------         ------------         ------------

             Total other income (expenses)                              40,205,255           (7,956,470)          24,515,456
                                                                      ------------         ------------         ------------

             Income (loss) before extraordinary item
             and cumulative effect of change in
             accounting policy                                             959,602          (16,820,738)          17,653,574

Extraordinary item - extinguishment of debt                                     --                   --           (3,800,368)

Cumulative effect on prior years of a change
    in accounting policy                                                   (52,416)          (1,564,384)                  --
                                                                     -------------         ------------         ------------

Net income (loss)                                                     $    907,186         $(18,385,122)        $ 13,853,206
                                                                      ============         ============         ============
</TABLE>


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

                                      F-45
<PAGE>
EUROTEL L.L.C.
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY (DEFICIT) AND
COMPREHENSIVE INCOME (LOSS)
for the years ended December 31, 2001, 2000 and 1999
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                    Cumulative
                                                                       Other              Total           Comprehensive
                                                 Members'          Comprehensive         Members'             Income
                                                  Capital              Loss           Equity (Deficit)         (Loss)
                                                ============        ============        ============        ============
<S>                                             <C>                 <C>                 <C>                 <C>
Balance, December 31, 1998                      $ 11,222,818        $ (6,213,328)       $  5,009,490        $ (9,907,091)
                                                                                                            ============

Capital contributions                              3,930,000                  --           3,930,000


Net income                                        13,853,206                  --          13,853,206        $ 13,853,206


Foreign currency translation adjustment                   --          (3,915,964)         (3,915,964)         (3,915,964)


Reclassification adjustment:
    Foreign currency translation related
        to investment in MTT sold in 1999                 --           6,064,251           6,064,251           6,064,251
                                                ------------        ------------        ------------        ------------


Balance, December 31, 1999                        29,006,024          (4,065,041)         24,940,983        $ 16,001,493
                                                                                                            ============


Capital contributions                              2,100,000                  --           2,100,000


Shareholder distributions                        (36,172,044)                 --         (36,172,044)


Net loss                                         (18,385,122)                 --         (18,385,122)       $(18,385,122)


Foreign currency translation adjustment                   --             776,763             776,763             776,763
                                                ------------        ------------        ------------        ------------


Balance, December 31, 2000                      $(23,451,142)       $ (3,288,278)       $(26,739,420)       $(17,608,359)
                                                                                                            ============


Net income                                           907,186                                 907,186             907,186


Foreign currency translation adjustment                                1,254,886           1,254,886           1,254,886
                                                ------------        ------------        ------------        ------------

Balance, December 31, 2001                      $(22,543,956)       $ (2,033,392)       $(24,577,348)       $  2,162,072
                                                ============        ============        ============        ============

</TABLE>
   The accompanying notes are an integral part of the consolidated financial
statements.



                                      F-46
<PAGE>
EUROTEL L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
--------------------------------------------------------------------------------
<Table>
<Caption>
                                                                                  2001              2000              1999

<S>                                                                         <C>                <C>               <C>
Cash flows from operating activities:
  Net income (loss)                                                         $      907,186     $ (18,385,122)    $  13,853,206
  Adjustments to reconcile net income (loss) to net case used by
    operating activities:
      Extraordinary item-extinguishment of debt                                          -                 -         3,800,368
      Gain on sale of affiliate                                                          -                 -       (35,410,444)
      Depreciation and amortization                                              4,791,795         3,907,570         2,755,619
      Amortization of deferred financing costs                                      47,500            47,500           916,378
      Unrealized foreign exchange (gains)/losses                                  (576,463)          339,899           740,113
      Loss on sale of fixed assets                                                 116,174            66,981            87,075
      Equity in income of affiliate                                                      -                 -        (1,524,684)
      Increase in deferred revenue                                                (462,718)                -                 -
      Gain from arbitration award                                              (40,000,000)                -                 -
      Loss related to assets held for sale                                      31,517,480                 -                 -
      Other                                                                        149,390                 -                 -
      Changes in assets and liabilities:
        Receivables                                                               (131,620)       (1,249,640)          287,706
        Accounts payable                                                         1,083,522        (1,151,303)        1,855,230
        Accounts payable to Founders                                             1,848,478         2,454,124         1,806,744
        Accrued liabilities                                                       (837,879)          814,894         2,487,586
        Accrued interest                                                         1,905,773          (656,797)       (1,660,374)
        Other assets                                                                36,621           127,090                 -
                                                                            --------------     -------------     -------------

          Total adjustments                                                       (511,947)        4,700,318       (23,858,683)
                                                                            --------------     -------------     -------------

          Net cash used in operating activities                                    395,239       (13,684,804)      (10,005,477)
                                                                            --------------     -------------     -------------

Cash flows from investing activities:
  Deposit received on sale of Pilicka                                                    -                 -        10,000,000
  Proceeds from sale of property, plant and equipment                               88,921            29,708             7,480
  Proceeds form arbitration award                                               30,000,000                 -                 -
  Purchase of property, plant and equipment                                     (8,038,651)      (10,117,734)      (16,400,238)
  Purchase of additional MTT shares                                                      -                 -           (50,522)
  Proceeds from sale of MTT, net                                                         -                 -        43,027,372
  Acquisition of intangible assets                                                 (99,745)         (590,042)         (976.324)
                                                                            --------------     -------------     -------------

          Net cash provided by/(used in) investing activities                   21,950,525       (10,678,068)       35,607,768
                                                                            --------------     -------------     -------------

Cash flows from financing activities:
  Payment of notes payable to Founders                                                   -        (3,607,263)                -
  Proceeds from issuance of notes payable to Founders                           24,495,976                 -         3,500,000
  Redemption of convertible bonds                                                        -                 -       (23,265,814)
  Distribution to Founders                                                               -       (36,172,044)                -
  Proceeds from short-term borrowings from Founders                                      -         2,100,000                 -
  Proceeds from issuance of long-term debt                                       3,100,000        14,225,447        32,300,000
  Payment of long-term debt                                                    (49,720,447)                -                 -
  Proceeds from issuance of common stock and member contributions                        -                 -         3,930,001
                                                                            --------------     -------------     -------------

          Net cash (used in)/provided by financing activities                  (22,124,471)      (23,453,860)       16,464,187
                                                                            --------------     -------------     -------------

Effect of exchange rate changes on cash                                            (23,253)          101,082          (492,519)
                                                                            --------------     -------------     -------------

Net increase in cash and cash equivalents                                          198,040       (47,715,650)       41,573,959

Cash and cash equivalents at beginning of period                                   811,097        48,526,747         6,952,788
                                                                            --------------     -------------     -------------

Cash and cash equivalents at end of period                                  $    1,009,137     $     811,097     $  48,526,747
                                                                            ==============     =============     =============

Cash paid for interest                                                      $    2,947,142     $   7,902,308     $   9,077,260
                                                                            ==============     =============     =============

Supplemental disclosure of noncash activity:
  Long-term debt of $95,000 was issued for debt financing costs in 1999.
  See Note 3, Note 7 and Note 10 for other noncash activity.
</Table>

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

                                      F-47
<PAGE>

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

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

 1. ORGANIZATION:

    EuroTel L.L.C. (the Company) was organized in December 1996 to act as a
    holding company for a foreign investment in Pilicka Telefonia Sp. z.o.o.
    (Pilicka). The Company directly held this investment until May 1998. In
    1998, the Company organized a subsidiary, PenneCom B.V. (PenneCom), to act
    as a Dutch holding company for foreign investments. PenneCom is an indirect
    wholly owned subsidiary of the Company. During 1998 and 1999, PenneCom's
    investments were comprised of Pilicka and Monor Telefon Tarasasag Rt. (MTT).
    In May 1998, Pilicka was contributed to PenneCom by the Company at its net
    book value, as the Company and PenneCom were entities under common control.
    Results of operations include the operations of the Company, PenneCom and
    Pilicka for the entire years ended December 31, 2001, 2000 and 1999. In
    August 1998, the Founders (see definition below) contributed a 48.7%
    financial interest in Monor Communications Group, Inc. (MCG) at its book
    value to PenneCom. MCG held a 92.7% interest in MTT at the time of
    contribution. On December 31, 1998, MCG was dissolved and its equity was
    distributed. As a result, PenneCom held an interest ranging from 46.4% to
    48.3% in MTT during 1998 and 1999, prior to the sale of MTT effective
    December 14, 1999. PenneCom's results of operations include the equity in
    the income of MTT through December 14, 1999.

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

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

 2. LIQUIDITY:

    The Company is dependent upon the Founders to provide the liquidity
    necessary for the Company to meet its cash flow requirements for the year
    2002. The Founders also have historically provided guarantees and collateral
    for the Company's long-term debt. See Notes 12 and 14.


                                      F-48
<PAGE>
EUROTEL L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
----------------------------------------------------------------------------

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

   PRINCIPLES OF CONSOLIDATION

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

   FOREIGN CURRENCY TRANSLATION

   The financial position and results of operations of Pilicka are measured
   using the local currency, Polish zlotys, as the functional currency. Assets
   and liabilities of this subsidiary are translated at the exchange rate in
   effect at year-end. Income statement accounts are translated at the average
   rate of exchange prevailing during the year. Translation adjustments arising
   from differences in exchange rates from period to period are included in the
   cumulative other comprehensive income (loss) account in shareholder's equity.
   Foreign currency transaction gains and losses, as well as translation
   adjustments for monetary assets and liabilities of Pilicka that are
   denominated in currencies other than the Polish zloty, are recognized in the
   statement of operations. Foreign exchange gains/(losses) in 2001, 2000 and
   1999 include $576,463 and $(339,899) and $(740,113), respectively, of
   unrealized foreign exchange gains/(losses) resulting primarily from the
   translation of foreign denominated payables at the balance sheet date.

   CASH AND CASH EQUIVALENTS

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

                                      F-49
<PAGE>
EUROTEL L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
----------------------------------------------------------------------------

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

   DERIVATIVE INSTRUMENTS

   Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
   Derivative Instruments and Hedging Activities," and its related amendment,
   SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
   Hedging Activities" (collectively referred to as "SFAS No. 133"). These
   standards require that all derivative instruments be recorded on the balance
   sheet at their fair value as either assets or liabilities. When the Company
   purchases a financial instrument or enters into other agreements in which a
   derivative instrument is "embedded", it assesses whether the economic
   characteristics of the embedded derivative are clearly and closely related to
   the economic characteristics of the remaining components of the financial
   instrument (i.e., the host contract) and whether a separate, non-embedded
   instrument with the same terms as the embedded instrument would meet the
   definition of a derivative instrument. When it is determined that (1) the
   embedded derivative possesses economic characteristics that are not clearly
   and closely related to the economic characteristics of the host contract and
   (2) a separate, stand-alone instrument with the same terms would qualify as a
   derivative instrument, the embedded derivative is separated from the host
   contract, carried at fair value, and designated as either (a) a fair-value,
   cash flow or foreign-currency hedge or (b) a trading or non-hedging
   derivative instrument. Changes in fair value of derivatives are recorded each
   period in earnings or comprehensive losses.



                                      F-50
<PAGE>
EUROTEL L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
----------------------------------------------------------------------------

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

    FAIR VALUE ESTIMATION

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

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

    PROPERTY, PLANT AND EQUIPMENT

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

    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).

                                      F-51
<PAGE>
EUROTEL L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
----------------------------------------------------------------------------

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

    INTANGIBLE ASSETS

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

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

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

    INCOME TAXES

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

    DUTCH TAX EXPENSE

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

                                      F-52
<PAGE>
EUROTEL L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
----------------------------------------------------------------------------

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

    RECOVERABILITY OF LONG-LIVED ASSETS

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

    ACCOUNTING FOR LEASES

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

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

    REVENUES

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

                                      F-53
<PAGE>
EUROTEL L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
----------------------------------------------------------------------------

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

    CONCENTRATION OF RISK

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

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

    COMPREHENSIVE INCOME (LOSS)

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

    USE OF ESTIMATES

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

    RECLASSIFICATIONS

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

                                      F-54
<PAGE>
EUROTEL L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
----------------------------------------------------------------------------

4. SALE OF PILICKA:

   On December 31, 2001, the Company and the Founders entered into an agreement
   with PenneCom whereby PenneCom will transfer 100% of its shares in Pilicka to
   the Company and the Founders in exchange for satisfaction of loans and
   interest payable totaling $15,000,000 with an intended economic effect date
   of December 31, 2001. As a result of this agreement, the Company has
   recognized a loss of $31,517,480 in 2001, which represents the excess of the
   carrying value of the net assets over their net realizable value. The actual
   share transfer is expected in March 2002. The net assets of Pilicka at
   December 31, 2001 and 2000 are as follows:



<TABLE>
<CAPTION>
                                                  2001                2000
<S>                                           <C>                 <C>

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


                                      F-55
<PAGE>
EUROTEL L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
----------------------------------------------------------------------------


4. SALE OF PILICKA, CONTINUED:

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

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

<TABLE>
<CAPTION>
                                            2001               2000                1999

<S>                                     <C>                 <C>                 <C>
   Operating revenue                    $  8,065,379        $  4,930,239        $ 3,412,594
   Operating expenses                    (12,846,871)        (10,639,905)        (7,978,021)
   Other income                              502,108              38,357             67,429
   Other expenses                            (90,426)            (74,859)          (709,988)
   Cumulative effect of change in
    accounting policy                        (52,416)         (1,564,384)                --
                                        ------------        ------------        -----------

   Net loss                             $ (4,422,226)       $ (7,310,552)       $(5,207,986)
                                        ============        ============        ===========
</TABLE>


5. RECEIVABLES:

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

<TABLE>
<CAPTION>
                                                  2001              2000
<S>                                             <C>              <C>
   Trade receivables, net of allowance for
     doubtful accounts of $761,494 and
     $245,607, respectively                    $1,467,193       $1,191,196
   VAT receivables                                 48,084          499,411
   Due from employee                                    1            1,001
   Other                                          217,240          523,448
                                               ----------       ----------

                                               $1,732,518       $2,215,056
                                               ==========       ==========
</TABLE>


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

                                      F-56
<PAGE>
EUROTEL L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
----------------------------------------------------------------------------

6. PROPERTY, PLANT AND EQUIPMENT:

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


<TABLE>
<CAPTION>
                                                               2001               2000

<S>                                                       <C>                 <C>
   Land, buildings and leasehold improvements             $  8,675,551        $  6,258,562
   Telecommunications equipment                             36,686,002          29,928,140
   Vehicles and other equipment                              1,348,363           1,128,075
   Construction-in-progress                                  5,015,222           5,951,787
                                                          ------------        ------------

                                                            51,725,138          43,266,564

                Accumulated depreciation                   (10,251,728)         (5,417,789)
                Write down for assets held for sale        (28,195,381)                 --
                                                          ------------        ------------

                                                          $ 13,278,029        $ 37,848,775
                                                          ============        ============
</TABLE>
   The write down of $28,195,381 relates to the transaction described in Note 4
   and is recorded in the income statement as part of the loss on assets held
   for sale.

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

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

                                      F-57
<PAGE>
EUROTEL L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
----------------------------------------------------------------------------

7. INTANGIBLE ASSETS:

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


<TABLE>
<CAPTION>
                                              2001              2000

<S>                                       <C>                <C>
   Licenses                               $ 7,861,335        $ 6,973,229
   Deferred financing costs                        --             95,000
   Software and other                         916,254            783,176
                                          -----------        -----------

   Total intangible assets                  8,777,589          7,851,405
   Less: Accumulated amortization          (3,892,436)        (2,392,179)
         Write down for assets held
           for sale                        (3,322,099)                --
                                          -----------        -----------

                                          $ 1,563,054        $ 5,459,226
                                          ===========        ===========
</TABLE>



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

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

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

8. LOAN RECEIVABLE:

   In July 2000, the Company loaned United Food Technologies BV (UFT), $500,000
   to expand its network of Wendy's restaurants in Hungary. UFT owns equity
   interests in companies operating Wendy's franchises. The loan earns interest
   at 20% (10% during the first year) and is due in July 2002. During 2001 and
   2000, interest income related to the loan was $73,425 and $23,425,
   respectively.

                                      F-58
<PAGE>
EUROTEL L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
----------------------------------------------------------------------------

9.  EMBEDDED DERIVATIVE INSTRUMENTS:

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

10. INSTALLATION AND EQUIPMENT SALES REVENUE RECOGNITION:

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

11. INVESTMENT IN MTT:

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


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


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

                                      F-59
<PAGE>
EUROTEL L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

12.  DUE TO FOUNDERS:

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

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



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

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

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

     Other related party transactions are described in Note 16.

13.  CONVERTIBLE BONDS PAYABLE:

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

                                      F-60
<PAGE>


EUROTEL L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
----------------------------------------------------------------------------
14. LONG-TERM DEBT:

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

15. INCOME TAXES:

    UNITED STATES

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

    NETHERLANDS

    PenneCom is subject to 35% Dutch corporate tax. However, any benefits
    derived from "qualifying subsidiaries," which includes Pilicka, are exempt
    from Dutch tax. All proceeds derived from the arbitration relating to the
    sale of Pilicka fall within that exempt category. In conjunction with the
    above, all costs that are attributable to such qualifying subsidiaries are
    not deductible for Dutch tax purposes. Also, the loss that PenneCom has
    recorded on the transfer of Pilicka in partial satisfaction of its debt to
    its various creditors, will not be deductible. As a result, PenneCom has no
    taxable profit or loss for 2001 and 2000. Therefore, no Dutch taxes have
    been recorded related to PenneCom.

                                      F-61
<PAGE>
EUROTEL L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
----------------------------------------------------------------------------
15. INCOME TAXES, CONTINUED:

    POLAND

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

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


<TABLE>
<CAPTION>
                                                   December 31,         December 31,
                                                      2001                  2000
                                                   ------------         ------------
<S>                                                <C>                  <C>
    TAXABLE DIFFERENCES

    Accelerated amortization for license           $     77,808         $    211,887
    Future interest charges on license liability        524,257              590,043
    Unrealized foreign exchange differences             133,297              153,933
                                                   ------------         ------------
                                                        735,362              955,863

    DEDUCTIBLE DIFFERENCES

    Net operating losses                              3,609,924            4,095,875
    Net operating losses carry forwards               8,013,043            3,102,662
    Provisions                                          426,494              244,068
    Deferred revenue                                  1,409,450            1,813,571
    Other accruals                                    1,034,475              775,488
                                                   ------------         ------------
                                                     14,493,386           10,031,664

    TOTAL TEMPORARY DIFFERENCES, NET                 13,758,024            9,075,801
    Future enacted tax rates                                 28%                  28%
                                                   ------------         ------------
    DEFERRED TAX ASSET                                3,852,247            2,541,224
    Valuation allowance                              (3,852,247)          (2,541,224)
                                                   ------------         ------------
    NET DEFERRED TAX ASSET                                   $-                   $-
                                                   ============         ============

</TABLE>


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

                                      F-62
<PAGE>
EUROTEL L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
----------------------------------------------------------------------------

16.  RELATED PARTY TRANSACTIONS:

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

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

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

17.  TELECOMMUNICATION LICENSES:

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

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

                                      F-63




<PAGE>
EUROTEL L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
----------------------------------------------------------------------------

18.  CONTINGENCIES AND COMMITMENTS:

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

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

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

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

                                      F-64
<PAGE>
EUROTEL L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999




19.  ARBITRATION AWARD:

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

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

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

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

20.  FAIR VALUE OF FINANCIAL INSTRUMENTS:

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

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

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

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

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

                                      F-65