##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended June 30, 2005



or



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



For the transition period from
 to



Commission File Number: 000-20709



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D&E Communications, Inc.

(Exact name of registrant as specified in its charter)



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PENNSYLVANIA

(State or other jurisdiction of

incorporation or organization)



I.R.S. Employer Identification Number: 23-2837108



Brossman Business Complex

124 East Main Street

P. O. Box 458

Ephrata, Pennsylvania 17522

(Address of principal executive offices)



Registrants Telephone Number: (717) 733-4101



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Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No ̈



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable
date.



|                                        |  |                             
|--------------------------------------- |  | ----------------------------
|Class                                   |  | Outstanding at July 29, 2005
|Common Stock, par value $0.16 per share |  | 14,313,875 Shares           

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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Form 10-Q



TABLE OF CONTENTS



|         |  |                                                                                                                                             |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Item No. |  |                                                                                                                                             |  | Page
|         |  | PART I. FINANCIAL INFORMATION                                                                                                               |  |     
|         |  |                                                                                                                                            
|1.       |  | Unaudited Financial Statements                                                                                                              |  |     
|         |  |                                                                                                                                            
|         |  | Condensed Consolidated Statements of Operations  For the three months and six months ended June 30, 2005 and 2004                          |  | 1   
|         |  |                                                                                                                                            
|         |  | Condensed Consolidated Balance Sheets  June 30, 2005 and December 31, 2004                                                                 |  | 2   
|         |  |                                                                                                                                            
|         |  | Condensed Consolidated Statements of Cash Flows  For the six months ended June 30, 2005 and 2004                                           |  | 3   
|         |  |                                                                                                                                            
|         |  | Condensed Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss)  For the six months ended June 30, 2005 and 2004 |  | 4   
|         |  |                                                                                                                                            
|         |  | Notes to Consolidated Financial Statements                                                                                                  |  | 5   
|         |  |                                                                                                                                            
|2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                       |  | 16  
|         |  |                                                                                                                                            
|3.       |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                  |  | 48  
|         |  |                                                                                                                                            
|4.       |  | Controls and Procedures                                                                                                                     |  | 49  
|         |  |                                                                                                                                            
|         |  | PART II. OTHER INFORMATION                                                                                                                  |  |     
|         |  |                                                                                                                                            
|1.       |  | Legal Proceedings                                                                                                                           |  | 50  
|         |  |                                                                                                                                            
|2.       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                 |  | 50  
|         |  |                                                                                                                                            
|4.       |  | Submission of Matters to a Vote of Security Holders                                                                                         |  | 50  
|         |  |                                                                                                                                            
|5.       |  | Other Information                                                                                                                           |  | 51  
|         |  |                                                                                                                                            
|6.       |  | Exhibits                                                                                                                                    |  | 51  
|         |  |                                                                                                                                            
|         |  | SIGNATURES                                                                                                                                  |  | 52  



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##### Table of Contents

Form 10-Q Part I  Financial Information

Item 1. Financial Statements



D&E Communications, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except per-share amounts)

(Unaudited)



|                                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                                  |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                                                  |  | 2005                       |        |   | 2004                     |   |        | 2005 |  |   | 2004   |  
|OPERATING REVENUES                                                                |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Communication service revenues                                                    |  | $                          | 40,659 |   |                          | $ | 40,325 |      |  | $ | 80,296 |   |  | $ | 80,384  |  
|Communication products sold                                                       |  |                            | 2,701  |   |                          |   | 2,969  |      |  |   | 5,118  |   |  |   | 5,985   |  
|Other                                                                             |  |                            | 682    |   |                          |   | 841    |      |  |   | 1,467  |   |  |   | 1,531   |  
|                                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Total operating revenues                                                          |  |                            | 44,042 |   |                          |   | 44,135 |      |  |   | 86,881 |   |  |   | 87,900  |  
|                                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|OPERATING EXPENSES                                                                |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Communication service expenses (exclusive of depreciation and amortization below) |  |                            | 17,269 |   |                          |   | 16,267 |      |  |   | 33,542 |   |  |   | 31,851  |  
|Cost of communication products sold                                               |  |                            | 1,997  |   |                          |   | 2,406  |      |  |   | 3,789  |   |  |   | 4,825   |  
|Depreciation and amortization                                                     |  |                            | 9,731  |   |                          |   | 9,918  |      |  |   | 19,381 |   |  |   | 19,619  |  
|Marketing and customer services                                                   |  |                            | 3,745  |   |                          |   | 4,166  |      |  |   | 7,460  |   |  |   | 8,147   |  
|General and administrative services                                               |  |                            | 6,476  |   |                          |   | 6,187  |      |  |   | 13,268 |   |  |   | 13,253  |  
|                                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Total operating expenses                                                          |  |                            | 39,218 |   |                          |   | 38,944 |      |  |   | 77,440 |   |  |   | 77,695  |  
|                                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Operating income                                                                  |  |                            | 4,824  |   |                          |   | 5,191  |      |  |   | 9,441  |   |  |   | 10,205  |  
|                                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|OTHER INCOME (EXPENSE)                                                            |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Equity in net losses of affiliates                                                |  |                            | (54    | ) |                          |   | (318   | )    |  |   | (113   | ) |  |   | (850    | )
|Interest expense, net of interest capitalized                                     |  |                            | (3,436 | ) |                          |   | (3,396 | )    |  |   | (6,821 | ) |  |   | (7,491  | )
|Gain (loss) on investment                                                         |  |                            | (10    | ) |                          |   |       |      |  |   | 2,043  |   |  |   |        |  
|Loss on early extinguishment of debt                                              |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   | (4,841  | )
|Other, net                                                                        |  |                            | 748    |   |                          |   | 320    |      |  |   | 1,696  |   |  |   | 993     |  
|                                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Total other income (expense)                                                      |  |                            | (2,752 | ) |                          |   | (3,394 | )    |  |   | (3,195 | ) |  |   | (12,189 | )
|                                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Income (loss) before income taxes and dividends on utility preferred stock        |  |                            | 2,072  |   |                          |   | 1,797  |      |  |   | 6,246  |   |  |   | (1,984  | )
|                                                                                  |  |                            |        |  
|INCOME TAXES AND DIVIDENDS ON UTILITY PREFERRED STOCK                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Income taxes (benefit)                                                            |  |                            | 688    |   |                          |   | 547    |      |  |   | 1,958  |   |  |   | (994    | )
|Dividends on utility preferred stock                                              |  |                            | 17     |   |                          |   | 17     |      |  |   | 33     |   |  |   | 33      |  
|                                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Total income taxes and dividends on utility preferred stock                       |  |                            | 705    |   |                          |   | 564    |      |  |   | 1,991  |   |  |   | (961    | )
|                                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|NET INCOME (LOSS)                                                                 |  | $                          | 1,367  |   |                          | $ | 1,233  |      |  | $ | 4,255  |   |  | $ | (1,023  | )
|                                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Weighted average common shares outstanding (basic)                                |  |                            | 14,296 |   |                          |   | 15,564 |      |  |   | 14,285 |   |  |   | 15,557  |  
|Weighted average common shares outstanding (diluted)                              |  |                            | 14,298 |   |                          |   | 15,631 |      |  |   | 14,303 |   |  |   | 15,557  |  
|                                                                                  |  |                            |        |  
|BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE                                |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Net income (loss) per common share                                                |  | $                          | 0.10   |   |                          | $ | 0.08   |      |  | $ | 0.30   |   |  | $ | (0.07   | )
|                                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Dividends per common share                                                        |  | $                          | 0.13   |   |                          | $ | 0.13   |      |  | $ | 0.25   |   |  | $ | 0.25    |  
|                                                                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  



See notes to condensed
consolidated financial statements.



1



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands)

(Unaudited)



|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                             |  | June 30, 2005 |         |   | December 31, 2004 |  
|ASSETS                                                                                                                                                                       |  |               |         |   |                   |   |         |  
|CURRENT ASSETS                                                                                                                                                               |  |               |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                                    |  | $             | 2,835   |   |                   | $ | 8,517   |  
|Accounts receivable, net of reserves of $742 and $1,024                                                                                                                      |  |               | 16,354  |   |                   |   | 16,570  |  
|Inventories, lower of cost or market, at average cost                                                                                                                        |  |               | 3,547   |   |                   |   | 3,523   |  
|Prepaid expenses                                                                                                                                                             |  |               | 9,013   |   |                   |   | 8,466   |  
|Other                                                                                                                                                                        |  |               | 3,231   |   |                   |   | 2,465   |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|TOTAL CURRENT ASSETS                                                                                                                                                         |  |               | 34,980  |   |                   |   | 39,541  |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|INVESTMENTS                                                                                                                                                                  |  |               |         |   |                   |   |         |  
|Investments in and advances to affiliated companies                                                                                                                          |  |               | 54      |   |                   |   | 52      |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|PROPERTY, PLANT AND EQUIPMENT                                                                                                                                                |  |               |         |   |                   |   |         |  
|In service                                                                                                                                                                   |  |               | 343,917 |   |                   |   | 335,883 |  
|Under construction                                                                                                                                                           |  |               | 16,963  |   |                   |   | 8,768   |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|                                                                                                                                                                             |  |               | 360,880 |   |                   |   | 344,651 |  
|Less accumulated depreciation                                                                                                                                                |  |               | 177,505 |   |                   |   | 162,078 |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|                                                                                                                                                                             |  |               | 183,375 |   |                   |   | 182,573 |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|OTHER ASSETS                                                                                                                                                                 |  |               |         |   |                   |   |         |  
|Goodwill                                                                                                                                                                     |  |               | 149,017 |   |                   |   | 149,032 |  
|Intangible assets, net of accumulated amortization                                                                                                                           |  |               | 164,345 |   |                   |   | 167,396 |  
|Other                                                                                                                                                                        |  |               | 7,712   |   |                   |   | 8,191   |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|                                                                                                                                                                             |  |               | 321,074 |   |                   |   | 324,619 |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|TOTAL ASSETS                                                                                                                                                                 |  | $             | 539,483 |   |                   | $ | 546,785 |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                         |  |               |         |   |                   |   |         |  
|CURRENT LIABILITIES                                                                                                                                                          |  |               |         |   |                   |   |         |  
|Long-term debt maturing within one year                                                                                                                                      |  | $             | 10,000  |   |                   | $ | 10,000  |  
|Accounts payable and accrued liabilities                                                                                                                                     |  |               | 22,088  |   |                   |   | 18,701  |  
|Accrued taxes                                                                                                                                                                |  |               | 277     |   |                   |   | 1,819   |  
|Accrued interest and dividends                                                                                                                                               |  |               | 1,695   |   |                   |   | 1,683   |  
|Advance billings, customer deposits and other                                                                                                                                |  |               | 9,967   |   |                   |   | 11,585  |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|TOTAL CURRENT LIABILITIES                                                                                                                                                    |  |               | 44,027  |   |                   |   | 43,788  |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|LONG-TERM DEBT                                                                                                                                                               |  |               | 210,500 |   |                   |   | 218,500 |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|OTHER LIABILITIES                                                                                                                                                            |  |               |         |   |                   |   |         |  
|Deferred income taxes                                                                                                                                                        |  |               | 85,319  |   |                   |   | 86,402  |  
|Other                                                                                                                                                                        |  |               | 20,687  |   |                   |   | 20,530  |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|                                                                                                                                                                             |  |               | 106,006 |   |                   |   | 106,932 |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|PREFERRED STOCK OF UTILITY SUBSIDIARY, Series A 41/2%, par value $100, cumulative, callable at par at the option of the Company, authorized 20 shares, outstanding 14 shares |  |               | 1,446   |   |                   |   | 1,446   |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|COMMITMENTS AND CONTINGENCIES SHAREHOLDERS EQUITY                                                                                                                           |  |               |         |   |                   |   |         |  
|Common stock, par value $0.16, authorized shares 100,000                                                                                                                     |  |               | 2,549   |   |                   |   | 2,542   |  
|Outstanding shares: 14,312 at June 30, 2005 and 14,268 at December 31, 2004                                                                                                  |  |               |         |   |                   |   |         |  
|Additional paid-in capital                                                                                                                                                   |  |               | 160,644 |   |                   |   | 160,255 |  
|Accumulated other comprehensive income (loss)                                                                                                                                |  |               | (6,274  | ) |                   |   | (6,574  | )
|Retained earnings                                                                                                                                                            |  |               | 39,202  |   |                   |   | 38,513  |  
|Treasury stock at cost, 1,640 shares at June 30, 2005 and December 31, 2004                                                                                                  |  |               | (18,617 | ) |                   |   | (18,617 | )
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|                                                                                                                                                                             |  |               | 177,504 |   |                   |   | 176,119 |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                   |  | $             | 539,483 |   |                   | $ | 546,785 |  
|                                                                                                                                                                             |  |               |         |   |                   |   |         |  



See notes to condensed
consolidated financial statements.



2



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)



|                                                                 |  |                           |         |   |      |   |          |  
|---------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | -------- | -
|                                                                 |  | Six Months Ended June 30, |        
|                                                                 |  | 2005                      |         |   | 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                             |  | $                         | 17,376  |   |      | $ | 23,870   |  
|                                                                 |  |                           |         |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                             |  |                           |         |   |      |   |          |  
|Capital expenditures, net of proceeds from sales                 |  |                           | (15,424 | ) |      |   | (9,802   | )
|Collection of note receivable                                    |  |                           | 750     |   |      |   |         |  
|Proceeds from sale of investment                                 |  |                           | 2,900   |   |      |   |         |  
|Increase in investments and advances to affiliates               |  |                           | (115    | ) |      |   | (384     | )
|Decrease in investments and repayments from affiliates           |  |                           |        |   |      |   | 134      |  
|                                                                 |  |                           |         |   |      |   |          |  
|Net Cash Used In Investing Activities                            |  |                           | (11,889 | ) |      |   | (10,052  | )
|                                                                 |  |                           |         |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                             |  |                           |         |   |      |   |          |  
|Dividends on common stock                                        |  |                           | (3,408  | ) |      |   | (3,727   | )
|Payments on long-term debt                                       |  |                           | (8,000  | ) |      |   | (211,978 | )
|Proceeds from long-term debt financing                           |  |                           |        |   |      |   | 200,000  |  
|Payment of debt issuance costs                                   |  |                           |        |   |      |   | (1,971   | )
|Proceeds from issuance of common stock                           |  |                           | 239     |   |      |   | 192      |  
|                                                                 |  |                           |         |   |      |   |          |  
|Net Cash Used In Financing Activities from Continuing Operations |  |                           | (11,169 | ) |      |   | (17,484  | )
|                                                                 |  |                           |         |   |      |   |          |  
|DECREASE IN CASH AND CASH EQUIVALENTS                            |  |                           | (5,682  | ) |      |   | (3,666   | )
|                                                                 |  |                          
|CASH AND CASH EQUIVALENTS                                        |  |                           |         |   |      |   |          |  
|BEGINNING OF PERIOD                                              |  |                           | 8,517   |   |      |   | 12,446   |  
|                                                                 |  |                           |         |   |      |   |          |  
|END OF PERIOD                                                    |  | $                         | 2,835   |   |      | $ | 8,780    |  
|                                                                 |  |                           |         |   |      |   |          |  



See notes to condensed
consolidated financial statements.



3



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders Equity
and Comprehensive Income (Loss)

For the six months ended June 30, 2005 and 2004

(in thousands)

(Unaudited)



|                                                                                                                                                                    |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | - |  | ------ | ------- | - | ------ | ------ | - | ------ | - | ------- | -
|                                                                                                                                                                    |  | 2005   |   |  | 2004   |        
|                                                                                                                                                                    |  | Shares |   |  | Amount |         |   | Shares |        |   | Amount |  
|COMMON STOCK                                                                                                                                                        |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at beginning of year                                                                                                                                        |  | 15,908 |   |  | $      | 2,542   |   |        | 15,854 |   |        | $ | 2,533   |  
|Common stock issued for Employee Stock Purchase, Long-Term Incentive, Dividend Reinvestment and Stock Compensation Plan and Policy for
Non-Employee Directors Plans |  | 44     |   |  |        | 7       |   |        | 26     |   |        |   | 4       |  
|                                                                                                                                                                    |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at June 30                                                                                                                                                  |  | 15,952 |   |  |        | 2,549   |   |        | 15,880 |   |        |   | 2,537   |  
|                                                                                                                                                                    |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|ADDITIONAL PAID-IN CAPITAL                                                                                                                                          |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at beginning of year                                                                                                                                        |  |        |   |  |        | 160,255 |   |        |        |   |        |   | 159,515 |  
|Common stock issued for Employee Stock Purchase, Long-Term Incentive, Dividend Reinvestment and Stock Compensation Plan and Policy for
Non-Employee Directors Plans |  |        |   |  |        | 389     |   |        |        |   |        |   | 344     |  
|                                                                                                                                                                    |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at June 30                                                                                                                                                  |  |        |   |  |        | 160,644 |   |        |        |   |        |   | 159,859 |  
|                                                                                                                                                                    |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)                                                                                                                       |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at beginning of year                                                                                                                                        |  |        |   |  |        | (6,574  | ) |        |        |   |        |   | (4,865  | )
|Unrealized gain on derivative financial instruments, net of tax                                                                                                     |  |        |   |  |        | 300     |   |        |        |   |        |   | 820     |  
|                                                                                                                                                                    |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at June 30                                                                                                                                                  |  |        |   |  |        | (6,274  | ) |        |        |   |        |   | (4,045  | )
|                                                                                                                                                                    |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|RETAINED EARNINGS                                                                                                                                                   |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at beginning of year                                                                                                                                        |  |        |   |  |        | 38,513  |   |        |        |   |        |   | 48,693  |  
|Net income (loss)                                                                                                                                                   |  |        |   |  |        | 4,255   |   |        |        |   |        |   | (1,023  | )
|Dividends on common stock: $0.25 per share for each period                                                                                                          |  |        |   |  |        | (3,566  | ) |        |        |   |        |   | (3,884  | )
|                                                                                                                                                                    |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at June 30                                                                                                                                                  |  |        |   |  |        | 39,202  |   |        |        |   |        |   | 43,786  |  
|                                                                                                                                                                    |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|TREASURY STOCK                                                                                                                                                      |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at beginning of year                                                                                                                                        |  | (1,640 | ) |  |        | (18,617 | ) |        | (307   | ) |        |   | (5,282  | )
|Treasury stock acquired                                                                                                                                             |  |       |   |  |        |        |   |        |       |   |        |   |        |  
|                                                                                                                                                                    |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at June 30                                                                                                                                                  |  | (1,640 | ) |  |        | (18,617 | ) |        | (307   | ) |        |   | (5,282  | )
|                                                                                                                                                                    |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                          |  | 14,312 |   |  | $      | 177,504 |   |        | 15,573 |   |        | $ | 196,855 |  
|                                                                                                                                                                    |  |        |   |  |        |         |   |        |        |   |        |   |         |  



|                                                                                                            |  |                             |       |                           |      |   |       |  |      |       |  |   |        |  
|----------------------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | ------------------------- | ---- | - | ----- |  | ---- | ----- |  | - | ------ | -
|                                                                                                            |  | Three months ended June 30, |       | Six months ended June 30, |     
|                                                                                                            |  | 2005                        |       |                           | 2004 |   | 2005  |  | 2004 |      
|COMPREHENSIVE INCOME (LOSS)                                                                                 |  |                             |       |                           |      |   |       |  |      |       |  |   |        |  
|Net income (loss)                                                                                           |  | $                           | 1,367 |                           |      | $ | 1,233 |  | $    | 4,255 |  | $ | (1,023 | )
|Unrealized gain (loss) on interest rate swap agreements, net of income taxes of ($157), $744, $206 and $560 |  |                             | (233  | )                         |      |   | 1,089 |  |      | 300   |  |   | 820    |  
|                                                                                                            |  |                             |       |                           |      |   |       |  |      |       |  |   |        |  
|Total comprehensive income                                                                                  |  | $                           | 1,134 |                           |      | $ | 2,322 |  | $    | 4,555 |  | $ | (203   | )
|                                                                                                            |  |                             |       |                           |      |   |       |  |      |       |  |   |        |  



See notes to condensed
consolidated financial statements.



4



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per-share amounts)

(Unaudited)



1.    Basis of Presentation



The accompanying condensed consolidated financial statements include the
accounts of D&E Communications, Inc. and its wholly-owned subsidiaries. D&E Communications, Inc., including its subsidiary companies, is defined and referred to herein as D&E or the Company.



The accompanying financial statements are unaudited and have been prepared
pursuant to generally accepted accounting principles and the rules and regulations of the United States Securities and Exchange Commission (SEC). In the opinion of management, the financial statements include all adjustments (consisting
of only normal recurring adjustments) necessary to present fairly the Companys results of operations, financial position and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules and regulations.



The use of generally accepted accounting principles 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 amount of revenues and expenses during the reporting period. Actual results could differ from
those estimates. D&E believes that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read in conjunction with D&Es financial statements and notes thereto included
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004. Operating results for the three and six month periods ended June 30, 2005 are not necessarily indicative of the results for the year ended December 31, 2005.



2.    Stock Compensation



The Company accounts for stock compensation under the intrinsic value method
of APB Opinion 25, Accounting for Stock Issued to Employees and related interpretations. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.



|                                                                                                                     |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ------ | -
|                                                                                                                     |  | Three months ended June 30, |       |   | Six months ended June 30, |  
|                                                                                                                     |  | 2005                        |       |   | 2004                      |   |       | 2005 |  |   | 2004  |  
|Net income (loss), as reported                                                                                       |  | $                           | 1,367 |   |                           | $ | 1,233 |      |  | $ | 4,255 |   |  | $ | (1,023 | )
|Add: stock-based employee compensation included in reported net income (loss), net of related tax                    |  |                             | 25    |   |                           |   |      |      |  |   | 54    |   |  |   |       |  
|Deduct: total stock-based employee compensation expense determined under fair value-based method, net of related tax |  |                             | (35   | ) |                           |   | (12   | )    |  |   | (93   | ) |  |   | (25    | )
|                                                                                                                     |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |        |  
|Pro forma net income (loss)                                                                                          |  | $                           | 1,357 |   |                           | $ | 1,221 |      |  | $ | 4,216 |   |  | $ | (1,048 | )
|                                                                                                                     |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |        |  
|Basic income (loss) per share:                                                                                       |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |        |  
|As reported                                                                                                          |  | $                           | 0.10  |   |                           | $ | 0.08  |      |  | $ | 0.30  |   |  | $ | (0.07  | )
|Pro forma                                                                                                            |  | $                           | 0.09  |   |                           | $ | 0.08  |      |  | $ | 0.30  |   |  | $ | (0.07  | )
|Diluted income (loss) per share:                                                                                     |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |        |  
|As reported                                                                                                          |  | $                           | 0.10  |   |                           | $ | 0.08  |      |  | $ | 0.30  |   |  | $ | (0.07  | )
|Pro forma                                                                                                            |  | $                           | 0.09  |   |                           | $ | 0.08  |      |  | $ | 0.29  |   |  | $ | (0.07  | )



5



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per-share amounts)

(Unaudited)



In 2002, the fair value of options granted and options converted in connection with the Companys acquisition of Conestoga Enterprises, Inc. was
$7.20 per share. In March 2005, 10,000 fully vested stock options were issued to the Companys new Chief Executive Officer, hired on March 16, 2005. The stock options have an exercise price of $9.92 per share, the market price at the date of
the grant, and a fair value of $3.13 per share. Employee Stock Purchase Plan purchases were made each month at a 10% discount from market price. The fair value of stock options and share purchases is estimated using the Black-Scholes option price
model with the following assumptions.



|                        |  |                |  |                    
|----------------------- |  | -------------- |  | -------------------
|                        |  | Option Plans   |  | Stock Purchase Plan
|Dividend yield          |  | 2.55 - 5.05%   |  | 4.28%              
|Expected life           |  | 5 years        |  | 0.16 years         
|Expected volatility     |  | 50.06 - 60.30% |  | 10.00%             
|Risk Free interest rate |  | 4.18 - 4.47%   |  | 1.00%              



There were 47,400
performance-restricted shares of common stock awarded in the six months ended June 30, 2005. A performance-restricted share entitles a participant to receive a target number of shares of common stock after a minimum vesting period based upon
the Companys attainment of a predetermined goal during a specified performance period. If the minimum 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 is considered equal to one share of common stock for dividend (but not voting) purposes, and the participant is
entitled to dividend equivalents, which are reinvested in additional performance-restricted shares. At the end of the vesting period, any performance-restricted shares that have been earned will be converted to shares of common stock through the
issuance of shares. We accrue compensation cost related to these performance-restricted shares based upon the probability that the conditions to receive these shares are met. During the six months ended June 30, 2005, there were 2,297 fully-vested
shares of common stock issued to employees of the Company. The expense related to the performance-restricted and fully-vested shares was $91 for the six months ended June 30, 2005. No shares were awarded in the first six months of 2004.



3.    Recent Accounting Pronouncements



In May 2005, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections (SFAS 154), which changes the requirements for the accounting and reporting of a change in accounting
principle. This Statement requires retrospective application to reflect the period-specific effects of applying a new accounting principle, unless it is impracticable to determine. However, when a new accounting pronouncement is issued, the specific
transition provisions of that guidance are applied. SFAS 154 is effective for fiscal years beginning after December 15, 2005 and is not expected to have a significant effect on the Companys financial position, results of operations or cash
flows.



6



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per-share amounts)

(Unaudited)



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



In December 2004, the FASB issued SFAS No. 123 (revised
2004), Share-Based Payment (SFAS 123R). SFAS 123R revises FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
and its related implementation guidance. This standard requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees (including stock options and discount stock purchase
plans). SFAS 123R requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The compensation cost of the award is recognized over the period
during which an employee is required to provide service, i.e. the requisite service period (usually the vesting period). In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107). SAB 107
provides further guidance based on the SEC staff views regarding the implementation of SFAS 123R.



On April 21, 2005, the SEC delayed the effective date of SFAS 123R. D&E expects to adopt SFAS 123R in January 2006 and will apply the modified
prospective transition method. Under this method, a company records compensation expense for all new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation expense is recorded for the
unvested portion of previously granted awards that remain outstanding at the date of adoption. The cost of the unvested portion of the award is recognized as the requisite service is rendered on or after the required effective date. The adoption of
SFAS 123R is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.



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



7



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per-share amounts)

(Unaudited)



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



4.    Earnings per
Share



Basic earnings per share amounts are based
on net income or loss divided by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share amounts are based on net income or loss divided by the weighted average number of shares of common stock
outstanding during the period after giving effect to dilutive common stock equivalents from assumed conversions of employee stock options. Options to purchase 96,916, 59,500, 86,312, and 256,915 shares for the three and six months ended June 30,
2005 and 2004, respectively, were not included in the computation of earnings per share assuming dilution because their effect on earnings per share would have been antidilutive. The following table shows how earnings per share were computed for the
periods presented:



|                                                                   |  |                            |        |                          |   |        |  |      |        |  |   |        |  
|------------------------------------------------------------------ |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------ | -
|                                                                   |  | Three months endedJune 30, |        | Six months endedJune 30, |  
|                                                                   |  | 2005                       |        | 2004                     |   | 2005   |  | 2004 |       
|Net income (loss)                                                  |  | $                          | 1,367  |                          | $ | 1,233  |  | $    | 4,255  |  | $ | (1,023 | )
|                                                                   |  |                            |        |                          |   |        |  |      |        |  |   |        |  
|Basic earnings per share:                                          |  |                            |        |                          |   |        |  |      |        |  |   |        |  
|Weighted average shares outstanding (thousands)                    |  |                            | 14,296 |                          |   | 15,564 |  |      | 14,285 |  |   | 15,557 |  
|                                                                   |  |                            |        |                          |   |        |  |      |        |  |   |        |  
|Net income (loss) per common share                                 |  | $                          | 0.10   |                          | $ | 0.08   |  | $    | 0.30   |  | $ | (0.07  | )
|                                                                   |  |                            |        |                          |   |        |  |      |        |  |   |        |  
|Diluted earnings per share:                                        |  |                            |        |                          |   |        |  |      |        |  |   |        |  
|Weighted average shares outstanding (thousands)                    |  |                            | 14,296 |                          |   | 15,564 |  |      | 14,285 |  |   | 15,557 |  
|Incremental shares from assumed stock option exercises (thousands) |  |                            | 2      |                          |   | 67     |  |      | 18     |  |   |       |  
|                                                                   |  |                            |        |                          |   |        |  |      |        |  |   |        |  
|Adjusted weighted average shares outstanding (thousands)           |  |                            | 14,298 |                          |   | 15,631 |  |      | 14,303 |  |   | 15,557 |  
|                                                                   |  |                            |        |                          |   |        |  |      |        |  |   |        |  
|Net income (loss) per common share                                 |  | $                          | 0.10   |                          | $ | 0.08   |  | $    | 0.30   |  | $ | (0.07  | )
|                                                                   |  |                            |        |                          |   |        |  |      |        |  |   |        |  



5.    Investments in Affiliated Companies



D&E owns a one-third investment in EuroTel, a domestic corporate joint venture. EuroTel holds a 100% investment in PenneCom, B.V. (PenneCom), an international telecommunications holding company, and also holds a
27.85% investment in Pilicka, a telecommunications company located in Poland. D&E also owns a 28.88% direct investment in Pilicka. D&E accounts for both its investment in EuroTel and its investment in Pilicka using the equity method of
accounting.



8



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per-share amounts)

(Unaudited)



Pilicka recognized an asset impairment late in 2004 requiring D&E to recognize a $1,068 loss in the fourth quarter of 2004 for its equity share of the
impairment. Since D&E and EuroTel have no legal obligation nor intention to provide future funding to Pilicka, both have written down their investment in Pilicka to zero and discontinued recognizing their equity share of Pilickas losses.
Beginning with the three months ended June 30, 2005, Pilicka generated a net income. D&E will recognize its share of such income only after it exceeds its share of the unrecognized Pilicka losses. EuroTel no longer records any value to its
investment in Pilicka and therefore the value of D&Es investment in EuroTel was written down as an other-than-temporary loss on investment of $1,057 in the fourth quarter of 2004.



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



The summarized results of the operations of EuroTel were as follows:



|                    |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|------------------- |  | --------------------------- | ---- | - | ------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                    |  | Three months ended June 30, |      |   | Six months ended June 30, |  
|                    |  | 2005                        |      |   | 2004                      |   |      | 2005 |  |   | 2004 |  
|Net sales           |  | $                           |     |   |                           | $ |     |      |  | $ |     |   |  | $ |     |  
|Net loss            |  |                             | (163 | ) |                           |   | (189 | )    |  |   | (340 | ) |  |   | (942 | )
|D&Es share of loss |  |                             | (54  | ) |                           |   | (63  | )    |  |   | (113 | ) |  |   | (314 | )



The summarized results
of operations of Pilicka were as follows:



|                        |  |                             |       |      |                          |       |      |  |      |       |  |   |        |  
|----------------------- |  | --------------------------- | ----- | ---- | ------------------------ | ----- | ---- |  | ---- | ----- |  | - | ------ | -
|                        |  | Three months ended June 30, |       |      | Six months endedJune 30, |      
|                        |  | 2005                        |       | 2004 |                          |       | 2005 |  | 2004 |      
|Net sales               |  | $                           | 3,029 |      | $                        | 2,778 |      |  | $    | 6,264 |  | $ | 5,393  |  
|Net income (loss)       |  |                             | 302   |      |                          | (478  | )    |  |      | 301   |  |   | (1,049 | )
|D&Es share of loss     |  |                             |      |      |                          | (138  | )    |  |      |      |  |   | (303   | )
|Investment amortization |  |                             |      |      |                          | (117  | )    |  |      |      |  |   | (233   | )
|Total loss              |  |                             |      |      |                          | (255  | )    |  |      |      |  |   | (536   | )



9



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per-share amounts)

(Unaudited)



6.    Intangible Assets



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



|                              |  |               |         |   |                   |   |         |  
|----------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                              |  | June 30, 2005 |         |   | December 31, 2004 |  
|Indefinite-lived intangibles: |  |               |         |   |                   |   |         |  
|Franchises                    |  | $             | 104,800 |   |                   | $ | 104,800 |  
|FCC licenses                  |  |               | 828     |   |                   |   | 828     |  
|Finite-lived intangibles:     |  |               |         |   |                   |   |         |  
|Customer relationships:       |  |               |         |   |                   |   |         |  
|Gross carrying amount         |  |               | 75,700  |   |                   |   | 75,700  |  
|Accumulated amortization      |  |               | (16,999 | ) |                   |   | (14,243 | )
|Trademarks and trade names:   |  |               |         |   |                   |   |         |  
|Gross carrying amount         |  |               | 1,200   |   |                   |   | 1,200   |  
|Accumulated amortization      |  |               | (1,200  | ) |                   |   | (1,033  | )
|Non-compete agreements:       |  |               |         |   |                   |   |         |  
|Gross carrying amount         |  |               | 1,424   |   |                   |   | 1,424   |  
|Accumulated amortization      |  |               | (1,408  | ) |                   |   | (1,280  | )
|                              |  |               |         |   |                   |   |         |  
|Net intangible assets         |  | $             | 164,345 |   |                   | $ | 167,396 |  
|                              |  |               |         |   |                   |   |         |  



The Company has
concluded that there are no legal, regulatory, contractual, competitive, economic, or other factors that currently limit the useful life of our franchise intangible assets. These intangible assets continue to generate adequate cash flow for the RLEC
segment, and the cash flows are expected to continue. Aggregate amortization expense related to the finite-lived intangible assets recorded for the three and six months ended June 30, 2005 and 2004 was $1,501, $1,549, $3,051 and $3,099 respectively.



The following table shows estimated amortization expense for
each of the five years ended December 31:



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



7.    Sale of
Investment



On February 28, 2005, D&E sold its
interest in PenTeleData Limited Partnership I for $2,900 resulting in a gain of $2,043 before taxes ($1,348 net of taxes).



10



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per-share amounts)

(Unaudited)



8.    Long-Term Debt



The following table sets forth the total long-term debt outstanding:



|                                         |  |                       |   |  |          |  |               |        
|---------------------------------------- |  | --------------------- | - |  | -------- |  | ------------- | -------
|                                         |  | Average Interest Rate |   |  | Maturity |  | June 30, 2005
|Senior Secured Revolving Credit Facility |  | 5.90                  | % |  | 2011     |  | $             | 7,000  
|Senior Secured Term Loan A               |  | 6.06                  | % |  | 2011     |  |               | 34,061 
|Senior Secured Term Loan B               |  | 5.52                  | % |  | 2011     |  |               | 146,189
|Secured Term Loan                        |  | 9.34                  | % |  | 2014     |  |               | 19,000 
|Secured Term Loan                        |  | 9.36                  | % |  | 2014     |  |               | 14,250 
|                                         |  |                       |   |  |          |  |               |        
|                                         |  |                       |   |  |          |  |               | 220,500
|Less current maturities                  |  |                       |   |  |          |  |               | 10,000 
|                                         |  |                       |   |  |          |  |               |        
|Total long-term debt                     |  |                       |   |  |          |  | $             | 210,500
|                                         |  |                       |   |  |          |  |               |        



9.    Derivative Financial Instruments



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



As of June 30, 2005 and December 31, 2004, the Company had interest rate swap agreements with total notional amounts of $110,000 and $85,000,
respectively, with maturity dates ranging from December 2005 to August 2009. The Company recognizes all derivatives on the balance sheet at fair value. Changes in the fair value for the effective portion of the gain or loss on a derivative that is
designated as, and meets all the required criteria for, a cash flow hedge are recorded in Accumulated Other Comprehensive Income (Loss) and reclassified into earnings as the underlying hedged items affect earnings. Amounts reclassified into earnings
related to interest rate swap agreements are included in Interest Expense. The ineffective portion of the gain or loss on a derivative is recognized in earnings within Other Income (Expense). The fair value of the derivatives was recorded as a
non-current other asset of $216 at June 30, 2005 and as an other long-term liability of $290 at December 31, 2004, resulting in unrealized income of $506 in the six months ended June 30, 2005. An unrealized gain of $216 ($128 net of tax) and an
unrealized net loss of $290 ($172 net of tax) related to these interest rate swaps were included in Accumulated Other Comprehensive Income (Loss) at June 30, 2005 and December 31, 2004, respectively. No hedge ineffectiveness has been recorded for
existing derivative instruments based on calculations in accordance with SFAS No. 133, Accounting for Derivative Investments and Hedging Activities, as amended.



11



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per-share amounts)

(Unaudited)



10.    Commitments and Contingencies



On May 24, 2002, pursuant to the merger agreement with Conestoga, D&E assumed Conestogas obligations under a Build-to-Suit agreement
(BTS) with Mountain Union Telecom LLC (Mountain Union). The obligations related to the construction of 20 wireless tower sites for Conestogas wireless subsidiary, Conestoga Wireless Company (CWC). In
November 2002, D&E entered into an asset purchase agreement (the Asset Purchase Agreement) with Keystone Wireless LLC (Keystone Wireless) for the sale of CWC. Although D&E sold the assets of this business, its
obligations under the BTS were not assumed by Keystone Wireless. Under the BTS, D&E is obligated to work with Mountain Union to find and develop 20 wireless tower sites and, in the event its obligations under the BTS are not timely fulfilled, is
obligated to pay a penalty to Mountain Union for nonperformance. Under the Asset Purchase Agreement, Keystone is obligated to enter into long-term operating leases for antenna space on up to 15 of the towers erected under the BTS, including the nine
transferred to Keystone Wireless at the closing of the sale transaction. In 2003, D&E paid Mountain Union $700 for its BTS obligation due for seven wireless tower sites that definitely would not be constructed. In July 2004, D&E paid
Mountain Union $200 for an additional two tower sites that would not be constructed. Under the terms of the Asset Purchase Agreement, Keystone is obligated to reimburse D&E for one-half of the penalties paid under the BTS, not to exceed $125.
Because the underlying assets of CWC were sold under the Asset Purchase Agreement, D&E has considered any remaining obligations and potential penalties under the BTS a contingent liability. As of June 30, 2005, D&E has recorded $200 for its
remaining commitment under the BTS as the potential cost or penalty for the two remaining sites. Construction has begun at both sites and it is estimated that they will be completed during the fourth quarter of 2005. Keystone Wireless has committed
to lease space on both sites. Under the Asset Purchase Agreement, D&E is obligated to pay the cost of equipping one tower, using some of the equipment transferred to Keystone Wireless in the sale, and one-half of the cost, up to $62.5 for the
second.



As part of the Companys acquisition of
Conestoga, D&E assumed a guarantee agreement with Mountain Union for the lease obligations on the wireless tower sites of Conestogas wireless subsidiary. When D&E entered into the Asset Purchase Agreement with Keystone Wireless,
whereby Keystone Wireless was assigned the responsibility for the leases, Mountain Union declined to release D&E from its guarantee. In the event of a default by Keystone Wireless, D&E continues to guarantee the wireless tower site lease
payments, which cover a 10-year period beginning on the commencement date of the lease of each tower. As such, the guarantee is a continuing guarantee provided on an individual tower site basis. The lease payments start at $1.5 per site per month,
with provision for an increase of 4% per year. The maximum potential amount of undiscounted future payments that D&E could be required to make under the guarantee as of June 30, 2005 is $12,311. The majority of these tower site leases and the
Companys guarantee will expire between 2011 and 2013. As of June 30, 2005, D&E has recorded a liability for the lease guarantees of $3,200. In the event that D&E is required to pay in excess of $100 to Mountain Union under
D&Es guarantee of the wireless tower site lease payments, then at such time, a default would occur on Keystone Wireless $10,000 note payable to D&E, received in connection with the sale of the assets of CWC. Upon such default,
the entire remaining balance of the $10,000 note would be immediately due and payable, and D&E could exercise its rights and remedies as the holder of a second lien security interest in all of the assets of Keystone Wireless. D&E will
recognize release from risk for the guarantee upon expiration or settlement of the guarantee.



12



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per-share amounts)

(Unaudited)



11.    Employee Benefit Plans



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



In January 2005, the Centers for Medicare and Medicaid Services issued
guidelines to define actuarial equivalence under the regulations. Based on these guidelines, the Company determined that the prescription drug benefits provided under one of its postretirement benefit plans is actuarially equivalent to the benefits
provided under Medicare Part D. The Company accounted for the federal subsidy attributable to past services as an actuarial gain, which reduced the accumulated postretirement benefit obligation. This actuarial gain is then amortized in future
periods in accordance with SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. The federal subsidy attributable to employee service rendered in current and future periods will reduce future net
periodic postretirement benefit cost as those employees provide service. The Company estimates the federal subsidy will reduce the accumulated postretirement benefit obligation by approximately $419 and will reduce the annual postretirement benefit
cost by approximately $53. This reduction was first reflected in the Companys financial statements in the first quarter of 2005.



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



|                                         |  |                             |      |   |                         |   |      |      |  |   |      |   |  |   |     |  
|---------------------------------------- |  | --------------------------- | ---- | - | ----------------------- | - | ---- | ---- |  | - | ---- | - |  | - | --- | -
|                                         |  | Pension Benefits            |      |   | Postretirement Benefits |  
|                                         |  | Three months ended June 30, |     
|                                         |  | 2005                        |      |   | 2004                    |   |      | 2005 |  |   | 2004 |  
|Components of Net Periodic Benefit Cost: |  |                             |      |   |                         |   |      |      |  |   |      |   |  |   |     |  
|Service cost                             |  | $                           | 624  |   |                         | $ | 587  |      |  | $ | 10   |   |  | $ | 41  |  
|Interest cost                            |  |                             | 884  |   |                         |   | 901  |      |  |   | 49   |   |  |   | 82  |  
|Expected return on plan assets           |  |                             | (847 | ) |                         |   | (868 | )    |  |   | (10  | ) |  |   | (13 | )
|Amortization of initial net obligation   |  |                             |     |   |                         |   |     |      |  |   | 5    |   |  |   | 6   |  
|Amortization of prior service cost       |  |                             | (17  | ) |                         |   | (18  | )    |  |   | (25  | ) |  |   |    |  
|Amortization of net (gain) loss          |  |                             | 344  |   |                         |   | 274  |      |  |   | 21   |   |  |   | 21  |  
|                                         |  |                             |      |   |                         |   |      |      |  |   |      |   |  |   |     |  
|Net periodic benefit cost                |  | $                           | 988  |   |                         | $ | 876  |      |  | $ | 50   |   |  | $ | 137 |  
|                                         |  |                             |      |   |                         |   |      |      |  |   |      |   |  |   |     |  



13



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per-share amounts)

(Unaudited)



|                                         |  |                           |        |   |                         |   |        |      |  |   |      |   |  |   |     |  
|---------------------------------------- |  | ------------------------- | ------ | - | ----------------------- | - | ------ | ---- |  | - | ---- | - |  | - | --- | -
|                                         |  | Pension Benefits          |        |   | Postretirement Benefits |  
|                                         |  | Six months ended June 30, |       
|                                         |  | 2005                      |        |   | 2004                    |   |        | 2005 |  |   | 2004 |  
|Components of Net Periodic Benefit Cost: |  |                           |        |   |                         |   |        |      |  |   |      |   |  |   |     |  
|Service cost                             |  | $                         | 1,286  |   |                         | $ | 1,132  |      |  | $ | 20   |   |  | $ | 82  |  
|Interest cost                            |  |                           | 1,812  |   |                         |   | 1,762  |      |  |   | 98   |   |  |   | 164 |  
|Expected return on plan assets           |  |                           | (1,700 | ) |                         |   | (1,736 | )    |  |   | (20  | ) |  |   | (26 | )
|Amortization of initial net obligation   |  |                           |       |   |                         |   |       |      |  |   | 10   |   |  |   | 12  |  
|Amortization of prior service cost       |  |                           | (34    | ) |                         |   | (34    | )    |  |   | (50  | ) |  |   |    |  
|Amortization of net (gain) loss          |  |                           | 738    |   |                         |   | 512    |      |  |   | 42   |   |  |   | 42  |  
|                                         |  |                           |        |   |                         |   |        |      |  |   |      |   |  |   |     |  
|Net periodic benefit cost                |  | $                         | 2,102  |   |                         | $ | 1,636  |      |  | $ | 100  |   |  | $ | 274 |  
|                                         |  |                           |        |   |                         |   |        |      |  |   |      |   |  |   |     |  



During the six months
ended June 30, 2005, D&E contributed $1,250 to its defined benefit pension plans and made no contribution to its other postretirement benefit plan. The Company presently anticipates contributing an additional $1,694 to its defined benefit plans
in 2005 for a total of $2,944.



12.    Business Segment
Data



D&Es business segments are:
incumbent rural local exchange carrier (RLEC), competitive local exchange carrier (CLEC), Internet Services and Systems Integration. Certain amounts for prior years have been reclassified to conform to the current
presentation. The measure of profitability that management uses to evaluate performance of our business segments is operating income.



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



|                    |  |                             |        |                             |   |        |                             |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|------------------- |  | --------------------------- | ------ | --------------------------- | - | ------ | --------------------------- | - | ------ | - |  | ---- | ------ | - | ---- | - | ------ | - |  | - | ------ | -
|                    |  | External Revenues           |        | Intersegment Revenues       |   |        | Operating Income (Loss)     |  
|                    |  | Three months ended June 30, |        | Three months ended June 30, |   |        | Three months ended June 30, |  
|Segment             |  | 2005                        |        | 2004                        |   | 2005   |                             |   | 2004   |   |  | 2005 |        |   | 2004 |  
|RLEC                |  | $                           | 25,334 |                             | $ | 25,476 |                             | $ | 2,183  |   |  | $    | 2,358  |   |      | $ | 7,856  |   |  | $ | 7,273  |  
|CLEC                |  |                             | 9,344  |                             |   | 9,014  |                             |   | 675    |   |  |      | 313    |   |      |   | (610   | ) |  |   | (741   | )
|Internet Services   |  |                             | 3,210  |                             |   | 2,572  |                             |   | 7      |   |  |      | 6      |   |      |   | (360   | ) |  |   | (5     | )
|Systems Integration |  |                             | 5,311  |                             |   | 6,230  |                             |   | 9      |   |  |      | 13     |   |      |   | (1,582 | ) |  |   | (1,189 | )
|Corporate and Other |  |                             | 843    |                             |   | 843    |                             |   |       |   |  |      |       |   |      |   | (480   | ) |  |   | (147   | )
|Eliminations        |  |                             |       |                             |   |       |                             |   | (2,874 | ) |  |      | (2,690 | ) |      |   |       |   |  |   |       |  
|                    |  |                             |        |                             |   |        |                             |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Total               |  | $                           | 44,042 |                             | $ | 44,135 |                             | $ |       |   |  | $    |       |   |      | $ | 4,824  |   |  | $ | 5,191  |  
|                    |  |                             |        |                             |   |        |                             |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  



14



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per-share amounts)

(Unaudited)



|                    |  |                           |        |                           |   |        |                           |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|------------------- |  | ------------------------- | ------ | ------------------------- | - | ------ | ------------------------- | - | ------ | - |  | ---- | ------ | - | ---- | - | ------ | - |  | - | ------ | -
|                    |  | External Revenues         |        | Intersegment Revenues     |   |        | Operating Income (Loss)   |  
|                    |  | Six months ended June 30, |        | Six months ended June 30, |   |        | Six months ended June 30, |  
|Segment             |  | 2005                      |        | 2004                      |   | 2005   |                           |   | 2004   |   |  | 2005 |        |   | 2004 |  
|RLEC                |  | $                         | 50,058 |                           | $ | 51,155 |                           | $ | 4,623  |   |  | $    | 4,663  |   |      | $ | 15,222 |   |  | $ | 14,774 |  
|CLEC                |  |                           | 18,619 |                           |   | 17,786 |                           |   | 1,200  |   |  |      | 626    |   |      |   | (1,199 | ) |  |   | (1,631 | )
|Internet Services   |  |                           | 6,287  |                           |   | 5,036  |                           |   | 13     |   |  |      | 11     |   |      |   | (600   | ) |  |   | 101    |  
|Systems Integration |  |                           | 10,187 |                           |   | 12,372 |                           |   | 15     |   |  |      | 24     |   |      |   | (2,997 | ) |  |   | (2,320 | )
|Corporate and Other |  |                           | 1,730  |                           |   | 1,551  |                           |   |       |   |  |      |       |   |      |   | (985   | ) |  |   | (719   | )
|Eliminations        |  |                           |       |                           |   |       |                           |   | (5,851 | ) |  |      | (5,324 | ) |      |   |       |   |  |   |       |  
|                    |  |                           |        |                           |   |        |                           |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Total               |  | $                         | 86,881 |                           | $ | 87,900 |                           | $ |       |   |  | $    |       |   |      | $ | 9,441  |   |  | $ | 10,205 |  
|                    |  |                           |        |                           |   |        |                           |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  



|                    |  |                |          |   |                   |   |          |  
|------------------- |  | -------------- | -------- | - | ----------------- | - | -------- | -
|                    |  | Segment Assets |         
|Segment             |  | June 30, 2005  |          |   | December 31, 2004 |  
|RLEC                |  | $              | 445,004  |   |                   | $ | 446,277  |  
|CLEC                |  |                | 67,667   |   |                   |   | 67,128   |  
|Internet Services   |  |                | 3,790    |   |                   |   | 3,009    |  
|Systems Integration |  |                | 18,843   |   |                   |   | 19,064   |  
|Corporate and Other |  |                | 457,123  |   |                   |   | 447,663  |  
|Eliminations        |  |                | (452,944 | ) |                   |   | (436,356 | )
|                    |  |                |          |   |                   |   |          |  
|Total               |  | $              | 539,483  |   |                   | $ | 546,785  |  
|                    |  |                |          |   |                   |   |          |  



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



|                                                                           |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                           |  | Three months ended June 30, |        |   | Six months ended June 30, |  
|                                                                           |  | 2005                        |        |   | 2004                      |   |        | 2005 |  |   | 2004   |  
|Operating income from reportable segments                                  |  | $                           | 5,304  |   |                           | $ | 5,338  |      |  | $ | 10,426 |   |  | $ | 10,924 |  
|Corporate and other operating loss                                         |  |                             | (480   | ) |                           |   | (147   | )    |  |   | (985   | ) |  |   | (719   | )
|Equity in net losses of affiliates                                         |  |                             | (54    | ) |                           |   | (318   | )    |  |   | (113   | ) |  |   | (850   | )
|Interest expense                                                           |  |                             | (3,436 | ) |                           |   | (3,396 | )    |  |   | (6,821 | ) |  |   | (7,491 | )
|Gain (loss) on investment                                                  |  |                             | (10    | ) |                           |   |       |      |  |   | 2,043  |   |  |   |       |  
|Loss on early extinguishment of debt                                       |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   | (4,841 | )
|Other, net                                                                 |  |                             | 748    |   |                           |   | 320    |      |  |   | 1,696  |   |  |   | 993    |  
|                                                                           |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) before income taxes and dividends on utility preferred stock |  | $                           | 2,072  |   |                           | $ | 1,797  |      |  | $ | 6,246  |   |  | $ | (1,984 | )
|                                                                           |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  



15



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Forward-Looking Statements



This quarterly report contains 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, the ability to generate income or cash flows, or our capital resources or financing plans 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. These forward-looking statements involve certain risks and uncertainties, including, but are not limited to:



| |  |  | changes in the competitive and technological environment in which we operate;
| | - |  | -----------------------------------------------------------------------------



| |  |  | our ability to fund necessary investment in plant and equipment to remain competitive;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | our current level of debt financing;
| | - |  | ------------------------------------



| |  |  | our ability to further penetrate our markets and the related cost of that effort;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | economic conditions;
| | - |  | --------------------



| |  |  | government and regulatory policies at both the federal and state levels; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | reductions in rates or call volume that is subject to access charges.
| | - |  | ---------------------------------------------------------------------



You should understand that various factors, in addition to those discussed in the section titled 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



Overview



This Overview is intended to provide a context for the following Managements Discussion and Analysis of Financial
Condition and Results of Operations. Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited



16



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



condensed consolidated financial statements, including the notes thereto, included in this quarterly report on Form 10-Q, as well as our audited consolidated financial
statements for the year ended December 31, 2004, as filed on Form 10-K with the SEC. We have attempted to identify the most important matters on which our management focuses in evaluating our financial condition and operating performance and the
short-term and long-term opportunities, challenges and risks (including material trends and uncertainties) which we face. We also discuss the actions we are taking to address these opportunities, challenges and risks. The Overview is not intended as
a summary of, or a substitute for review of, Managements Discussion and Analysis of Financial Condition and Results of Operations. For comparative purposes, certain amounts have been reclassified to conform to the current-year presentation.
The reclassifications had no impact on net income.



Business Segments



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



Our segments
are RLEC, CLEC, Internet Services, and Systems Integration. The measure of profitability that management uses to evaluate performance of our business segments is operating income because individual segment managers are not accountable for such items
as interest and taxes that are reported below operating income.



As of June 30, 2005, we served 136,929 RLEC access lines, 39,381 CLEC access lines, 10,082 dial-up Internet access subscribers, 14,993 digital subscriber lines (DSL) and 929 web hosting customers. For the quarter ended June 30,
2005, we generated total revenues of $44.0 million, operating income of $4.8 million and net income of $1.4 million.



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



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



17



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



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 outside plant costs. Our CLEC incurs costs related to leased network facilities associated with providing local telephone service to customers, engineering costs, and network access costs for local calls
and long distance expense. Our Internet services segment incurs leased network facilities costs for our dial-up Internet service and for our DSL broadband data service. Our systems integration business incurs expenses primarily related to wages and
employee benefit costs, and equipment and materials used in the course of the installation and provision of our products and services.



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



Business Strategy



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



| |  |  | We will pursue the goal of delivering excellence for our customers by providing reliable, responsive, state of the art broadband communications services, including voice, high-speed
data, VoIP and, in certain of our RLEC and CLEC markets, video. We believe bundling high-speed data, voice and video is a key part of the strategy to grow revenue and strengthen customer relationships while providing increased value through
productivity gains for our customers.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will continue to build-out our fiber-to-the-node infrastructure to support the future deployment of advanced broadband Internet Protocol (IP) communication services.
We expect that the demands of our residential and business customers for increased bandwidth will continue to grow.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will pursue the goal of capturing as many broadband connections to customers homes and businesses as possible.
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | We will make efforts to further expand our market share of the Internet services market by meeting or exceeding the customer service and technical requirements of individual and
business customers. While we intend to maintain our dial-up Internet access customer base, our focus will be to migrate these customers in the RLEC areas to at least an entry level DSL Internet service. New RLEC broadband customers will also be
aggressively pursued. Targeting RLEC customers with a broadband connection in their home and/or business is vital for the future delivery of IP services.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



| |  |  | We will endeavor to be a single source provider of voice and data communications services to our business customers. We believe that the convergence and complexity of voice
communications and data network technologies has increased the need for businesses to seek a single provider for all of their communications and data networking needs. Our systems integration business leverages our core Network Operations Center
(NOC) experience with our managed service offerings: the remote monitoring of the status of customers Internet access, email servers and web servers. Our managed services offers revenue growth opportunities and competitive
advantages. Managed services fills the needs of our customers by allowing them to improve reliability, provide higher levels of service and save money through efficient device management and planning. Our complement of services can be used for
internal monitoring (within the enterprise), external monitoring (devices visible outside the enterprise) and through comprehensive security assessments and management. The services go beyond status monitoring by customizing application level
monitoring (e.g. anti-virus, email services, web services), which we believe is a significant point of differentiation compared to competitive offerings. The services are also customized in terms of the threshold for alerts and the ability to engage
D&E service personnel as part of the response.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | We will offer a broad array of advanced communication services that will enable new modes of communication to become a part of the daily home or business experience. A unified
communications strategy will provide integrated applications (e.g. email, voice mail, instant messaging, video conferencing and worker collaboration tools) to provide customers with greater flexibility to select their preferred method of
communication.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Critical Developments in The Communications
Industry



The critical driver in the communications
industry today is the convergence of voice and data communication technologies into various IP based platforms, all of which have the potential to provide VoIP, high-speed data transmission, and IP video over telephone companies copper and
fiber networks, cable companies coaxial and fiber networks, wireless telephone companies wireless networks, satellite companies satellite networks and electric companies electric lines. Although



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



each of the networks has relative strengths and weaknesses, they are all effectively in competition for the customers communications needs. These developments mean
that the Company is competing for its existing customer base in its RLEC and CLEC territories with cable TV companies, wireless telephone companies, satellite communications providers, VoIP providers and, eventually, electric power companies. The
recent decreases in the number of access lines in our RLEC territories reflect, in part, such increased competition, in addition to the elimination of second lines by our customers as they shift to DSL for high-speed Internet access.



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



Cable TV companies are subject to far less
regulation than the local telephone companies, which are subject to federal and state regulation. There is not consistent regulation of VoIP offerings at this time, placing VoIP at a possible regulatory advantage over traditional telephone services.
To date, VoIP is not regulated as a voice public utility service, except to the extent that the Federal Communications Commission (FCC) has recently ordered that VoIP providers must enable their customers to access 911 services. To
maintain and grow our voice communication business, we are introducing VoIP offerings into our marketplace. The convergence of voice and data networks enables the deployment of VoIP services. As an ISP, the provision of VoIP services is not
geographically limited. We have the potential to offer and provide our VoIP services anywhere in the U.S. to anyone who has a broadband connection, either through a DSL or cable modem connection. The deployment of VoIP services minimizes the amount
of additional infrastructure costs required to offer next generation voice services outside of our traditional service territories. Our VoIP initiatives will drive converged services and networks to produce operational efficiencies in addition to
benefiting from the current minimal regulation to which it is subject. Other VoIP providers can offer VoIP services within our territory from any point outside of our territory that has Internet access, subject to the requirement of also providing
911. If they qualify as a CLEC in our RLEC territories, VoIP providers also might be eligible for number portability. Number portability would make it possible for our customers to switch to the VoIP services of another provider without changing
telephone numbers.



The delivery systems of local telephone
companies and cable TV companies are structured differently. Telephone systems are structured to foster two way conversations by providing separate lines to each customer. This structure enables telephone systems, as they are upgraded to provide DSL
and even video services, to transmit with similar capacities to and from customers premises without the system slowing down or failing in times of high traffic. Cable TV systems were originally structured to carry traffic one way to the
customer and, although the systems are being upgraded to carry two way traffic, cable TV systems are not structured as well as telephone systems to carry two way traffic with the result that, in times of peak demand, cable TV systems may slow down
or even fail effectively to transmit their cable Internet traffic. This fundamental difference in the structure of telephone and cable systems gives telephone companies an advantage in providing DSL and IPTV services, as both are highly interactive
systems requiring fast transmittals in both directions.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Nationally, the growth rate of DSL subscribers has recently been outpacing the growth rate of modem subscribers, although cable is still ahead in terms of total
subscribers. The Company has been quite successful in marketing its DSL high-speed Internet service to new subscribers, with the number of subscribers increasing from 8,706 as of June 30, 2004 to 14,993 as of June 30, 2005, a 72% increase. During
the same period the number of our RLEC access lines decreased by 3% from 141,270 as of June 30, 2004 to 136,929 as of June 30, 2005.



We are also in competition with providers of wireless telephone and data services for the local telephone and data customer. Wireless telephone service
providers have impacted our number of RLEC access lines as customers use wireless for a second line and even substitute wireless entirely for wireline service. We believe that wireline telephone and high-speed data transmissions still have
significant advantages over wireless services in terms of rapid data rates and service accessibility and reliability. Our broadband emphasis through the expansion of our fiber-to-the-node deployment, prepares us for accommodating the continuing
demands of increased bandwidth for both consumers and businesses. However, the access and mobility provided by wireless technologies creates tremendous value as the communications industry seeks to provide a seamless integration between wireline and
wireless networks. We are evaluating the capacity to provide local wireless data services, through Wi-Fi and WiMax technologies, in order to provide full broadband coverage to all of our customers.



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



In order to remain competitive and provide the broadband services required for high-speed data and video, we must continue to invest substantial amounts
in the Companys infrastructure. We have installed significant amounts of fiber in our system. We have even been installing ducts into new houses and businesses over the last 10 years to enhance our ability to install fiber. We have installed
gigabit networks, and believe that we have the expertise to lead the way to providing ubiquitous broadband access. We have completed 95% of our requirements under Chapter 30 of the Pennsylvania Public Utility Code to provide broadband
availability in 100% of our RLEC system by December 31, 2008. In keeping with the foregoing, our 2005 capital budget is approximately $29 million. However, as discussed more fully under the Business Risks section, our ability to invest in
infrastructure to remain competitive may be limited by our indebtedness of approximately $220.5 million as of June 30, 2005.



The foregoing opportunities and risks require management to attempt to balance several aspects of our business. Our relatively stable RLEC business
segment provides cash flow both to pursue our business plan to be a leading, regional broadband ICP and to provide a current return on investment to our shareholders in the form of a dividend. However, since our resources are limited and the manner
in which the communications industry will develop is uncertain, both in terms of technology and competition, we may not be able to pursue every possible avenue of development, and critical decisions will need to be made at various stages of our
evolution as a company. These decisions can



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



be made more difficult by our desire to balance our short-term goals of maintaining our RLEC business segment and dividend return and our long-term goal of providing
voice, data and video services on the next generation, IP-based network. Maintaining our dividend payout may be challenging due to the capital requirements of our business strategy, payments of principal and interest on our long-term debt and
restrictions under our financing facilities, both in the form of an annual limitation of $10 million in dividends and the requirement to remain in compliance with financial covenants.



Recent Development



We had 668 employees as of June 30, 2005, of which approximately 76 are covered by a collective bargaining agreement. On July 15, 2005, D&E announced
that it had reached an agreement with the International Brotherhood of Electrical Workers Local 1671. The membership of Local 1671 ratified a new four-year contract. The union represents employees at D&Es Birdsboro location.



Business Risks



Our primary business risks include the external threats of increased competition, the complex and uncertain regulatory
environment in the telecommunications industry and the internal risk of our debt financing.



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



It is basic policy of the FCC and the Pennsylvania Public Utility Commission (PUC) to encourage competition in the communications industry.
The limited suspension that we held until January 2003 from certain interconnection requirements of the Telecommunications Act of 1996 has been discontinued, although legislation enacted in Pennsylvania in the fourth quarter of 2004 provided a
continued limited suspension to our Buffalo Valley RLEC through December 31, 2008. These developments mean that two of our RLECs could be required to allow competitors to have access to our customers by our competitors seeking the removal of our
rural exemption, entering our territory and using our services and facilities through interconnection agreements to provide local services. Although CLEC providers have not expressed interest in coming into our RLEC franchise territories, the
significance of this legislation might be that local cable TV companies may apply to be licensed as CLECs within our franchise territories in order to attempt to qualify for number portability. This would enable our existing telephone customers to
switch to VoIP services provided by the cable TV companies and still retain the same telephone numbers, thus making the transfer of local telephone services to VoIP far more convenient to the customer.



As described under the heading Critical Developments in the Communications
Industry, the convergence of voice and data communication technologies has brought the telephone companies into direct competition with cable TV companies, wireless telephone companies, VoIP providers, the satellite companies and even electric
companies. The development of VoIP has enabled cable TV companies to provide telephone service in competition with us. These developments have placed our core telephone business at risk, although also enabling us to compete in the provision of cable
TV services.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



| |  |  | We are subject to a complex and uncertain regulatory environment that may require us to alter our business plans and face increased competition.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



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



The PUC is currently considering changes in intrastate switched access rates and Universal Service Funding (USF)
reform for independent local exchange carriers in Pennsylvania. The proceeding, which began in December 2004, addresses the rates that our RLECs charge to long distance carriers for intrastate toll calls that originate or terminate on our
RLECs local telephone lines. Our RLECs also receive funding from the Pennsylvania USF, which could be affected by the PUCs investigation. At this time, we cannot predict either the timing or the outcome of the PUCs proceeding.



On February 10, 2005, the FCC initiated a proceeding to
develop a unified intercarrier compensation regime. This proceeding will likely affect our RLECs, CLECs, long distance and VoIP operations. The FCC is considering various plans that have been submitted to the FCC and has solicited comments from the
public concerning those proposals. Most, if not all of these proposals, if adopted would affect the intercarrier compensation revenues and expenses as well as the USF funding that our RLECs receive. We have been active in addressing these proposals
through our industry association, the United States Telecom Association (USTA). The rule changes that result from this proceeding could have a material effect on our revenues, expenses and earnings. Until the FCC adopts a specific
proposal, it is impossible to predict how changes will affect our company.



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



We had indebtedness of approximately $220.5 million at June 30, 2005 that was primarily incurred in connection with the acquisition of Conestoga in 2002.
We refinanced our indebtedness in March 2004 and further amended our credit facility in November 2004. The effect of the refinancing was to lower the interest rates on our indebtedness, provide greater flexibility in our financial covenants and
spread out the amortization of principal. The refinancing also lifted restrictions on the expansion of our CLEC edge-out market and eliminated the requirement of the prior loan agreement that excess cash flow be applied to prepayments of principal.
This new structure, pursued to manage our balance sheet in order to better achieve our business plan, decreases the risks associated with our indebtedness. However, our indebtedness could still restrict our operations because:



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



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



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



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



Results
of Operations



The following table is a summary of our
operating results by segment for the three months ended June 30, 2005 and 2004. Certain amounts for prior years have been reclassified to conform to the current presentation. The reclassifications had no impact on total operating income. Monetary
amounts presented in the following discussion are in thousands, except per share amounts.



|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                     |        |   |              |   |       |               |  |   |        |   |  |   |       
|----------------------------- |  | ---- | ------ | ---- | - | ------ | ----------------- |  | - | ------------------- | - |  | ------------------- | ------ | - | ------------ | - | ----- | ------------- |  | - | ------ | - |  | - | ------
|Three months ended            |  | RLEC |        | CLEC |   |        | Internet Services |  |   | Systems Integration |   |  | Corporate and Other |        |   | Eliminations |   |       | Total Company
|June 30, 2005                 |  |      |        |      |   |        |                   |  |   |                     |   |  |                     |        |   |              |   |       |              
|Revenues  External           |  | $    | 25,334 |      | $ | 9,344  |                   |  | $ | 3,210               |   |  | $                   | 5,311  |   |              | $ | 843   |               |  | $ |       |   |  | $ | 44,042
|Revenues  Intercompany       |  |      | 2,183  |      |   | 675    |                   |  |   | 7                   |   |  |                     | 9      |   |              |   |      |               |  |   | (2,874 | ) |  |   |      
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                     |        |   |              |   |       |               |  |   |        |   |  |   |       
|Total Revenues                |  |      | 27,517 |      |   | 10,019 |                   |  |   | 3,217               |   |  |                     | 5,320  |   |              |   | 843   |               |  |   | (2,874 | ) |  |   | 44,042
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                     |        |   |              |   |       |               |  |   |        |   |  |   |       
|Depreciation and Amortization |  |      | 7,485  |      |   | 1,176  |                   |  |   | 349                 |   |  |                     | 433    |   |              |   | 288   |               |  |   |       |   |  |   | 9,731 
|Other Operating Expenses      |  |      | 12,176 |      |   | 9,453  |                   |  |   | 3,228               |   |  |                     | 6,469  |   |              |   | 1,035 |               |  |   | (2,874 | ) |  |   | 29,487
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                     |        |   |              |   |       |               |  |   |        |   |  |   |       
|Total Operating Expenses      |  |      | 19,661 |      |   | 10,629 |                   |  |   | 3,577               |   |  |                     | 6,902  |   |              |   | 1,323 |               |  |   | (2,874 | ) |  |   | 39,218
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                     |        |   |              |   |       |               |  |   |        |   |  |   |       
|Operating Income (Loss)       |  | $    | 7,856  |      | $ | (610   | )                 |  | $ | (360                | ) |  | $                   | (1,582 | ) |              | $ | (480  | )             |  | $ |       |   |  | $ | 4,824 
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                     |        |   |              |   |       |               |  |   |        |   |  |   |       
|                              |  |      |        |      |   |        |                  
|June 30, 2004                 |  |      |        |      |   |        |                   |  |   |                     |   |  |                     |        |   |              |   |       |              
|Revenues  External           |  | $    | 25,476 |      | $ | 9,014  |                   |  | $ | 2,572               |   |  | $                   | 6,230  |   |              | $ | 843   |               |  | $ |       |   |  | $ | 44,135
|Revenues  Intercompany       |  |      | 2,358  |      |   | 313    |                   |  |   | 6                   |   |  |                     | 13     |   |              |   |      |               |  |   | (2,690 | ) |  |   |      
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                     |        |   |              |   |       |               |  |   |        |   |  |   |       
|Total Revenues                |  |      | 27,834 |      |   | 9,327  |                   |  |   | 2,578               |   |  |                     | 6,243  |   |              |   | 843   |               |  |   | (2,690 | ) |  |   | 44,135
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                     |        |   |              |   |       |               |  |   |        |   |  |   |       
|Depreciation and Amortization |  |      | 7,874  |      |   | 1,067  |                   |  |   | 255                 |   |  |                     | 487    |   |              |   | 235   |               |  |   |       |   |  |   | 9,918 
|Other Operating Expenses      |  |      | 12,687 |      |   | 9,001  |                   |  |   | 2,328               |   |  |                     | 6,945  |   |              |   | 755   |               |  |   | (2,690 | ) |  |   | 29,026
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                     |        |   |              |   |       |               |  |   |        |   |  |   |       
|Total Operating Expenses      |  |      | 20,561 |      |   | 10,068 |                   |  |   | 2,583               |   |  |                     | 7,432  |   |              |   | 990   |               |  |   | (2,690 | ) |  |   | 38,944
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                     |        |   |              |   |       |               |  |   |        |   |  |   |       
|Operating Income (Loss)       |  | $    | 7,273  |      | $ | (741   | )                 |  | $ | (5                  | ) |  | $                   | (1,189 | ) |              | $ | (147  | )             |  | $ |       |   |  | $ | 5,191 
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                     |        |   |              |   |       |               |  |   |        |   |  |   |       



24



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



The following table is a summary of our operating results by segment for the six months ended June 30, 2005 and 2004. Certain amounts for prior years have
been reclassified to conform to the current presentation. The reclassifications had no impact on total operating income. Monetary amounts presented in the following discussion are in thousands, except per share amounts.



|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|----------------------------- |  | ---- | ------ | ---- | - | ------ | ----------------- |  | - | ------------------- | - |  | ------------------ | ------ | - | ------------ | - | ----- | ------------ |  | - | ------ | - |  | - | ------
|Six months ended              |  | RLEC |        | CLEC |   |        | Internet Services |  |   | Systems Integration |   |  | Corporateand Other |        |   | Eliminations |   |       | TotalCompany
|June 30, 2005                 |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |       |             
|Revenues  External           |  | $    | 50,058 |      | $ | 18,619 |                   |  | $ | 6,287               |   |  | $                  | 10,187 |   |              | $ | 1,730 |              |  | $ |       |   |  | $ | 86,881
|Revenues  Intercompany       |  |      | 4,623  |      |   | 1,200  |                   |  |   | 13                  |   |  |                    | 15     |   |              |   |      |              |  |   | (5,851 | ) |  |   |      
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|Total Revenues                |  |      | 54,681 |      |   | 19,819 |                   |  |   | 6,300               |   |  |                    | 10,202 |   |              |   | 1,730 |              |  |   | (5,851 | ) |  |   | 86,881
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|Depreciation and Amortization |  |      | 14,951 |      |   | 2,311  |                   |  |   | 674                 |   |  |                    | 881    |   |              |   | 564   |              |  |   |       |   |  |   | 19,381
|Other Operating Expenses      |  |      | 24,508 |      |   | 18,707 |                   |  |   | 6,226               |   |  |                    | 12,318 |   |              |   | 2,151 |              |  |   | (5,851 | ) |  |   | 58,059
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|Total Operating Expenses      |  |      | 39,459 |      |   | 21,018 |                   |  |   | 6,900               |   |  |                    | 13,199 |   |              |   | 2,715 |              |  |   | (5,851 | ) |  |   | 77,440
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|Operating Income (Loss)       |  | $    | 15,222 |      | $ | (1,199 | )                 |  | $ | (600                | ) |  | $                  | (2,997 | ) |              | $ | (985  | )            |  | $ |       |   |  | $ | 9,441 
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|June 30, 2004                 |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |       |             
|Revenues  External           |  | $    | 51,155 |      | $ | 17,786 |                   |  | $ | 5,036               |   |  | $                  | 12,372 |   |              | $ | 1,551 |              |  | $ |       |   |  | $ | 87,900
|Revenues  Intercompany       |  |      | 4,663  |      |   | 626    |                   |  |   | 11                  |   |  |                    | 24     |   |              |   |      |              |  |   | (5,324 | ) |  |   |      
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|Total Revenues                |  |      | 55,818 |      |   | 18,412 |                   |  |   | 5,047               |   |  |                    | 12,396 |   |              |   | 1,551 |              |  |   | (5,324 | ) |  |   | 87,900
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|Depreciation and Amortization |  |      | 15,542 |      |   | 2,127  |                   |  |   | 504                 |   |  |                    | 985    |   |              |   | 461   |              |  |   |       |   |  |   | 19,619
|Other Operating Expenses      |  |      | 25,502 |      |   | 17,916 |                   |  |   | 4,442               |   |  |                    | 13,731 |   |              |   | 1,809 |              |  |   | (5,324 | ) |  |   | 58,076
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|Total Operating Expenses      |  |      | 41,044 |      |   | 20,043 |                   |  |   | 4,946               |   |  |                    | 14,716 |   |              |   | 2,270 |              |  |   | (5,324 | ) |  |   | 77,695
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|Operating Income (Loss)       |  | $    | 14,774 |      | $ | (1,631 | )                 |  | $ | 101                 |   |  | $                  | (2,320 | ) |              | $ | (719  | )            |  | $ |       |   |  | $ | 10,205
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       



Consolidated Operations



Three months ended June 30, 2005 compared

to three months ended June 30, 2004



Consolidated revenues decreased $93, or 0.2%, to $44,042 for the quarter ended June 30, 2005, from $44,135 for the same period in 2004. The decrease was
primarily due to decreases of approximately $527 in long distance, $341 in communication services and $268 in communication product sales. These decreases were partially offset by gains of $410 in DSL revenue, $290 in local telephone service, $310
in directory revenues and $304 in network access.



Consolidated
operating income decreased $367, to $4,824, for the second quarter of 2005, from $5,191 in the same period of 2004. Operating income as a percentage of revenue decreased to 11.0% in the second quarter of 2005, compared to 11.8% in the same period of
2004. The decrease was from



25



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



the decline in operating revenues and an increase in operating expenses. Expense increases included $483 in benefits primarily from pension costs and incentive accruals
offset by a $424 decrease in wages related to the decrease in the number of employees. Professional fees increased $396 primarily from legal fees, information technology consulting fees and audit expense offset by a small reduction in Sarbanes-Oxley
consulting expenses. Other expense increases included directory expense of $250 and gross receipts taxes of $242. Offsetting expense decreases included subcontracted labor of $188, primarily from the decline in Systems Integration projects;
depreciation of $188, related to revisions in our depreciation rates due to changes in the estimated lives of various asset categories and contracted services of $295, primarily from the billing system conversion late in 2004.



Other income and expense was a net expense of $2,752 in the second quarter of
2005, compared to a net expense of $3,394 for the same period in 2004.



| |  |  | We discontinued recognizing equity losses from our Polish affiliate after the fourth quarter of 2004 which resulted in our equity in the losses of our European affiliates decreasing
to $54 in the second quarter of 2005 from $318 in the same period of 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest expense increased to $3,436 in the second quarter of 2005, compared to $3,396 in the same period of 2004 as a result of higher short term interest rates on our variable
rate debt offset by the 75 basis point reduction on our Term Loan B from the November 2004 amendment to our credit facilities.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other, net was income of $748 in 2005 compared to income of $320 in 2004. Other, net included $689 of interest income and principal repayments collected in 2005 on the note received
from the sale of assets of Conestoga Wireless and $154 of interest income received in 2004. We recognize income upon collection of the note principal and interest as this note receivable is from a highly leveraged entity and the business sold had
not generated positive cash flows prior to its sale. Therefore, the note receivable has not been recognized as an asset on our balance sheet.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Income taxes were $688 in the second quarter of 2005, compared to $547 for the same period in 2004. Net income was $1,367, or $0.10 per share, in the
second quarter of 2005 compared to $1,233, or $0.08 per share, in the second quarter of 2004.



Six months ended June 30, 2005 compared

to six months ended June 30, 2004



Consolidated revenues decreased $1,019, or 1.2%, to $86,881 for the six
months ended June 30, 2005, from $87,900 for the same period in 2004. The decrease was primarily due to decreases of approximately $1,066 in long distance, $526 in communication services, $867 in communication product sales and $190 in network
access revenues. These decreases, along with $333 of other miscellaneous decreases, were partially offset by gains of $786 in DSL revenue, $644 in local telephone service and $533 of directory revenues.



26



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Consolidated operating income decreased $764, to $9,441, for the first half of 2005, from $10,205 in the same period of 2004. Operating income as a
percentage of revenue decreased to 10.9% in the first half of 2005 compared to 11.6% in the same period of 2004. The decrease was from the decline in operating revenues and an increase in operating expenses. Expense increases included approximately
$800 in benefits primarily from pension costs and incentive accruals offset by wage decreases of $534 from a decrease in the number of employees. Professional fees increased $772 primarily from increased audit expense, information technology
consulting fees and legal fees offset by a decline in Sarbanes-Oxley consulting expenses that will continue to decline in the second half of 2005. Directory expense also increased $380, in line with the related revenue increase. Offsetting expense
decreases included subcontracted labor of $228, primarily from the decline in Systems Integration projects; depreciation of $239, related to revisions in our depreciation rates due to changes in the estimated lives of various asset categories,
contracted services of $611 primarily from the billing system conversion later in 2004; and cost of products sold of $626, primarily from lower computer equipment sales.



Other income and expense was a net expense of $3,195 in the first half of 2005 compared to a net expense of $12,189 for the
same period in 2004.



| |  |  | We discontinued recognizing equity losses from our Polish affiliate after the fourth quarter of 2004 which resulted in our equity in the losses of our European affiliates decreasing
to $113 in the first half of 2005 from $850 in the same period of 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Interest expense decreased to $6,821 in the first half of 2005, compared to $7,491 in the same period of 2004 as a result of savings from refinancing the debt in March 2004 and a
reduction of 75 basis points on our Term Loan B amendment to our credit facility in November 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A gain on investment from the sale of our interest in PenTeleData added $2,043 of income to 2005 with no similar transaction in the prior year.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A $4,841 loss on early extinguishment of debt was incurred in 2004 as a result of refinancing our long-term debt on March 5, 2004. The expense included a one-time non-cash charge of
$4,628 from writing off deferred financing costs related to the May 2002 credit facility and $213 of one-time cash expense related to bank fees incurred to arrange the refinanced credit facility which was not eligible for capitalization.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other, net was income of $1,696 in the first half of 2005 compared to income of $993 in the same period of 2004 partially from an increase of $180 in the patronage dividend received
as a borrower from a cooperative bank. Other, net also included $939 of interest income and principal repayments collected in 2005 on the note received from the sale of assets of Conestoga Wireless compared to $308 of interest income received in
2004. We recognize income upon collection of the note principal and interest as this note receivable is from a highly leveraged entity and the business sold had not generated positive cash flows prior to its sale. Therefore, the note receivable has
not been recognized as an asset on our balance sheet.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



27



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Income taxes were $1,958 in the first half of 2005 compared to a benefit of $994 for the same period in 2004. A lower effective tax rate in the 2005 was
partially related to the gain on the sale of investment not being fully subject to state income tax. Net income was $4,255, or $0.30 per share, in the first half of 2005 compared to a net loss of $1,023, or $0.07 per share, in the first half of
2004.



RLEC Segment Results



|                              |  |                             |         |      |   |         |  |   |          |   |  |      |  
|----------------------------- |  | --------------------------- | ------- | ---- | - | ------- |  | - | -------- | - |  | ---- | -
|                              |  | Three months ended June 30, |        
|                              |  | 2005                        |         | 2004 |   | Change  |  |   | % Change |  
|Revenues:                     |  |                             |         |      |   |         |  |   |          |   |  |      |  
|Local Telephone Service       |  | $                           | 8,170   |      | $ | 8,490   |  | $ | (320     | ) |  | (3.8 | )
|Network Access                |  |                             | 14,002  |      |   | 13,890  |  |   | 112      |   |  | 0.8  |  
|Other                         |  |                             | 5,345   |      |   | 5,454   |  |   | (109     | ) |  | (2.0 | )
|                              |  |                             |         |      |   |         |  |   |          |   |  |      |  
|Total Revenues                |  |                             | 27,517  |      |   | 27,834  |  |   | (317     | ) |  | (1.1 | )
|                              |  |                             |         |      |   |         |  |   |          |   |  |      |  
|Depreciation and Amortization |  |                             | 7,485   |      |   | 7,874   |  |   | (389     | ) |  | (4.9 | )
|Other Operating Expenses      |  |                             | 12,176  |      |   | 12,687  |  |   | (511     | ) |  | (4.0 | )
|                              |  |                             |         |      |   |         |  |   |          |   |  |      |  
|Total Operating Expenses      |  |                             | 19,661  |      |   | 20,561  |  |   | (900     | ) |  | (4.4 | )
|                              |  |                             |         |      |   |         |  |   |          |   |  |      |  
|Operating Income              |  | $                           | 7,856   |      | $ | 7,273   |  | $ | 583      |   |  | 8.0  |  
|                              |  |                             |         |      |   |         |  |   |          |   |  |      |  
|Access Lines at June 30       |  |                             | 136,929 |      |   | 141,270 |  |   | (4,341   | ) |  | (3.1 | )
|                              |  |                             |         |      |   |         |  |   |          |   |  |      |  



RLEC segment revenues
decreased $317, or 1.1%, to $27,517 in the three months ended June 30, 2005, from $27,834 in the three months ended June 30, 2004. A decrease of $320 in local telephone service was related to fewer access lines. Local telephone service was affected
positively from growth in the number of dedicated data circuits and leased facilities. DSL inter-segment revenue increased $208. Decreases in network access minutes of use and rates were offset by increases in National Exchange Carrier Association
(NECA) settlement revenues and resulted in a net decrease of $96. Long distance revenues decreased $119 and revenue from inter-segment billing and collection services were down $289. Since November 2004, expenses for preparation of
customer billing are charged directly to each segment. Prior to the November 2004 billing conversion, certain expenses were recorded in one segment and then recorded as inter-segment billing and collection revenue. Directory revenue increased $300
over the second quarter of 2004.



RLEC operating expenses
decreased $900, or 4.4%, to $19,661 in the second quarter of 2005, from $20,561 in the same period of the prior year. Contracted billing services decreased $355, depreciation decreased $389 related to revisions in our depreciation rates due to
changes in the estimated lives of various asset categories, network access expenses decreased $157, and other operating taxes decreased $113. Directory expenses increased $250 in line with the increased revenue generated by our directories.



Effective July 1, 2005, certain NECA settlement calculations
have changed. Management anticipates that the net impact of these changes to be an increase of approximately 2% over previous settlement calculations.



Effective August 1, 2005, rates for local dial tone service in our three RLECs increased approximately 5% to 10%. Management estimates this change will
increase quarterly local service revenues by approximately $300.



28



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



|                              |  |                           |         |      |   |         |  |   |          |   |  |      |  
|----------------------------- |  | ------------------------- | ------- | ---- | - | ------- |  | - | -------- | - |  | ---- | -
|                              |  | Six months ended June 30, |        
|                              |  | 2005                      |         | 2004 |   | Change  |  |   | % Change |  
|Revenues:                     |  |                           |         |      |   |         |  |   |          |   |  |      |  
|Local Telephone Service       |  | $                         | 16,403  |      | $ | 16,875  |  | $ | (472     | ) |  | (2.8 | )
|Network Access                |  |                           | 27,550  |      |   | 27,964  |  |   | (414     | ) |  | (1.5 | )
|Other                         |  |                           | 10,728  |      |   | 10,979  |  |   | (251     | ) |  | (2.3 | )
|                              |  |                           |         |      |   |         |  |   |          |   |  |      |  
|Total Revenues                |  |                           | 54,681  |      |   | 55,818  |  |   | (1,137   | ) |  | (2.0 | )
|                              |  |                           |         |      |   |         |  |   |          |   |  |      |  
|Depreciation and Amortization |  |                           | 14,951  |      |   | 15,542  |  |   | (591     | ) |  | (3.8 | )
|Other Operating Expenses      |  |                           | 24,508  |      |   | 25,502  |  |   | (994     | ) |  | (3.9 | )
|                              |  |                           |         |      |   |         |  |   |          |   |  |      |  
|Total Operating Expenses      |  |                           | 39,459  |      |   | 41,044  |  |   | (1,585   | ) |  | (3.9 | )
|                              |  |                           |         |      |   |         |  |   |          |   |  |      |  
|Operating Income              |  | $                         | 15,222  |      | $ | 14,774  |  | $ | 448      |   |  | 3.0  |  
|                              |  |                           |         |      |   |         |  |   |          |   |  |      |  
|Access Lines at June 30       |  |                           | 136,929 |      |   | 141,270 |  |   | (4,341   | ) |  | (3.1 | )
|                              |  |                           |         |      |   |         |  |   |          |   |  |      |  



RLEC segment revenues
decreased $1,137, or 2.0%, to $54,681 in the six months ended June 30, 2005, from $55,818 in the six months ended June 30, 2004. Decreases of $472 in local telephone service were related to fewer access lines. Local telephone service was affected
positively from growth in the number of dedicated data circuits and leased facilities. Network access revenue decreased $414 including approximately $1,641 from lower network access minutes of use and certain rate decreases offset by approximately
$750 in increased NECA settlement revenues and $477 increased inter-segment DSL revenues. Long distance revenues decreased $311 and revenue from inter-segment billing and collection services were down $574. Since November 2004, expenses for
preparation of customer billing are charged directly to each segment. Prior to the November 2004 billing conversion, certain expenses were recorded in one segment and then recorded as inter-segment billing and collection revenue. Directory revenue
increased $517 and other revenues increased $117 from the first half of 2004.



RLEC operating expenses decreased $1,585, or 3.9%, to $39,459 in the first half of 2005, from $41,044 in the same period of the prior year. Wage and benefit increases of $422 and a directory expense increase of $380,
were more than offset by decreases of $757 for contracted billing services, $591 in depreciation related to revisions in our depreciation rates due to changes in the estimated lives of various asset categories, $426 in network access expenses, $241
in other operating taxes, and $372 in other expenses including management fees.



29



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



CLEC Segment Results



|                              |  |                             |        |   |      |   |        |        |  |   |          |   |  |       |  
|----------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | ------ |  | - | -------- | - |  | ----- | -
|                              |  | Three months ended June 30, |       
|                              |  | 2005                        |        |   | 2004 |   |        | Change |  |   | % Change |  
|Revenues:                     |  |                             |        |   |      |   |        |        |  |   |          |   |  |       |  
|Local Telephone Service       |  | $                           | 3,348  |   |      | $ | 2,779  |        |  | $ | 569      |   |  | 20.5  |  
|Network Access                |  |                             | 2,290  |   |      |   | 1,635  |        |  |   | 655      |   |  | 40.1  |  
|Long Distance                 |  |                             | 4,253  |   |      |   | 4,668  |        |  |   | (415     | ) |  | (8.9  | )
|Other                         |  |                             | 128    |   |      |   | 245    |        |  |   | (117     | ) |  | (47.8 | )
|                              |  |                             |        |   |      |   |        |        |  |   |          |   |  |       |  
|Total Revenues                |  |                             | 10,019 |   |      |   | 9,327  |        |  |   | 692      |   |  | 7.4   |  
|                              |  |                             |        |   |      |   |        |        |  |   |          |   |  |       |  
|Depreciation and Amortization |  |                             | 1,176  |   |      |   | 1,067  |        |  |   | 109      |   |  | 10.2  |  
|Other Operating Expenses      |  |                             | 9,453  |   |      |   | 9,001  |        |  |   | 452      |   |  | 5.0   |  
|                              |  |                             |        |   |      |   |        |        |  |   |          |   |  |       |  
|Total Operating Expenses      |  |                             | 10,629 |   |      |   | 10,068 |        |  |   | 561      |   |  | 5.6   |  
|                              |  |                             |        |   |      |   |        |        |  |   |          |   |  |       |  
|Operating Loss                |  | $                           | (610   | ) |      | $ | (741   | )      |  | $ | 131      |   |  | (17.7 | )
|                              |  |                             |        |   |      |   |        |        |  |   |          |   |  |       |  
|Access Lines at June 30       |  |                             | 39,381 |   |      |   | 35,338 |        |  |   | 4,043    |   |  | 11.4  |  
|                              |  |                             |        |   |      |   |        |        |  |   |          |   |  |       |  



CLEC segment revenues
increased $692, or 7.4%, to $10,019 in the three months ended June 30, 2005, from $9,327 in the three months ended June 30, 2004. The increase was related to the addition of access lines for new customers and growth in the number of dedicated data
circuits, which increased local telephone service and network access revenues. Long distance revenues decreased approximately $415 due to a decline in the rate per minute of use. We anticipate the rate per minute will continue to decrease as
competitors such as wireless carriers and VoIP providers continue to offer unlimited minute pricing.



Operating expenses for the CLEC segment increased $561, or 5.6%, to $10,629 in the second quarter of 2005, from $10,068 in the same period of 2004. Direct
cost of operations increased primarily from additional customers resulting in increased wages and benefits, depreciation and network access expenses offset by cost reductions in customer billing expenses resulting from completion of the billing
conversion during the fourth quarter of 2004. The increase in network access expense is offset by savings achieved from the implementation of a new agreement to provide a least cost routing service for completion of long distance calls. Gross
receipts taxes including an adjustment for the prior year return increased operating tax expense by approximately $200.



30



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



|                              |  |                           |        |   |      |   |        |        |  |   |          |   |  |       |  
|----------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | ------ |  | - | -------- | - |  | ----- | -
|                              |  | Six months ended June 30, |       
|                              |  | 2005                      |        |   | 2004 |   |        | Change |  |   | % Change |  
|Revenues:                     |  |                           |        |   |      |   |        |        |  |   |          |   |  |       |  
|Local Telephone Service       |  | $                         | 6,517  |   |      | $ | 5,456  |        |  | $ | 1,061    |   |  | 19.4  |  
|Network Access                |  |                           | 4,356  |   |      |   | 3,085  |        |  |   | 1,271    |   |  | 41.2  |  
|Long Distance                 |  |                           | 8,618  |   |      |   | 9,372  |        |  |   | (754     | ) |  | (8.0  | )
|Other                         |  |                           | 328    |   |      |   | 499    |        |  |   | (171     | ) |  | (34.3 | )
|                              |  |                           |        |   |      |   |        |        |  |   |          |   |  |       |  
|Total Revenues                |  |                           | 19,819 |   |      |   | 18,412 |        |  |   | 1,407    |   |  | 7.6   |  
|                              |  |                           |        |   |      |   |        |        |  |   |          |   |  |       |  
|Depreciation and Amortization |  |                           | 2,311  |   |      |   | 2,127  |        |  |   | 184      |   |  | 8.7   |  
|Other Operating Expenses      |  |                           | 18,707 |   |      |   | 17,916 |        |  |   | 791      |   |  | 4.4   |  
|                              |  |                           |        |   |      |   |        |        |  |   |          |   |  |       |  
|Total Operating Expenses      |  |                           | 21,018 |   |      |   | 20,043 |        |  |   | 975      |   |  | 4.9   |  
|                              |  |                           |        |   |      |   |        |        |  |   |          |   |  |       |  
|Operating Loss                |  | $                         | (1,199 | ) |      | $ | (1,631 | )      |  | $ | 432      |   |  | (26.5 | )
|                              |  |                           |        |   |      |   |        |        |  |   |          |   |  |       |  
|Access Lines at June 30       |  |                           | 39,381 |   |      |   | 35,338 |        |  |   | 4,043    |   |  | 11.4  |  
|                              |  |                           |        |   |      |   |        |        |  |   |          |   |  |       |  



CLEC segment revenues
increased $1,407, or 7.6%, to $19,819 in the six months ended June 30, 2005, from $18,412 in the six months ended June 30, 2004. The increase was related to the 11% increase in access lines for new customers and growth in the number of dedicated
data circuits, which increased local telephone service and network access revenues more than $1,000. Long distance revenues decreased approximately $754 due to a decline in the rate per minute of use. We anticipate the rate per minute will continue
to decrease as competitors such as wireless carriers and VoIP providers continue to offer unlimited minute pricing.



Operating expenses for the CLEC segment increased $975, or 4.9%, to $21,018 in the first half of 2005, from $20,043 in the same period of 2004. Direct
cost of operations increased primarily from additional customers resulting in increased wages and benefits, depreciation and network access expenses offset by cost reductions in customer billing expenses resulting from completion of the billing
conversion during the fourth quarter of 2004. The increase in network access expense is offset by savings achieved from the implementation of a new agreement to provide a least cost routing service for completion of long distance calls. Gross
receipts taxes including an adjustment for the prior year tax return increased operating tax expense by approximately $200.



31



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Internet Services Segment Results



|                              |  |                             |        |   |      |   |        |        |  |   |          |   |  |       |  
|----------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | ------ |  | - | -------- | - |  | ----- | -
|                              |  | Three months ended June 30, |       
|                              |  | 2005                        |        |   | 2004 |   |        | Change |  |   | % Change |  
|Revenues                      |  | $                           | 3,217  |   |      | $ | 2,578  |        |  | $ | 639      |   |  | 24.8  |  
|                              |  |                             |        |  
|Depreciation and Amortization |  |                             | 349    |   |      |   | 255    |        |  |   | 94       |   |  | 36.9  |  
|Other Operating Expenses      |  |                             | 3,228  |   |      |   | 2,328  |        |  |   | 900      |   |  | 38.7  |  
|                              |  |                             |        |   |      |   |        |        |  |   |          |   |  |       |  
|Total Operating Expenses      |  |                             | 3,577  |   |      |   | 2,583  |        |  |   | 994      |   |  | 38.5  |  
|                              |  |                             |        |   |      |   |        |        |  |   |          |   |  |       |  
|Operating Loss                |  | $                           | (360   | ) |      | $ | (5     | )      |  | $ | (355     | ) |  |       |  
|                              |  |                             |        |   |      |   |        |        |  |   |          |   |  |       |  
|Customers at June 30          |  |                             |        |   |      |   |        |        |  |   |          |   |  |       |  
|DSL                           |  |                             | 14,993 |   |      |   | 8,706  |        |  |   | 6,287    |   |  | 72.2  |  
|Dial-up Access                |  |                             | 10,082 |   |      |   | 12,514 |        |  |   | (2,432   | ) |  | (19.4 | )
|Web-hosting Services          |  |                             | 929    |   |      |   | 872    |        |  |   | 57       |   |  | 6.5   |  



Internet Services
segment revenues increased $639, or 24.8%, to $3,217 in the three months ended June 30, 2005, from $2,578 in the three months ended June 30, 2004. The increase resulted from additional DSL customers and included approximately $176 of DSL revenue
recorded as CLEC revenue in the previous year, prior to the wholesale arrangement effective January 1, 2005. Revenue per DSL customer declined as a result of temporary promotional rates for new customers and the introduction of lower priced levels
of DSL service. The decrease in dial-up subscribers resulted in a 17.3% decrease in dial-up revenue.



Operating expenses for the Internet Services segment increased $994, or 38.5%, to $3,577 in the second quarter of 2005, from $2,583 in the same period of
2004. Direct cost of operations included a wage and benefits increase of $126 primarily related to the initiation of the new VoIP phone service and direct cost of services increased approximately $600 from the increased broadband capacity rental
required by the anticipated continued growth in the number of customers and approximately $150 from the CLEC wholesale transport charge beginning in 2005. Depreciation increased as a result of more assets being employed and management fees increased
by $82 as the Internet segment was allocated a larger percentage of corporate overhead in 2005, as a result of our annual update to the formula that distributes overhead expenses to the segments.



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D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



|                              |  |                           |        |   |      |   |        |  |   |          |   |  |       |  
|----------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ |  | - | -------- | - |  | ----- | -
|                              |  | Six months ended June 30, |       
|                              |  | 2005                      |        |   | 2004 |   | Change |  |   | % Change |  
|Revenues                      |  | $                         | 6,300  |   |      | $ | 5,047  |  | $ | 1,253    |   |  | 24.8  |  
|                              |  |                           |        |  
|Depreciation and Amortization |  |                           | 674    |   |      |   | 504    |  |   | 170      |   |  | 33.7  |  
|Other Operating Expenses      |  |                           | 6,226  |   |      |   | 4,442  |  |   | 1,784    |   |  | 40.2  |  
|                              |  |                           |        |   |      |   |        |  |   |          |   |  |       |  
|Total Operating Expenses      |  |                           | 6,900  |   |      |   | 4,946  |  |   | 1,954    |   |  | 39.5  |  
|                              |  |                           |        |   |      |   |        |  |   |          |   |  |       |  
|Operating Income (Loss)       |  | $                         | (600   | ) |      | $ | 101    |  | $ | (701     | ) |  |       |  
|                              |  |                           |        |   |      |   |        |  |   |          |   |  |       |  
|Customers at June 30          |  |                           |        |   |      |   |        |  |   |          |   |  |       |  
|DSL                           |  |                           | 14,993 |   |      |   | 8,706  |  |   | 6,287    |   |  | 72.2  |  
|Dial-up Access                |  |                           | 10,082 |   |      |   | 12,514 |  |   | (2,432   | ) |  | (19.4 | )
|Web-hosting Services          |  |                           | 929    |   |      |   | 872    |  |   | 57       |   |  | 6.5   |  



Internet Services
segment revenues increased $1,253, or 24.8%, to $6,300 in the six months ended June 30, 2005, from $5,047 in the six months ended June 30, 2004. The increase resulted from additional DSL customers and included approximately $271 of DSL revenue
recorded as CLEC revenue in the previous year, prior to the wholesale arrangement effective January 1, 2005. Revenue per DSL customer declined as a result of temporary promotional rates for new customers and the introduction of lower priced levels
of DSL service. The decrease in dial-up subscriber resulted in a 16.5% decrease in dial-up revenue.



Operating expenses for the Internet Services segment increased $1,954, or 39.5%, to $6,900 in the first half of 2005, from $4,946 in the same period of
2004. Wage and benefits increased $213 resulting from the increased number of subscribers and included $126 related to the initiation of our new VoIP phone service. Other initial VoIP expenses increased approximately $130. Direct costs of operations
increased from increased broadband capacity to accommodate the anticipated larger number of customers and approximately $230 from the CLEC wholesale transport charge, which began in 2005. Depreciation increased as a result of more assets being
employed and management fees increased by $179 as the Internet segment was allocated a larger percentage of corporate overhead in 2005, as a result of our annual update to the formula that distributes overhead expenses to the segments.



Systems Integration Segment Results



|                              |  |                             |        |   |      |   |        |        |  |   |          |   |  |       |  
|----------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | ------ |  | - | -------- | - |  | ----- | -
|                              |  | Three months ended June 30, |       
|                              |  | 2005                        |        |   | 2004 |   |        | Change |  |   | % Change |  
|Revenues                      |  | $                           | 5,320  |   |      | $ | 6,243  |        |  | $ | (923     | ) |  | (14.8 | )
|Depreciation and Amortization |  |                             | 433    |   |      |   | 487    |        |  |   | (54      | ) |  | (11.1 | )
|Other Operating Expenses      |  |                             | 6,469  |   |      |   | 6,945  |        |  |   | (476     | ) |  | (6.9  | )
|                              |  |                             |        |   |      |   |        |        |  |   |          |   |  |       |  
|Total Operating Expenses      |  |                             | 6,902  |   |      |   | 7,432  |        |  |   | (530     | ) |  | (7.1  | )
|                              |  |                             |        |   |      |   |        |        |  |   |          |   |  |       |  
|Operating Loss                |  | $                           | (1,582 | ) |      | $ | (1,189 | )      |  | $ | (393     | ) |  | 33.1  |  
|                              |  |                             |        |   |      |   |        |        |  |   |          |   |  |       |  



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Systems Integration segment revenues decreased $923, or 14.8%, to $5,320 in the three months ended June 30, 2005, from $6,243 in the three months ended
June 30, 2004. The decrease consisted of $593 in communication services revenue related to a reduction in project hours worked for several large customers. A decrease in equipment sales of $330 was made up of a $182 decrease in telecommunications
voice products and $148 in computer products



Operating
expenses for the Systems Integration segment decreased $530, or 7.1%, to $6,902 in the first quarter 2005, from $7,432 in the same period of 2004. The major expense variance was a decrease of approximately $376 in wages and subcontractor services
and a decrease of $54 in depreciation. A large government service contract expired on June 30, 2005 and will likely result in further reductions of service revenue and expense in future quarters.



|                              |  |                           |        |   |      |   |        |        |  |   |          |   |  |       |  
|----------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | ------ |  | - | -------- | - |  | ----- | -
|                              |  | Six months ended June 30, |       
|                              |  | 2005                      |        |   | 2004 |   |        | Change |  |   | % Change |  
|Revenues                      |  | $                         | 10,202 |   |      | $ | 12,396 |        |  | $ | (2,194   | ) |  | (17.7 | )
|Depreciation and Amortization |  |                           | 881    |   |      |   | 985    |        |  |   | (104     | ) |  | (10.6 | )
|Other Operating Expenses      |  |                           | 12,318 |   |      |   | 13,731 |        |  |   | (1,413   | ) |  | (10.3 | )
|                              |  |                           |        |   |      |   |        |        |  |   |          |   |  |       |  
|Total Operating Expenses      |  |                           | 13,199 |   |      |   | 14,716 |        |  |   | (1,517   | ) |  | (10.3 | )
|                              |  |                           |        |   |      |   |        |        |  |   |          |   |  |       |  
|Operating Loss                |  | $                         | (2,997 | ) |      | $ | (2,320 | )      |  | $ | (677     | ) |  | 29.2  |  
|                              |  |                           |        |   |      |   |        |        |  |   |          |   |  |       |  



Systems Integration
segment revenues decreased $2,194, or 17.7%, to $10,202 in the six months ended June 30, 2005, from $12,396 in the six months ended June 30, 2004. The decrease consisted of $1,089 in communication services revenue related to a reduction in project
hours worked for several large customers and certain price reductions. A decrease of $1,105 in equipment sales resulted from $582 decrease in voice equipment and $523 in computer equipment sales.



Operating expenses for the Systems Integration segment decreased $1,517, or
10.3%, to $13,199 in the first half 2005, from $14,716 in the same period of 2004. The major expense variance was a decrease of approximately $687 in wages and subcontractor services, a decrease of $595 in material costs and a decrease of $104 in
depreciation. A large government service contract expired on June 30, 2005 will likely result in further reductions of service revenue and expense in future quarters.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Financial Condition



Liquidity and Capital Resources



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



|                                |  |                           |         |   |      |   |         |  
|------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                |  | Six months ended June 30, |        
|                                |  | 2005                      |         |   | 2004 |  
|Net cash provided by (used in): |  |                           |         |   |      |   |         |  
|Operating activities            |  | $                         | 17,376  |   |      | $ | 23,870  |  
|Investing activities            |  |                           | (11,889 | ) |      |   | (10,052 | )
|Financing activities            |  |                           | (11,169 | ) |      |   | (17,484 | )



Net cash provided by
operating activities was $17,376 in the six months ended June 30, 2005, compared with $23,870 in the same period of 2004. Net cash provided by operating activities in the six months ended June 30, 2005 was primarily attributable to net income plus
non-cash expenses for depreciation and amortization, an increase in accounts payable and accrued liabilities, offset by the gain on investments and cash recovery of a note receivable, an increase in prepaid expenses and a decrease in accrued taxes,
advance billings and customer deposits. The primary reason for the decrease from 2004 to 2005 was the collection of an income tax refund of $3,065 in 2004 with no similar refund collected in 2005 and an increase in income tax payments of $3,218 in
2005 over 2004.



Net cash used in investing activities was
$11,889 in the six months ended June 30, 2005, compared with net cash of $10,052 used in the same period of 2004. Capital additions in the first six months of 2005 were primarily for information technology upgrades of approximately $4,699,
communications network enhancements of approximately $7,070 and outside plant expansion totaling approximately $3,212. Investing activities included a cash receipt of $2,900 from the sale of our interest in PenTeleData in February 2005 with no
similar receipt in 2004. In the first six months of 2005, principal payments of $750 were received on the note that was part of the sale price for the Conestoga Wireless assets. We expect to receive additional principal payments of $625 on this note
during the remainder of 2005.



Net cash used in financing
activities was $11,169 in the six months ended June 30, 2005, compared with $17,484 of net cash used in the same period of 2004. In the first six months of 2005, payment of dividends of $3,408 was a slight decrease in use of funds from dividends
paid in the first half of the prior year as a result of treasury shares purchased in August 2004. Long-term debt payments were $8,000 in the six months ended June 30, 2005, including a $3,000 voluntary prepayment made on March 14, 2005. The
long-term debt refinancing on March 5, 2004 was the significant financing activity in 2004 with proceeds of $200,000 of which $191,700 was used to repay the original loan and $1,971 to pay new debt issuance costs. Scheduled and voluntary repayments
of long-term bank debt totaled $17,600 for the first six months of 2004. Additionally, a long-term capital lease obligation was reduced by $2,678 as a result of the capital lease payments, the eventual purchase of the office building and land and
cancellation of the lease.



External Sources of Capital at June 30, 2005



As of June 30, 2005, our credit facility consists of Term
Loan A (a $50,000 single draw 10-year senior term loan with a remaining balance of $34,061), Term Loan B (a $150,000 single draw 8.5-



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



year senior term loan with a remaining balance of $146,189) and an 8.5-year senior reducing revolving credit facility, with a total availability of $25,000 ($18,000
remaining available) to fund capital expenditures, acquisitions, general corporate purposes and working capital needs. In connection with the Conestoga acquisition, we acquired its long-term loans of $35,000 (single draw loans with a remaining
balance of $33,250), which were transferred to D&E Communications under the same terms as part of the March 2004 refinancing.



The Term Loan A requires interest payments with increasing quarterly principal payments, which began in the first quarter of 2004 and continue through the
second quarter of 2011. The Term Loan B requires interest payments with small quarterly principal payments, which began in the first quarter of 2004 and continue through 2010 and four large quarterly payments in 2011. The revolving credit facility
requires interest only payments until December 31, 2006 when the commitment will be reduced from $25,000 to $15,000 until the final required payment on June 30, 2011. Interest on Term Loan A and the revolving credit facility is payable at the U.S.
prime rate plus an applicable margin or at LIBOR rates plus an applicable margin based on our leverage ratio. Term Loan B bears interest at our option at either the U.S. prime rate plus 1.00% or a one, two, three or six month LIBOR rate plus 2.00%,
regardless of the Companys leverage ratio. A commitment fee of 0.50% must be paid on the unused portion of the revolving credit facility. The fixed interest rate loans of $35,000 transferred from Conestoga required interest only payments until
the first quarter of 2005 and equal quarterly principal payments from the first quarter of 2005 through the fourth quarter of 2014.



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
leverage ratio, maximum indebtedness to total capitalization ratio, debt service coverage and fixed charge coverage. As of June 30, 2005, we had no other unsecured lines of credit. As of June 30, 2005, $18,000 of the revolving credit facility was
available for borrowing without violating any of the covenants. Our ratio of total debt to total debt plus capital decreased to 55.0% at June 30, 2005 from 56.3% at December 31, 2004 due to our long-term debt principal repayments.



Commitments, Contingencies and Projected Uses of Capital



We believe that our most significant commitments, contingencies and
projected uses of funds in 2005, other than for operations, include capital expenditures, the payment of quarterly common stock dividends, as and when declared by the board of directors, scheduled principal payments on our long-term debt, and other
contractual obligations. On July 28, 2005, we declared a quarterly common stock dividend of $0.125 per share payable on September 15, 2005, to holders of record on September 1, 2005. We expect that this dividend will result in an aggregate payment
of approximately $1,700. We believe that we have adequate internal and external resources available to meet ongoing operating requirements.



On May 24, 2002, pursuant to the merger agreement with Conestoga, D&E assumed Conestogas obligations under a Build-to-Suit agreement
(BTS) with Mountain Union Telecom LLC (Mountain Union). The obligations related to the construction of 20 wireless tower sites for Conestogas wireless subsidiary, Conestoga Wireless Company (CWC). In
November 2002, D&E



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



entered into an asset purchase agreement (the Asset Purchase Agreement) with Keystone Wireless LLC (Keystone Wireless) for the sale of CWC.
Although D&E sold the assets of this business, its obligations under the BTS were not assumed by Keystone Wireless. Under the BTS, D&E is obligated to work with Mountain Union to find and develop 20 wireless tower sites and, in the event its
obligations under the BTS are not timely fulfilled, is obligated to pay a penalty to Mountain Union for nonperformance. Under the Asset Purchase Agreement, Keystone Wireless is obligated to enter into long-term operating leases for antenna space on
up to 15 of the towers erected under the BTS, including the nine transferred to Keystone Wireless at the closing of the sale transaction. In 2003, D&E paid Mountain Union $700 for its BTS obligation due for seven wireless tower sites that
definitely would not be constructed. In July 2004, D&E paid Mountain Union $200 for an additional two tower sites that would not be constructed. Under the terms of the Asset Purchase Agreement, Keystone is obligated to reimburse D&E for
one-half of the penalties paid under the BTS, not to exceed $125. Because the underlying assets of CWC were sold under the Asset Purchase Agreement, D&E has considered any remaining obligations and potential penalties under the BTS a contingent
liability. As of June 30, 2005, D&E has recorded $200 for its remaining commitment under the BTS as the potential cost or penalty for the two remaining sites. Construction has begun at both sites, and it is estimated that they will be completed
during the fourth quarter of 2005. Keystone Wireless has committed to lease space on both sites. Under the Asset Purchase Agreement, D&E is obligated to pay the cost of equipping one tower, using some of the equipment transferred to Keystone
Wireless in the sale, and one-half of the cost, up to $62.5 for the second.



As part of the Companys acquisition of Conestoga, D&E assumed a guarantee agreement with Mountain Union for the lease obligations on the wireless tower sites of Conestogas wireless subsidiary. When
D&E entered into the Asset Purchase Agreement with Keystone Wireless, whereby Keystone Wireless was assigned the responsibility for the leases, Mountain Union declined to release D&E from its guarantee. In the event of a default by Keystone
Wireless, D&E continues to guarantee the wireless tower site lease payments, which cover a 10-year period beginning on the commencement date of the lease of each tower. As such, the guarantee is a continuing guarantee provided on an individual
tower site basis. The lease payments start at $1.5 per site per month, with provision for an increase of 4% per year. The maximum potential amount of undiscounted future payments that D&E could be required to make under the guarantee as of June
30, 2005 is $12,311. The majority of these tower site leases and our guarantee will expire between 2011 and 2013. As of June 30, 2005, D&E has recorded a liability for the lease guarantees of $3,200. In the event that D&E is required to pay
in excess of $100 to Mountain Union under D&Es guarantee of the wireless tower site lease payments, then at such time, a default would occur on Keystone Wireless $10,000 note payable to D&E, received in connection with the sale
of the assets of CWC. Upon such default, the entire remaining balance of the $10,000 note would be immediately due and payable, and D&E could exercise its rights and remedies as the holder of a second lien security interest in all of the assets
of Keystone Wireless. D&E will recognize release from risk for the guarantee upon expiration or settlement of the guarantee.



We hold a 33% interest in EuroTel and a 28.88% direct interest in Pilicka, both of which we account for under the equity method of accounting. Pilicka
recognized an asset impairment late in 2004 requiring us to recognize a $1,068 loss in December 2004 for our equity share of the impairment. Since we and EuroTel have no legal obligation nor intention to provide future funding to Pilicka, we each
have written down our investment in Pilicka to zero and discontinued recognizing our equity share of their ongoing losses. EuroTel no longer records any value to its investment in



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Pilicka and therefore the value of our investment in EuroTel was written down as an other-than-temporary loss on investment of $1,057 in December 2004. Neither the assets
nor the liabilities of EuroTel or Pilicka is presented on a consolidated basis on our balance sheets. We have committed to loan EuroTel, on an equal basis with the other investors in EuroTel, funds for its operating cash needs. In the six months
ended June 30, 2005, we advanced $115 to EuroTel and expect that our total 2005 advances will be less than $500 in the aggregate.



Critical Accounting Policies



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



We have identified the following critical accounting policies, as those that are the most significant to our financial statement presentation and that
require difficult, subjective and complex judgments.



Revenue Recognition



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



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



We receive a portion of our interstate access revenues in our RLEC segments from settlement pools in which we participate with other telephone companies through NECA. These pools were established at the direction of the FCC and are funded
by interstate access service revenues, which the FCC regulates. Revenues earned through this pooling process are initially recognized based on estimates and are subject to adjustments that may either increase or decrease the amount of interstate
access revenues. If the actual amounts that we receive from the settlement pools differ from the amounts that we have recorded as accounts receivable on our balance sheets, we are required to record the amount of such a reduction or increase as an
adjustment to our earnings. During the first six months of 2005 and 2004, we have not recorded significant adjustments to our revenues as a result of our participation in these pools.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Regulated Asset Depreciation



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



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



Impairment of Long-Lived Assets



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



Impairment of Goodwill and Indefinite-Lived Intangibles



SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), requires that goodwill and intangible assets with indefinite lives no longer be
amortized to earnings, but instead be subject to at least an annual assessment for impairment and between annual tests in certain circumstances by comparing carrying value to fair value. There is a two-step process for goodwill. The first step is to
identify a potential impairment by comparing the fair value of reporting units to their carrying value. If the results of the first step of the impairment testing indicate a potential impairment, the second step would be completed to measure the
amount of any impairment loss. We continually evaluate whether events and circumstances have occurred that indicate the remaining balances of goodwill and indefinite-lived intangibles may not be recoverable. In evaluating impairment, we estimate the
sum of the expected future cash flows derived from such goodwill and indefinite-lived intangibles. Such evaluations for impairment are significantly impacted by estimates of future revenues, costs and expenses, the market price of our stock and
other factors. An impairment assessment was completed as of April 30, 2005 and did not result in an impairment charge for goodwill and indefinite-lived intangibles. Significant judgment is required to determine the fair value of reporting units, the



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



estimation of future cash flows, the estimation of discount rates, and other assumptions. Changes in these estimates and assumptions could have a significant impact on
the fair value and/or goodwill impairment of each reporting unit. If forecasts and assumptions used in the assessment analysis, change in the future, significant impairment charges could result that would adversely affect our results of operations
and financial condition.



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 that 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 represent obligations that will be settled in the future. Retirement benefits accounting is intended to reflect the recognition of future benefit costs over the employees approximate
service period based on the terms of the plans and the investment and funding decisions made by a company. We record the costs of providing retirement benefits in accordance with SFAS No. 87 Employers Accounting for Pensions. In
December 2003, we adopted SFAS No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits, which provides expanded disclosures related to our employee benefit plans. Our estimates include assumptions regarding
the discount rate to value the future obligation and the expected return on our plan assets. We use discount rates in line with current market interest rates on high quality fixed rate debt securities. Our return on assets is based on our current
expectation of the long-term returns on assets held by the plan. Changes in these key assumptions can have a significant impact on the projected benefit obligations, funding requirements and periodic benefit costs that we incur.



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.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



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



Recent Accounting Pronouncements



In May 2005,
the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections (SFAS 154), which changes the requirements
for the accounting and reporting of a change in accounting principle. This Statement requires retrospective application to reflect the period-specific effects of applying a new accounting principle, unless it is impracticable to determine. However,
when a new accounting pronouncement is issued, the specific transition provisions of that guidance are applied. SFAS 154 is effective for fiscal years beginning after December 15, 2005 and is not expected to have a significant effect on the
Companys financial position, results of operations or cash flows.



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



In December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment (SFAS 123R). SFAS 123R revises FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. This standard requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees (including stock options and discount stock purchase plans).
SFAS 123R requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The compensation cost of the award is recognized over the period during
which an employee is required to provide service, i.e. the requisite service period (usually the vesting period). In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107, Share-Based
Payment (SAB 107). SAB 107 provides further guidance based on the SEC staff views regarding the implementation of SFAS 123R.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



On April 21, 2005, the SEC delayed the effective date of SFAS 123R. D&E expects to adopt SFAS 123R in January 2006 and will apply the modified
prospective transition method. Under this method, a company records compensation expense for all new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation expense is recorded for the
unvested portion of previously granted awards that remain outstanding at the date of adoption. The cost of the unvested portion of the award is recognized as the requisite service is rendered on or after the required effective date. The adoption of
SFAS 123R is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.



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



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



Factors Affecting Our Prospects



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



The convergence of voice and data communication technologies is changing the communications industry. For several years, telephone and cable companies
have been able to provide data transmission, with telephone companies having the advantage in voice and cable companies having the advantage in video. Technology is reducing those advantages. The development of VoIP is changing voice communication
to a packet data transmission process. This enables cable companies, ISPs and new start-ups who require minimal capital investment; to compete with telephone companies for voice services and phone features like voicemail and unified communications.



Adding to the complexity of the competitive environment,
wireless offerings in voice and data are becoming increasingly competitive; and technology has been developed that could enable electric power transmission companies to compete in the communications industry in the future. Service offerings of
telephone, cable and electric power companies in voice, data and video may be similar,



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



while wireless is a significant provider in voice and data. In addition, the FCC is taking additional steps to further increase the amount of competition in the
marketplace. The FCC has implemented local number portability when switching end users between carriers, without regard to whether the new carrier is a wireline or wireless service provider.



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



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



Our RLECs held a limited suspension from certain interconnection requirements with competitors which expired in 2003. The
suspension had protected our RLEC markets by excluding us from requirements to allow competitors to have access to our customers by relying upon our services and facilities. Since the Pennsylvania Public Utility Act, as amended in November 2004,
provides a suspension only to RLECs under 50,000 lines, two of our three RLECs may see competitors seeking to remove our rural exemption for the purposes of entering our territory and using our services and facilities through interconnection
agreements to provide competitive services. The introduction of new competitors could result in the loss of customers and have a negative effect on our revenues and earnings. Although our two RLECs have lost their suspension from certain
interconnection requirements, changes at the federal level as noted below have provided some relief permitting our RLECs to offer only certain services, affording them a greater ability to recover their investment costs.



The PUC is currently considering changes in intrastate switched access rates
and intrastate USF reform for ILECs in Pennsylvania. The proceeding, which began in December 2004, addresses the rates that our RLECs charge to long distance carriers for intrastate toll calls that originate or terminate on our RLECs local
telephone lines. Our RLECs also receive funding from the Pennsylvania USF, which could be affected by the PUCs investigation. At this time, we cannot predict either the timing or the outcome of the PUCs proceeding.



The FCC has made changes and are considering additional changes that will
affect both our RLEC and CLEC operations. On December 15, 2004, the FCC adopted rules limiting ILEC unbundling obligations in order to provide incentives for both ILECs and CLECs to invest in the telecommunications market in a way that best allows
for innovation and sustainable competition. The new rules eliminate mass market switching as an unbundled network element and limit the availability of high-capacity loops and dedicated interoffice transport as unbundled network elements to CLECs.
While beneficial to our RLECs, our CLEC interconnects with and uses other telephone



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



companies networks to access certain of their customers in order to provide service, such as voice, and data communications and DSL. Our CLEC depends, in certain
circumstances, upon the technology and capabilities of other telephone companies as well as the quality, availability and maintenance of the facilities of those telephone companies. We must also maintain efficient procedures for ordering,
provisioning, maintaining and repairing facilities from these other telephone companies. We may not be able to obtain facilities and services of satisfactory quality from other telephone companies, or on satisfactory terms and conditions, in which
case we may experience delays in the growth of our CLEC networks and the degradation of the quality of our service to customers. The new rules may have an adverse impact on our CLECs because they purchase unbundled switching from ILECs. Although
Verizon has indicated that they will continue to offer unbundled switching on a commercial contract basis, our CLECs will receive less favorable terms and conditions in the commercial contract than they received under the prior FCC mandated
contracts.



The FCC, on February 10, 2005, initiated a
proceeding to develop a unified intercarrier compensation regime. This proceeding will affect our RLECs, CLECs, long distance and VoIP operations. The FCC is considering various plans that have been submitted to the FCC and has solicited comments
from the public concerning those proposals. Most, if not all of these proposals, if adopted would affect the intercarrier compensation revenues and expenses as well as the USF funding that our RLECs receive. We have been active in addressing these
proposals through our industry association, the USTA. The rule changes that result from this proceeding could have a material effect on our revenues, expenses and earnings. Until the FCC adopts a specific proposal, it is impossible to predict how
changes will affect our company.



The Supreme Court ruled in
favor of the FCC that cable modem service provided by cable operators is properly classified as an information service and not a telecommunications service. The FCC, on June 27, 2005 in response to the decision handed down by the Supreme Court,
indicated that they intended to place telephone companies DSL offerings on equal regulatory parity with cable modem service. On August 5, 2005, the FCC released an announcement that DSL would be classified as an information service. Management is in
the process of understanding the impact of this announcement. The changes the FCC will make and the impact they may have on our DSL service will not be known until the FCC releases a Notice of Proposed Rulemaking.



The FCC has yet to act on the uncertainty in the regulation of VoIP
offerings, placing VoIP at a regulatory advantage over our RLEC legacy telephone services. Currently, two recent FCC rulings have defined the regulatory status of VoIP as an information service subject to minimal regulation by the FCC rather than
state commission regulation. The FCC has issued a Notice of Proposed Rulemaking to investigate the appropriate regulatory treatment of VoIP services. It is unknown at this time when the FCC will act on this proposal or what effects any changes may
have on the results of our operations or financial conditions. The FCC has ordered strict requirements for the provision of 911 services by VoIP providers. All interconnected VoIP providers must notify customers regarding the provisions of 911
service and certify to the FCC that existing customers have been informed and that they acknowledged receipt of such information. Our ISP is in full compliance with the FCC requirements and we are working to make 911 available everywhere we wish to
offer the service. The cost to provide 911 connectivity in all potential locations is still under investigation.



The FCC also initiated a Notice of Proposed Rulemaking proposing changes to certain technical rules that would foster broadband deployment using the
capabilities of the nations power grid. All of



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



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



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



As of June 30, 2005, we had approximately $220,500 of
total indebtedness, including current maturities, most of which was incurred in connection with the Conestoga acquisition. We will use a substantial portion of our cash flow from operations, if any, to pay principal and interest on our indebtedness,
which will reduce the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes. Additionally, our level of indebtedness may make us more vulnerable to economic or industry downturns and competitive
pressures. The agreements governing our indebtedness contain covenants imposing financial and operating restrictions on our business. These restrictions may limit our ability to take advantage of potential business opportunities as they arise and
adversely affect the conduct of our business. These covenants place restrictions on our ability and the ability of our subsidiaries to, among other things:



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



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



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



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



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



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



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



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



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



The 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.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



As an integrated communications provider, we face competition from:



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



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



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



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



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



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



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



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



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



The Systems Integration Segment could be affected by the overall economic climate and the concentration of business among a few customers.



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



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



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



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



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##### Table of Contents

Form 10-Q

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)



Item 3. Quantitative and Qualitative Disclosure

About Market Risks

(Dollar
amounts are in thousands)



We are highly leveraged and, as
a result, our cash flows and earnings are exposed to fluctuations in interest rates. Our debt obligations are U.S. dollar denominated. Our market risk, therefore, is the potential loss arising from adverse changes in interest rates and changes in
our leverage ratio which may increase the margin added to the interest rate as provided in our loan agreement. During 2005, we have reduced our market risk as a result of having 65% of our long-term debt with fixed rates as compared with 53% as of
December 31, 2004. As of June 30, 2005, and December 31, 2004 our debt can be categorized as follows:



|                                         |  |               |         |                   |   |        
|---------------------------------------- |  | ------------- | ------- | ----------------- | - | -------
|                                         |  | June 30, 2005 |         | December 31, 2004
|Fixed interest rates:                    |  |               |         |                   |   |        
|Secured Term Loans                       |  | $             | 33,250  |                   | $ | 35,000 
|Subject to interest rate fluctuations:   |  |               |         |                   |   |        
|Senior Secured Revolving Credit Facility |  |               | 7,000   |                   |   | 10,000 
|Senior Secured Term Loans                |  |               | 180,250 |                   |   | 183,500
|                                         |  |               |         |                   |   |        
|                                         |  | $             | 220,500 |                   | $ | 228,500
|                                         |  |               |         |                   |   |        



As part of our loan
covenant conditions, we have arranged interest rate protection on more than one-half of the total amount of senior indebtedness outstanding, with a weighted average life of at least 2 years. As of June 30, 2005, our debt is as follows:



|                                                        |  |           |         |              |      |   |            |   |        
|------------------------------------------------------- |  | --------- | ------- | ------------ | ---- | - | ---------- | - | -------
|                                                        |  | Principal |         | Average Rate |      |   | Fair Value
|Rates fixed for three years through interest rate swaps |  | $         | 35,000  |              | 5.05 | % |            | $ | 35,000 
|Rates fixed for four years through interest rate swaps  |  |           | 35,000  |              | 5.49 | % |            |   | 35,000 
|Rates fixed for four years through interest rate swaps  |  |           | 15,000  |              | 5.98 | % |            |   | 15,000 
|Rates fixed for four years through interest rate swaps  |  |           | 25,000  |              | 6.18 | % |            |   | 25,000 
|Fixed rate debt, rates fixed for twelve years           |  |           | 33,250  |              | 9.35 | % |            |   | 38,292 
|                                                        |  |           |         |              |      |   |            |   |        
|Total fixed rate debt, 65%                              |  |           | 143,250 |              | 6.45 | % |            |   | 148,292
|Variable rate debt, 35%                                 |  |           | 77,250  |              | 5.72 | % |            |   | 77,250 
|                                                        |  |           |         |              |      |   |            |   |        
|                                                        |  | $         | 220,500 |              |      |   |            | $ | 225,542
|                                                        |  |           |         |              |      |   |            |   |        



If interest rates rise
above the rates of the variable debt, we could incur extra interest expense of $386 for each 50 basis points above the variable rates. If rates were to decline, we would realize reductions in interest expense of approximately $386 for each 50 basis
point decrease in rates.



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



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##### Table of Contents

Form 10-Q

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)



Item 3. Quantitative and Qualitative Disclosure

About Market Risks

(Dollar amounts are in thousands)



|                     |  |                  |        |                  |      |   |                       |      |   |                                 |   |     |  
|-------------------- |  | ---------------- | ------ | ---------------- | ---- | - | --------------------- | ---- | - | ------------------------------- | - | --- | -
|Terms of Swaps       |  | Notional Amounts |        | Average Pay Rate |      |   | Average Received Rate |      |   | Fair Value of Asset (Liability) |  
|12/04/02 to 12/04/05 |  | $                | 35,000 |                  | 6.93 | % |                       | 5.35 | % |                                 | $ | 89  |  
|11/25/02 to 11/25/06 |  | $                | 35,000 |                  | 7.23 | % |                       | 5.30 | % |                                 | $ | 178 |  
|11/25/04 to 11/25/08 |  | $                | 15,000 |                  | 5.98 | % |                       | 5.30 | % |                                 | $ | (9  | )
|06/30/05 to 08/26/09 |  | $                | 25,000 |                  | 5.18 | % |                       | 5.30 | % |                                 | $ | (42 | )



If interest rates rise
above the rates fixed by these swaps, we could realize other comprehensive income of $550 for each 50 basis points above the fixed rates. If rates were to decline, we would realize other comprehensive expense of approximately $550 for each 50 basis
point decrease in rates.



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



Item 4. Controls and Procedures



As of June 30, 2005, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporations management, including the Corporations Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be
disclosed in Corporation reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. These controls and
procedures, without limitation, include controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files under the Act is accumulated and communicated to the issuers management,
including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, the Corporations Chief Executive
Officer and Chief Financial Officer concluded that the Corporations disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.



It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitation of control
systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions, regardless of how remote. There have been no changes in our internal controls that could significantly affect internal
controls subsequent to the date we carried out this evaluation.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part II - Other Information



Item 1. Legal Proceedings



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



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



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



Our 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
leverage ratio, maximum indebtedness to total capitalization ratio, debt service coverage and fixed charge coverage. There is also an annual limitation of $10,000 on the payment of dividends.



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



(a) Date of meeting. The Annual Meeting of Shareholders was held on April 28, 2005.



(b) Matters Voted Upon at Annual Meeting. The vote tabulations in respect to the three matters voted upon at the 2005 Annual Meeting were as follows:



(1) Election of the four directors to hold
office for a three-year term to expire in 2008.



|                   |  |            |  |          
|------------------ |  | ---------- |  | ---------
|Director           |  | For        |  | Withheld 
|John Amos          |  | 11,819,901 |  | 502,179  
|G. William Ruhl    |  | 10,732,060 |  | 1,590,020
|W. Garth Sprecher  |  | 10,672,584 |  | 1,649,496
|Richard G. Weidner |  | 11,684,723 |  | 637,357  



(2)
Approval of the amendment and restatement of the Companys Articles of Incorporation.



|          |  |           |  |         |  |                
|--------- |  | --------- |  | ------- |  | ---------------
|For       |  | Against   |  | Abstain |  | Broker Non-Vote
|4,794,493 |  | 4,734,697 |  | 55,520  |  | 2,737,370      



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part II - Other Information



(3) Ratification of the Board of Directors selection of PricewaterhouseCoopers LLP as independent auditors in 2005.



|           |  |         |  |        
|---------- |  | ------- |  | -------
|For        |  | Against |  | Abstain
|12,063,554 |  | 214,678 |  | 43,848 



Item 5. Other Information



On
August 4, 2005, EuroTel LLC, HunTel Systems, Inc., D&E Investments, Inc. and Consolidated Companies, Inc., the shareholders of Pilicka sp. zo. o., agreed in principle to sell Pilicka to MNI S.A. for USD $15,750,000. D&E will receive its
share of the sale proceeds based on its ownership percentage. The Company expects that a definitive agreement will be negotiated and completed in the near future.



Item 6. Exhibits



(a)
Exhibits:



|           |  |                                                                                                                                         |  |                
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------
|ExhibitNo. |  | Identification of Exhibit                                                                                                               |  | Reference      
|           |  |                                                                                                                                        
|31         |  | Certification of the Chief Executive Officer and the Chief Financial Officer Required by Section 13a-15 of the Exchange Act             |  | Filed herewith.
|           |  |                                                                                                                                        
|32         |  | Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |  | Filed herewith.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries



Signatures



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                     |  |     |  |                                      
|-------------------- |  | --- |  | -------------------------------------
|                     |  |     |  | D&E Communications, Inc.             
|                     |  |    
|Date: August 9, 2005 |  |     |  |                                      
|                     |  | By: |  | /s/ James W. Morozzi                 
|                     |  |     |  | James W. Morozzi                     
|                     |  |     |  | President & Chief Executive Officer  
|Date: August 9, 2005 |  |     |  |                                      
|                     |  | By: |  | /s/ Thomas E. Morell                 
|                     |  |     |  | Thomas E. Morell                     
|                     |  |     |  | Senior Vice President,               
|                     |  |     |  | Chief Financial Officer and Treasurer



52