##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

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

For the quarterly period ended June 30, 2003


or

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

For the transition period
from  to


Commission File Number: 000-20709

D&E Communications, Inc.

(Exact name of registrant as specified in its charter)


PENNSYLVANIA
(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

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 August 8, 2003
|                                        |  |                              
|Common Stock, par value $0.16 per share |  | 15,525,156 Shares            





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TABLE OF CONTENTS



|                                       |                                                                                               |                                                 |  |  |  |  |  | 
|-------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|PART I. - FINANCIAL INFORMATION       
|                                       | Item 1. Financial Statements                                                                 
|                                       |                                                                                               | Consolidated Statements of Operations          
|                                       |                                                                                               | Consolidated Balance Sheets                    
|                                       |                                                                                               | Consolidated Statements of Cash Flows          
|                                       |                                                                                               | Consolidated Statements of Shareholders Equity
|                                       | Item 1. Notes to Consolidated Financial Statements                                           
|                                       | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                       | Item 3. Quantitative and Qualitative Disclosure About Market Risks                           
|                                       | Item 4. Controls and Procedures                                                              
|Part II - Other Information           
|                                       | Item 1. Legal Proceedings                                                                    
|                                       | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                       | Item 6. Exhibits and Reports on Form 8-K                                                     
|Signatures                            
|CERTIFICATIONS PURSUANT TO SECTION 302
|CERTIFICATIONS PURSUANT TO SECTION 906



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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.   Financial Statements                                                                  |                                                                                                          |      |                               |  
|                                                                                           | Consolidated Statements of Operations  For the three months and six months ended
June 30, 2003 and 2002 |      |                               | 1 | 
|                                                                                           | Consolidated Balance Sheets  June 30, 2003 and December 31, 2002                                        |      |                               | 2 | 
|                                                                                           | Consolidated Statements of Cash Flows  For the six months ended
June 30, 2003 and 2002                  |      |                               | 3 | 
|                                                                                           | Consolidated Statements of Shareholders Equity  For the six months ended
June 30, 2003 and 2002        |      |                               | 4 | 
|                                                                                           | Notes to Consolidated Financial Statements                                                               |      |                               | 5 | 
|2.   Managements Discussion and Analysis of Financial
Condition and Results of Operations |                                                                                                          |      | 18                            |  
|3.   Quantitative and Qualitative Disclosures
about Market Risk                            |                                                                                                          |      | 44                            |  
|4.   Controls and Procedures                                                               |                                                                                                          |      | 45                            |  
|                                                                                           |                                                                                                          |      | PART II. OTHER INFORMATION    |   |  |  | 
|1.   Legal Proceedings                                                                     |                                                                                                          |      | 46                            |  
|4.   Submission of Matters to a Vote of Security Holders                                   |                                                                                                          |      | 46                            |  
|6.   Exhibits and Reports on Form 8-K                                                      |                                                                                                          |      | 47                            |  
|SIGNATURES                                                                                 |                                                                                                          |      | 48                            |  

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D&E Communications, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per-share amounts)
(Unaudited)

|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |        |        |        |        |  
|--------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ---------------------------- | ----------------------------------------------------------------------------------------------------- | ---- | ------------------ | ------ | ---------------- | ------ | ------ | ------ | ------ | ---- | ------ | ------ | ------ | ------ | ------ | ------ | -
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      | Three Months Ended |        | Six Months Ended
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      | June 30,           |        | June 30,        
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                 
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      | 2003               |        | 2002             |        | 2003   |        | 2002  
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |       
|OPERATING REVENUE                                                                             |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|                                                                                              | Communication service revenues                                                                                                            |                                                             | $                            | 38,975                                                                                                |      |                    | $      | 22,673           |        |        | $      | 77,833 |      |        | $      | 38,582 |       
|                                                                                              | Communication products sold                                                                                                               |                                                             |                              | 3,698                                                                                                 |      |                    |        | 3,690            |        |        |        | 6,343  |      |        |        | 6,968  |       
|                                                                                              | Other                                                                                                                                     |                                                             |                              | 614                                                                                                   |      |                    |        | 467              |        |        |        | 1,196  |      |        |        | 857    |       
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|                                                                                              | Total operating revenues                                                                                                                  |                                                             |                              | 43,287                                                                                                |      |                    |        | 26,830           |        |        |        | 85,372 |      |        |        | 46,407 |       
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|OPERATING EXPENSES                                                                            |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|                                                                                              | Communication service expenses (exclusive of
depreciation and amortization below)                                                         |                                                             |                              | 14,473                                                                                                |      |                    |        | 8,618            |        |        |        | 29,429 |      |        |        | 15,624 |       
|                                                                                              | Cost of communication products sold                                                                                                       |                                                             |                              | 2,755                                                                                                 |      |                    |        | 3,257            |        |        |        | 5,016  |      |        |        | 6,032  |       
|                                                                                              | Depreciation and amortization                                                                                                             |                                                             |                              | 9,576                                                                                                 |      |                    |        | 5,847            |        |        |        | 19,127 |      |        |        | 9,728  |       
|                                                                                              | Marketing and customer services                                                                                                           |                                                             |                              | 3,891                                                                                                 |      |                    |        | 2,865            |        |        |        | 7,930  |      |        |        | 5,007  |       
|                                                                                              | Merger related costs                                                                                                                      |                                                             |                              |                                                                                                      |      |                    |        | 973              |        |        |        |       |      |        |        | 973    |       
|                                                                                              | General and administrative services                                                                                                       |                                                             |                              | 6,125                                                                                                 |      |                    |        | 5,961            |        |        |        | 12,200 |      |        |        | 9,497  |       
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|                                                                                              |                                                                                                                                           |                                                             | Total operating expenses     |                                                                                                       |      | 36,820             |        |                  |        | 27,521 |        |        |      | 73,702 |        |        |        | 46,861 |       
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|                                                                                              |                                                                                                                                           |                                                             |                              | Operating income (loss)                                                                               |      |                    | 6,467  |                  |        |        | (691   | )      |      |        | 11,670 |        |        |        | (454   | )
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|OTHER INCOME (EXPENSE)                                                                        |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|                                                                                              | Equity in net losses of affiliates                                                                                                        |                                                             |                              | (682                                                                                                  | )    |                    |        | (702             | )      |        |        | (1,360 | )    |        |        | (1,177 | )     
|                                                                                              | Interest expense                                                                                                                          |                                                             |                              | (4,602                                                                                                | )    |                    |        | (2,048           | )      |        |        | (9,197 | )    |        |        | (2,756 | )     
|                                                                                              | Other-than-temporary loss on investments                                                                                                  |                                                             |                              |                                                                                                      |      |                    |        | (2,999           | )      |        |        |       |      |        |        | (2,999 | )     
|                                                                                              | Other, net                                                                                                                                |                                                             |                              | 72                                                                                                    |      |                    |        | 194              |        |        |        | 928    |      |        |        | 201    |       
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|                                                                                              |                                                                                                                                           |                                                             | Total other income (expense) |                                                                                                       |      | (5,212             | )      |                  |        | (5,555 | )      |        |      | (9,629 | )      |        |        | (6,731 | )     
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|                                                                                              |                                                                                                                                           |                                                             |                              | Income (loss) from continuing operations
before
income taxes and dividends on utility
preferred stock |      |                    | 1,255  |                  |        |        | (6,246 | )      |      |        | 2,041  |        |        |        | (7,185 | )
|INCOME TAXES AND DIVIDENDS ON
UTILITY PREFERRED STOCK                                         |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|                                                                                              | Income taxes (benefit)                                                                                                                    |                                                             |                              | 428                                                                                                   |      |                    |        | (2,288           | )      |        |        | 743    |      |        |        | (2,437 | )     
|                                                                                              | Dividends on utility preferred stock                                                                                                      |                                                             |                              | 17                                                                                                    |      |                    |        | 17               |        |        |        | 33     |      |        |        | 33     |       
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|                                                                                              |                                                                                                                                           | Total income taxes and dividends
on utility preferred stock |                              |                                                                                                       | 445  |                    |        |                  | (2,271 | )      |        |        | 776  |        |        |        | (2,404 | )     
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|                                                                                              |                                                                                                                                           |                                                             |                              | Income (loss) from continuing operations                                                              |      |                    | 810    |                  |        |        | (3,975 | )      |      |        | 1,265  |        |        |        | (4,781 | )
|Discontinued operations:                                                                      |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|                                                                                              | Gain on disposal of discontinued D&E Wireless
Segment, net of operating losses during phase-out period and net of income taxes of $29,199 |                                                             |                              |                                                                                                      |      |                    |        | 55,785           |        |        |        |       |      |        |        | 55,785 |       
|                                                                                              | Loss from operations of discontinued
Paging business, net of income tax
benefit of $24, $3, $27 and $5                                    |                                                             |                              | (46                                                                                                   | )    |                    |        | (6               | )      |        |        | (53    | )    |        |        | (9     | )     
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|                                                                                              |                                                                                                                                           |                                                             |                              | Income before cumulative effect of change in
accounting principle                                     |      |                    | 764    |                  |        |        | 51,804 |        |      |        | 1,212  |        |        |        | 50,995 |  
|Cumulative effect of change in accounting principle,
net of income taxes of $177 (See Note 2) |                                                                                                                                           |                                                             |                             |                                                                                                       |      |                    |       |                  |        |        | 260    |        |      |        |       |       
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|NET INCOME                                                                                    |                                                                                                                                           | $                                                           | 764                          |                                                                                                       |      | $                  | 51,804 |                  |        | $      | 1,472  |        |      | $      | 50,995 |       
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|                                                                                              | Weighted average common shares outstanding                                                                                                |                                                             |                              | 15,453                                                                                                |      |                    |        | 10,722           |        |        |        | 15,437 |      |        |        | 9,047  |       
|BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE                                            |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|                                                                                              | Income (loss) from continuing operations                                                                                                  |                                                             | $                            | 0.05                                                                                                  |      |                    | $      | (0.37            | )      |        | $      | 0.08   |      |        | $      | (0.53  | )     
|                                                                                              | Income from discontinued operations                                                                                                       |                                                             |                              | 0.00                                                                                                  |      |                    |        | 5.20             |        |        |        | 0.00   |      |        |        | 6.17   |       
|                                                                                              | Cumulative effect of accounting change (See Note 2)                                                                                       |                                                             |                              | 0.00                                                                                                  |      |                    |        | 0.00             |        |        |        | 0.02   |      |        |        | 0.00   |       
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|                                                                                              |                                                                                                                                           | Net income (loss) per common share                          |                              | $                                                                                                     | 0.05 |                    |        | $                | 4.83   |        |        | $      | 0.10 |        |        | $      | 5.64   |       
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       
|                                                                                              | Dividends per common share                                                                                                                |                                                             | $                            | 0.13                                                                                                  |      |                    | $      | 0.13             |        |        | $      | 0.25   |      |        | $      | 0.25   |       
|                                                                                              |                                                                                                                                           |                                                             |                              |                                                                                                       |      |                    |        |                  |        |        |        |        |      |        |        |       

See notes to consolidated financial statements.

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##### Table of Contents






D&E Communications, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except per-share amounts)
(Unaudited)

|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |              |        |  |  | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------ | ------- | ------ | -------- | ------- | ------------ | ------ |  |  | 
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        | June 30, |         | December 31,
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        | 2003     |         | 2002        
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      | ASSETS  |        |          |         |              |        |  |  | 
|CURRENT ASSETS                                                                                                                                                                      |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|                                                                                                                                                                                    | Cash and cash equivalents                                                                       |                                                                                     | $                                    | 14,137  |        |          | $       | 15,514       |       
|                                                                                                                                                                                    | Accounts receivable, net of reserves of $1,162 and $1,416                                       |                                                                                     |                                      | 17,780  |        |          |         | 19,368       |       
|                                                                                                                                                                                    | Inventories, lower of cost or market, at average cost                                           |                                                                                     |                                      | 3,573   |        |          |         | 3,475        |       
|                                                                                                                                                                                    | Prepaid expenses                                                                                |                                                                                     |                                      | 10,213  |        |          |         | 7,454        |       
|                                                                                                                                                                                    | Other                                                                                           |                                                                                     |                                      | 1,174   |        |          |         | 1,074        |       
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|                                                                                                                                                                                    |                                                                                                 | TOTAL CURRENT ASSETS                                                                |                                      |         | 46,877 |          |         |              | 46,885 | 
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|INVESTMENTS                                                                                                                                                                         |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|                                                                                                                                                                                    | Investments in and advances to affiliated companies                                             |                                                                                     |                                      | 4,488   |        |          |         | 5,142        |       
|                                                                                                                                                                                    | Investments available-for-sale                                                                  |                                                                                     |                                      | 2,061   |        |          |         | 1,313        |       
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|                                                                                                                                                                                    |                                                                                                 |                                                                                     | 6,549                                |         |        |          | 6,455   |             
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|PROPERTY, PLANT AND EQUIPMENT                                                                                                                                                       |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|                                                                                                                                                                                    | In service                                                                                      |                                                                                     |                                      | 312,045 |        |          |         | 307,000      |       
|                                                                                                                                                                                    | Under construction                                                                              |                                                                                     |                                      | 6,373   |        |          |         | 3,456        |       
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|                                                                                                                                                                                    |                                                                                                 |                                                                                     | 318,418                              |         |        |          | 310,456 |             
|                                                                                                                                                                                    | Less accumulated depreciation                                                                   |                                                                                     |                                      | 123,167 |        |          |         | 109,351      |       
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|                                                                                                                                                                                    |                                                                                                 |                                                                                     | 195,251                              |         |        |          | 201,105 |             
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|OTHER ASSETS                                                                                                                                                                        |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|                                                                                                                                                                                    | Assets held for sale                                                                            |                                                                                     |                                      |        |        |          |         | 6,665        |       
|                                                                                                                                                                                    | Goodwill                                                                                        |                                                                                     |                                      | 147,488 |        |          |         | 147,488      |       
|                                                                                                                                                                                    | Intangible assets, net of accumulated amortization                                              |                                                                                     |                                      | 175,865 |        |          |         | 178,964      |       
|                                                                                                                                                                                    | Other                                                                                           |                                                                                     |                                      | 13,089  |        |          |         | 14,256       |       
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|                                                                                                                                                                                    |                                                                                                 |                                                                                     | 336,442                              |         |        |          | 347,373 |             
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|                                                                                                                                                                                    | TOTAL ASSETS                                                                                    |                                                                                     | $                                    | 585,119 |        |          | $       | 601,818      |       
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|                                                                                                                                                                                    |                                                                                                 |                                                                                     | LIABILITIES AND SHAREHOLDERS EQUITY |         |        |          |         |              |        |  | 
|CURRENT LIABILITIES                                                                                                                                                                 |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|                                                                                                                                                                                    | Long-term debt maturing within one year                                                         |                                                                                     | $                                    | 1,203   |        |          | $       | 132          |       
|                                                                                                                                                                                    | Accounts payable and accrued liabilities                                                        |                                                                                     |                                      | 21,614  |        |          |         | 20,112       |       
|                                                                                                                                                                                    | Accrued taxes                                                                                   |                                                                                     |                                      | 731     |        |          |         | 19,520       |       
|                                                                                                                                                                                    | Accrued interest and dividends                                                                  |                                                                                     |                                      | 1,767   |        |          |         | 1,840        |       
|                                                                                                                                                                                    | Advance billings, customer deposits and other                                                   |                                                                                     |                                      | 8,232   |        |          |         | 8,535        |       
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|                                                                                                                                                                                    |                                                                                                 | TOTAL CURRENT LIABILITIES                                                           |                                      |         | 33,547 |          |         |              | 50,139 | 
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|LONG-TERM DEBT                                                                                                                                                                      |                                                                                                 |                                                                                     | 244,630                              |         |        |          | 244,966 |             
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|OTHER LIABILITIES                                                                                                                                                                   |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|                                                                                                                                                                                    | Deferred income taxes                                                                           |                                                                                     |                                      | 84,132  |        |          |         | 85,516       |       
|                                                                                                                                                                                    | Other                                                                                           |                                                                                     |                                      | 22,634  |        |          |         | 19,148       |       
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|                                                                                                                                                                                    |                                                                                                 |                                                                                     | 106,766                              |         |        |          | 104,664 |             
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|PREFERRED
STOCK OF UTILITY SUBSIDIARY, Series A 4 1⁄2%,
par value $100, cumulative, callable at par at the option of the
Company, authorized 20,000 shares, outstanding 14,456 shares |                                                                                                 |                                                                                     | 1,446                                |         |        |          | 1,446   |             
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|COMMITMENTS                                                                                                                                                                         |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|SHAREHOLDERS EQUITY                                                                                                                                                                |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|                                                                                                                                                                                    | Common stock, par value $0.16, authorized shares 30,000,000                                     |                                                                                     |                                      | 2,524   |        |          |         | 2,512        |       
|                                                                                                                                                                                    |                                                                                                 | Outstanding shares: 15,492,305 at June 30, 2003 and
15,413,640 at December 31, 2002 |                                      |         |        |          |         |              |        | 
|                                                                                                                                                                                    | Additional paid-in capital                                                                      |                                                                                     |                                      | 158,856 |        |          |         | 158,101      |       
|                                                                                                                                                                                    | Accumulated other comprehensive income (loss)                                                   |                                                                                     |                                      | (7,327  | )      |          |         | (7,071       | )     
|                                                                                                                                                                                    | Retained earnings                                                                               |                                                                                     |                                      | 49,959  |        |          |         | 52,343       |       
|                                                                                                                                                                                    | Treasury stock at cost, 306,913 shares at June 30, 2003 and
306,910 shares at December 31, 2002 |                                                                                     |                                      | (5,282  | )      |          |         | (5,282       | )     
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|                                                                                                                                                                                    |                                                                                                 |                                                                                     | 198,730                              |         |        |          | 200,603 |             
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             
|                                                                                                                                                                                    | TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                      |                                                                                     | $                                    | 585,119 |        |          | $       | 601,818      |       
|                                                                                                                                                                                    |                                                                                                 |                                                                                     |                                      |         |        |          |         |             

See notes to consolidated financial statements.

2



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##### Table of Contents






D&E Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)

|                                                              |                                                                            |                                                                                |        |         |         |                  |         |          |          |   |  | 
|------------------------------------------------------------- | -------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ------ | ------- | ------- | ---------------- | ------- | -------- | -------- | - |  | 
|                                                              |                                                                            |                                                                                |        |         |         | Six Months Ended
|                                                              |                                                                            |                                                                                |        |         |         | June 30,        
|                                                              |                                                                            |                                                                                |        |         |         | 2003             |         | 2002    
|                                                              |                                                                            |                                                                                |        |         |         |                  |         |         
|CASH FLOWS FROM OPERATING ACTIVITIES OF
CONTINUING OPERATIONS |                                                                            | $                                                                              | 20,021 |         |         | $                | 2,721   |         
|                                                              |                                                                            |                                                                                |        |         |         |                  |         |         
|CASH FLOWS FROM INVESTING ACTIVITIES                          |                                                                            |                                                                                |        |         |         |                  |         |         
|                                                              | Capital expenditures, net of proceeds from sales                           |                                                                                |        | (7,951  | )       |                  |         | (10,763  | )       
|                                                              | Business acquisition costs                                                 |                                                                                |        |        |         |                  |         | (156,143 | )       
|                                                              | Proceeds from Conestoga Wireless and Paging sales                          |                                                                                |        | 10,176  |         |                  |         |         |         
|                                                              | Increase in investments and advances to affiliates                         |                                                                                |        | (825    | )       |                  |         | (1,267   | )       
|                                                              | Decrease in investments and repayments from affiliates                     |                                                                                |        | 120     |         |                  |         | 550      |         
|                                                              |                                                                            |                                                                                |        |         |         |                  |         |         
|                                                              |                                                                            | Net Cash Provided By (Used In) Investing Activities from
Continuing Operations |        |         | 1,520   |                  |         |          | (167,623 | )
|                                                              |                                                                            |                                                                                |        |         |         |                  |         |         
|CASH FLOWS FROM FINANCING ACTIVITIES                          |                                                                            |                                                                                |        |         |         |                  |         |         
|                                                              | Dividends on common stock                                                  |                                                                                |        | (3,689  | )       |                  |         | (2,718   | )       
|                                                              | Payments on long-term debt                                                 |                                                                                |        | (11,264 | )       |                  |         | (42,210  | )       
|                                                              | Proceeds from long-term debt financing                                     |                                                                                |        | 12,000  |         |                  |         | 160,000  |         
|                                                              | Payment of debt issuance costs                                             |                                                                                |        |        |         |                  |         | (7,922   | )       
|                                                              | Net proceeds from (payments on) revolving lines of credit                  |                                                                                |        |        |         |                  |         | (11,757  | )       
|                                                              | Proceeds from issuance of common stock                                     |                                                                                |        | 588     |         |                  |         | 570      |         
|                                                              |                                                                            |                                                                                |        |         |         |                  |         |         
|                                                              |                                                                            | Net Cash Provided By (Used In) Financing Activities
from Continuing Operations |        |         | (2,365  | )                |         |          | 95,963   |  
|                                                              |                                                                            |                                                                                |        |         |         |                  |         |         
|CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS              |                                                                            |                                                                                | 19,176 |         |         |                  | (68,939 | )       
|CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS            |                                                                            |                                                                                |        |         |         |                  |         |         
|                                                              | Cash Provided by (Used in) Operating Activities of
Discontinued Operations |                                                                                |        | (20,553 | )       |                  |         | 40       |         
|                                                              | Cash Provided by Investing Activities of Discontinued Operations           |                                                                                |        |        |         |                  |         | 75,435   |         
|                                                              |                                                                            |                                                                                |        |         |         |                  |         |         
|                                                              |                                                                            | Net Cash Provided by (Used In) Discontinued Operations                         |        |         | (20,553 | )                |         |          | 75,475   |  
|                                                              |                                                                            |                                                                                |        |         |         |                  |         |         
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS              |                                                                            |                                                                                | (1,377 | )       |         |                  | 6,536   |         
|CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD                 |                                                                            |                                                                                | 15,514 |         |         |                  | 615     |         
|                                                              |                                                                            |                                                                                |        |         |         |                  |         |         
|                                                              |                                                                            | END OF PERIOD                                                                  |        | $       | 14,137  |                  |         | $        | 7,151    |  
|                                                              |                                                                            |                                                                                |        |         |         |                  |         |         

See notes to consolidated financial statements.

3



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##### Table of Contents






D&E Communications, Inc. and Subsidiaries
Consolidated Statements of Shareholders Equity
For the six months ended June 30, 2003 and 2002
(in thousands)
(Unaudited)

|                                              |                                                                                                      |  |        |        |      |  |  |  |        |   |         |         |   |  |        |        |        |  |  |  |  |   |         |         |  
|--------------------------------------------- | ---------------------------------------------------------------------------------------------------- |  | ------ | ------ | ---- |  |  |  | ------ | - | ------- | ------- | - |  | ------ | ------ | ------ |  |  |  |  | - | ------- | ------- | -
|                                              |                                                                                                      |  | 2003   |        | 2002
|                                              |                                                                                                      |  |        |        |     
|                                              |                                                                                                      |  | Shares |        |      |  |  |  | Amount |   | Shares  |         |   |  |        |        | Amount
|                                              |                                                                                                      |  |        |        |      |  |  |  |        |   |         |         |   |  |        |        |       
|COMMON STOCK                                  |                                                                                                      |  |        |        |      |  |  |  |        |   |         |         |   |  |        |        |        |  |  |  |  |   |         |        
|                                              | Balance at beginning of year                                                                         |  |        | 15,721 |      |  |  |  |        |   | $       | 2,512   |   |  |        | 7,639  |        |  |  |  |  |   | $       | 1,219   |  
|                                              | Common stock issued for acquisition                                                                  |  |        |       |      |  |  |  |        |   |         |        |   |  |        | 7,869  |        |  |  |  |  |   |         | 1,259   |  
|                                              | Common stock issued for Employee Stock Purchase, Long-term
Incentive and Dividend Reinvestment Plans |  |        | 36     |      |  |  |  |        |   |         | 5       |   |  |        | 115    |        |  |  |  |  |   |         | 18      |  
|                                              | Common stock issued for stock options exercised                                                      |  |        | 42     |      |  |  |  |        |   |         | 7       |   |  |        | 40     |        |  |  |  |  |   |         | 6       |  
|                                              |                                                                                                      |  |        |        |      |  |  |  |        |   |         |         |   |  |        |        |        |  |  |  |  |   |         |        
|                                              | Balance at June 30                                                                                   |  |        | 15,799 |      |  |  |  |        |   |         | 2,524   |   |  |        | 15,663 |        |  |  |  |  |   |         | 2,502   |  
|                                              |                                                                                                      |  |        |        |      |  |  |  |        |   |         |         |   |  |        |        |        |  |  |  |  |   |         |        
|ADDITIONAL PAID-IN CAPITAL                    |                                                                                                      |  |        |        |      |  |  |  |        |   |         |         |   |  |        |        |        |  |  |  |  |   |         |        
|                                              | Balance at beginning of year                                                                         |  |        |        |      |  |  |  |        |   |         | 158,101 |   |  |        |        |        |  |  |  |  |   |         | 39,956  |  
|                                              | Common stock issued for acquisition                                                                  |  |        |        |      |  |  |  |        |   |         |        |   |  |        |        |        |  |  |  |  |   |         | 115,668 |  
|                                              | Common stock issued for Employee Stock Purchase
and Dividend Reinvestment Plan                       |  |        |        |      |  |  |  |        |   |         | 378     |   |  |        |        |        |  |  |  |  |   |         | 1,667   |  
|                                              | Common stock issued for stock options exercised                                                      |  |        |        |      |  |  |  |        |   |         | 377     |   |  |        |        |        |  |  |  |  |   |         | 367     |  
|                                              |                                                                                                      |  |        |        |      |  |  |  |        |   |         |         |   |  |        |        |        |  |  |  |  |   |         |        
|                                              | Balance at June 30                                                                                   |  |        |        |      |  |  |  |        |   |         | 158,856 |   |  |        |        |        |  |  |  |  |   |         | 157,658 |  
|                                              |                                                                                                      |  |        |        |      |  |  |  |        |   |         |         |   |  |        |        |        |  |  |  |  |   |         |        
|ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |                                                                                                      |  |        |        |      |  |  |  |        |   |         |         |   |  |        |        |        |  |  |  |  |   |         |        
|                                              | Balance at beginning of year                                                                         |  |        |        |      |  |  |  |        |   |         | (7,071  | ) |  |        |        |        |  |  |  |  |   |         | (2,833  | )
|                                              | Unrealized gain (loss) on investments, net of tax                                                    |  |        |        |      |  |  |  |        |   |         | 464     |   |  |        |        |        |  |  |  |  |   |         | (1,868  | )
|                                              | Loss realized on other-than-temporary decline, net of tax                                            |  |        |        |      |  |  |  |        |   |         |        |   |  |        |        |        |  |  |  |  |   |         | 1,825   |  
|                                              | Unrealized loss on interest rate swap agreements, net of tax                                         |  |        |        |      |  |  |  |        |   |         | (720    | ) |  |        |        |        |  |  |  |  |   |         |        |  
|                                              |                                                                                                      |  |        |        |      |  |  |  |        |   |         |         |   |  |        |        |        |  |  |  |  |   |         |        
|                                              | Balance at June 30                                                                                   |  |        |        |      |  |  |  |        |   |         | (7,327  | ) |  |        |        |        |  |  |  |  |   |         | (2,876  | )
|                                              |                                                                                                      |  |        |        |      |  |  |  |        |   |         |         |   |  |        |        |        |  |  |  |  |   |         |        
|RETAINED EARNINGS                             |                                                                                                      |  |        |        |      |  |  |  |        |   |         |         |   |  |        |        |        |  |  |  |  |   |         |        
|                                              | Balance at beginning of year                                                                         |  |        |        |      |  |  |  |        |   |         | 52,343  |   |  |        |        |        |  |  |  |  |   |         | 10,637  |  
|                                              | Net income (loss)                                                                                    |  |        |        |      |  |  |  |        |   |         | 1,472   |   |  |        |        |        |  |  |  |  |   |         | 50,995  |  
|                                              | Dividends on common stock: $0.25 per share for each period                                           |  |        |        |      |  |  |  |        |   |         | (3,856  | ) |  |        |        |        |  |  |  |  |   |         | (2,835  | )
|                                              |                                                                                                      |  |        |        |      |  |  |  |        |   |         |         |   |  |        |        |        |  |  |  |  |   |         |        
|                                              | Balance at June 30                                                                                   |  |        |        |      |  |  |  |        |   |         | 49,959  |   |  |        |        |        |  |  |  |  |   |         | 58,797  |  
|                                              |                                                                                                      |  |        |        |      |  |  |  |        |   |         |         |   |  |        |        |        |  |  |  |  |   |         |        
|TREASURY STOCK                                |                                                                                                      |  |        |        |      |  |  |  |        |   |         |         |   |  |        |        |        |  |  |  |  |   |         |        
|                                              | Balance at beginning of year                                                                         |  |        | (307   | )    |  |  |  |        |   |         | (5,282  | ) |  |        | (277   | )      |  |  |  |  |   |         | (5,104  | )
|                                              | Treasury stock acquired                                                                              |  |        |       |      |  |  |  |        |   |         |        |   |  |        |       |        |  |  |  |  |   |         |        |  
|                                              |                                                                                                      |  |        |        |      |  |  |  |        |   |         |         |   |  |        |        |        |  |  |  |  |   |         |        
|                                              | Balance at June 30                                                                                   |  |        | (307   | )    |  |  |  |        |   |         | (5,282  | ) |  |        | (277   | )      |  |  |  |  |   |         | (5,104  | )
|                                              |                                                                                                      |  |        |        |      |  |  |  |        |   |         |         |   |  |        |        |        |  |  |  |  |   |         |        
|TOTAL SHAREHOLDERS EQUITY                    |                                                                                                      |  | 15,492 |        |      |  |  |  |        | $ | 198,730 |         |   |  | 15,386 |        |        |  |  |  |  | $ | 210,977 |        
|                                              |                                                                                                      |  |        |        |      |  |  |  |        |   |         |         |   |  |        |        |        |  |  |  |  |   |         |        

|                            |                                                                                              |  |  |  |  |  |                    |      |                  |  |      |        |      |  |   |       |   |  |   |        |  
|--------------------------- | -------------------------------------------------------------------------------------------- |  |  |  |  |  | ------------------ | ---- | ---------------- |  | ---- | ------ | ---- |  | - | ----- | - |  | - | ------ | -
|                            |                                                                                              |  |  |  |  |  | Three months ended |      | Six months ended
|                            |                                                                                              |  |  |  |  |  | June 30,           |      | June 30,        
|                            |                                                                                              |  |  |  |  |  | 2003               |      | 2002             |  | 2003 |        | 2002
|                            |                                                                                              |  |  |  |  |  |                    |      |                  |  |      |        |     
|COMPREHENSIVE INCOME (LOSS) |                                                                                              |  |  |  |  |  |                    |      |                  |  |      |        |      |  |   |       |   |  |   |       
|                            | Net income                                                                                   |  |  |  |  |  | $                  | 764  |                  |  | $    | 51,804 |      |  | $ | 1,472 |   |  | $ | 50,995 |  
|                            | Unrealized gain (loss) on investments, net of income
taxes of $251,($774), $284 and ($1,198) |  |  |  |  |  |                    | 410  |                  |  |      | (1,211 | )    |  |   | 464   |   |  |   | (1,868 | )
|                            | Unrealized loss on interest rate swap agreements, net of income
taxes of ($335) and ($493)   |  |  |  |  |  |                    | (488 | )                |  |      |       |      |  |   | (720  | ) |  |   |       |  
|                            | Loss realized on other-than-temporary decline, net of tax of
$1,174                          |  |  |  |  |  |                    |     |                  |  |      | 1,825  |      |  |   |      |   |  |   | 1,825  |  
|                            |                                                                                              |  |  |  |  |  |                    |      |                  |  |      |        |      |  |   |       |   |  |   |       
|                            | Total comprehensive income                                                                   |  |  |  |  |  | $                  | 686  |                  |  | $    | 52,418 |      |  | $ | 1,216 |   |  | $ | 50,952 |  
|                            |                                                                                              |  |  |  |  |  |                    |      |                  |  |      |        |      |  |   |       |   |  |   |       

See notes to 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 Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)



|(1) |  | BASIS OF PRESENTATION
|--- |  | ---------------------



| |                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The accompanying 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 we have
prepared them pursuant to generally accepted accounting principles and
the rules and regulations of the Securities and Exchange Commission
(SEC). In the opinion of management, the financial statements include all
adjustments (consisting of normal recurring adjustments) necessary to
present fairly our results of operations, financial position and cash
flows for the periods presented. Certain items in the financial
statements for the three months and six months ended June 30, 2002 have
been reclassified for comparative purposes to conform to the current
periods presentation. In addition, 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. We believe 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, 2002.

Stock Compensation



| |                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company accounts for stock compensation under the intrinsic
value method of APB Opinion 25 and related interpretations. Based on the
additional disclosure requirements of SFAS No. 148, the following table
illustrates the effect on net income and earnings per share if the
Company had applied the fair value recognition provisions of SFAS No.
123.

|                                         |                      |                                                                                                                      |     |                    |     |                  |        |        |   |      |       |       |     |   |        |        |   | 
|---------------------------------------- | -------------------- | -------------------------------------------------------------------------------------------------------------------- | --- | ------------------ | --- | ---------------- | ------ | ------ | - | ---- | ----- | ----- | --- | - | ------ | ------ | - | 
|                                         |                      |                                                                                                                      |     | Three months ended |     | Six months ended
|(In thousands, except per share amounts) |                      | June 30,                                                                                                             |     | June 30,          
|                                         |                      |                                                                                                                      |     | 2003               |     | 2002             |        | 2003   |   | 2002
|                                         |                      |                                                                                                                      |     |                    |     |                  |        |        |   |     
|Net income, as reported                  |                      | $                                                                                                                    | 764 |                    |     | $                | 51,804 |        |   | $    | 1,472 |       |     | $ | 50,995 |       
|                                         |                      | Add: stock-based employee compensation included in
reported net income, net of related tax                           |     |                    |    |                  |        |        |  |      |       |       |    |   |        |        |  | 
|                                         |                      | Deduct: total stock-based employee compensation
expense determined under fair value-based method,
net of related tax |     |                    | (12 | )                |        |        |  |      |       |       | (25 | ) |        |        |  | 
|                                         |                      |                                                                                                                      |     |                    |     |                  |        |        |   |      |       |       |     |   |        |       
|                                         | Pro forma net income |                                                                                                                      | $   | 752                |     |                  | $      | 51,804 |   |      | $     | 1,447 |     |   | $      | 50,995 |  
|                                         |                      |                                                                                                                      |     |                    |     |                  |        |        |   |      |       |       |     |   |        |       
|Basic and diluted income per share:      |                      |                                                                                                                      |     |                    |     |                  |        |        |   |      |       |       |     |   |        |       
|                                         | As reported          |                                                                                                                      | $   | 0.05               |     |                  | $      | 4.83   |   |      | $     | 0.10  |     |   | $      | 5.64   |  
|                                         | Pro forma            |                                                                                                                      | $   | 0.05               |     |                  | $      | 4.83   |   |      | $     | 0.09  |     |   | $      | 5.64   |  

5



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##### Table of Contents



D&E Communications, Inc. and Subsidiaries
Part I  - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)

The fair value of options grants of $4.46 and $6.20, based on the
estimated value at the date of grant, both of which were in the year
ended December 31, 2002 and options converted at the Conestoga
acquisition of $7.20 is estimated using the Black-Scholes option price
model with the following assumptions that have not changed since no
options were granted in 2003:

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



|(2) |  | ACCOUNTING CHANGES AND RECENT ACCOUNTING PRONOUNCEMENTS
|--- |  | -------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In May 2003, the Financial Accounting Standards Board (FASB)
issued SFAS No. 150, Accounting for Certain financial Instruments with
Characteristics of both Liabilities and Equity (SFAS No. 150). SFAS
No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities
and equity. The preferred stock of utility subsidiary does not fall
within the guidance of SFAS No. 150 requiring classification as a
liability.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities (SFAS No. 149).
SFAS No. 149 amends and clarifies the accounting guidance on derivative
instruments (including certain derivative instruments embedded in other
contracts) and hedging activities that fall within the scope of SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 149 also amends certain other existing pronouncements, which will
result in more consistent reporting of contracts that are derivatives in
their entirety or that contain embedded derivatives that warrant separate
accounting. This Statement, the provisions of which are applied,
prospectively is effective for contracts entered into or modified after
June 30, 2003, with certain exceptions, and for hedging relationships
designated after June 30, 2003. The Company does not expect the adoption
of SFAS 149 to have a material impact on the Companys financial
position, results of operations or cash flows.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS No. 143). This Statement establishes
accounting practices relating to legal obligations associated with the
retirement of tangible long-lived assets that result from the
acquisition, construction, development or normal operation of a
long-lived asset. SFAS No. 143 requires that companies recognize the fair
value of a liability for asset retirement obligations in the period in
which the legal obligations are incurred and capitalize that amount as a
part of the book value of the long-lived asset. That cost is then
depreciated over the remaining life of the underlying long-lived asset.
D&E adopted SFAS No. 143 effective January 1, 2003 and recorded an
after-tax benefit of approximately $260 as a cumulative effect accounting
adjustment in the first quarter 2003. The adjustment represents the
cumulative estimate of cost of removal charged to depreciation expense in
earlier years. As a result, D&E has no liability accrued at June 30,
2003.

6



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##### Table of Contents



D&E Communications, Inc. and Subsidiaries
Part I  - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)



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

|                           |  |                    |      |                  |  |             |      |           |  |   |       |  |  |   |       | 
|-------------------------- |  | ------------------ | ---- | ---------------- |  | ----------- | ---- | --------- |  | - | ----- |  |  | - | ----- | 
|                           |  | Three months ended |      | Six months ended
|                           |  | June 30, 2003      |      | June 30, 2003   
|                           |  |                    |      |                 
|                           |  | As Reported        |      | Pro forma        |  | As Reported |      | Pro forma
|                           |  |                    |      |                  |  |             |      |          
|Net income                 |  | $                  | 764  |                  |  | $           | 764  |           |  | $ | 1,472 |  |  | $ | 1,212 | 
|Basic earnings per share   |  | $                  | 0.05 |                  |  | $           | 0.05 |           |  | $ | 0.10  |  |  | $ | 0.08  | 
|Diluted earnings per share |  | $                  | 0.05 |                  |  | $           | 0.05 |           |  | $ | 0.10  |  |  | $ | 0.08  | 

|                           |  |                    |        |                  |  |             |        |           |  |   |        |  |  |   |        | 
|-------------------------- |  | ------------------ | ------ | ---------------- |  | ----------- | ------ | --------- |  | - | ------ |  |  | - | ------ | 
|                           |  | Three months ended |        | Six months ended
|                           |  | June 30, 2002      |        | June 30, 2002   
|                           |  |                    |        |                 
|                           |  | As Reported        |        | Pro forma        |  | As Reported |        | Pro forma
|                           |  |                    |        |                  |  |             |        |          
|Net income                 |  | $                  | 51,804 |                  |  | $           | 51,810 |           |  | $ | 50,995 |  |  | $ | 51,007 | 
|Basic earnings per share   |  | $                  | 4.83   |                  |  | $           | 4.83   |           |  | $ | 5.64   |  |  | $ | 5.64   | 
|Diluted earnings per share |  | $                  | 4.83   |                  |  | $           | 4.83   |           |  | $ | 5.64   |  |  | $ | 5.64   | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. D&E applied the initial
recognition and measurement provisions consistent with a prospective
basis effective December 31, 2002. This interpretation requires that at
the time a company issues a guarantee, the company must recognize a
liability for the fair value of that obligation under the guarantee. As
part of the Companys acquisition of Conestoga, D&E assumed a guarantee
agreement with Mountain Union Telecom for lease obligations on the
wireless tower sites of Conestogas wireless subsidiary. When D&E entered
into the asset purchase agreement with Keystone Wireless, whereby
Keystone Wireless was assigned the responsibility for the leases,
Mountain Union declined to release D&E from its guarantee. In the event
of a default by Keystone Wireless, D&E continues to guarantee the
wireless tower site lease payments, which cover a 10-year period
commencing 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 majority of these tower
site leases and our guarantee will expire in 2011 and thereafter. D&E has
estimated and recorded the fair value of the liability for the lease
guarantees of $3,200 and that is presented as an offset to the fair value
of the Conestoga assets held for sale at December 31, 2002.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities  An Interpretation of
Accounting Research Bulletin (ARB) No. 51 (FIN 46). This
interpretation clarifies how to identify variable interest entities and
how a company should assess its interests in a variable interest entity
to decide whether to consolidate the entity. FIN 46 applies to variable
interest entities created after January 31, 2003, in which a company
obtains an interest after that date. Also, FIN 46 applies in the first
fiscal quarter or interim period beginning

7



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##### Table of Contents



D&E Communications, Inc. and Subsidiaries
Part I  - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)



| |                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | after June 15, 2003, to variable interest entities in
which a company holds a variable interest that it acquired before
February 1, 2003. D&E is currently evaluating the impact of this
interpretation on the Companys financial position, results of operations
or cash flows.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In January 2003, the Emerging Issues Task Force issued EITF 00-21
Revenue Arrangements with Multiple Deliverables (EITF 00-21). EITF
00-21 primarily addresses certain aspects of the accounting by a vendor
for arrangements under which it will perform multiple revenue-generating
activities. Specifically, it addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit
of accounting. In applying EITF 00-21, separate contracts with the same
entity or related parties that are entered into at or near the same time
are presumed to have been negotiated as a package and should, therefore,
be evaluated as a single arrangement in considering whether there are one
or more units of accounting. That presumption may be overcome if there is
sufficient evidence to the contrary. EITF 00-21 also addresses how
arrangement consideration should be measured and allocated to the
separate units of accounting in the arrangement. The provisions of EITF
00-21 are effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. D&E is currently evaluating the
impact this statement will have on its financial position or results of
operations.



|(3) |  | EARNINGS PER SHARE
|--- |  | ------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Basic earnings per share amounts are based on income divided by the
weighted average number of shares of common stock outstanding during the
period. Diluted earnings per share amounts are based on income 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. The following table shows
how earnings per share were computed for the periods presented:

|                                            |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |   |  |  |  | 
|------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | - |  |  |  | 
|                                            |  | Three months ended |        | Six months ended
|                                            |  | June 30,           |        | June 30,        
|                                            |  |                    |        |                 
|                                            |  | 2003               |        | 2002             |  | 2003 |        | 2002 |  |   |        |  
|                                            |  |                    |        |                  |  |      |        |      |  |   |        |  
|Basic earnings (loss) per share computation |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations    |  | $                  | 810    |                  |  | $    | (3,975 | )    |  | $ | 1,265  |   |  | $ | (4,781 | )
|Income (loss) from discontinued operations  |  |                    | (46    | )                |  |      | 55,779 |      |  |   | (53    | ) |  |   | 55,776 |  
|Cumulative effect of accounting change      |  |                    |       |                  |  |      |       |      |  |   | 260    |   |  |   |       |  
|                                            |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Net income                                  |  | $                  | 764    |                  |  | $    | 51,804 |      |  | $ | 1,472  |   |  | $ | 50,995 |  
|                                            |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Weighted average shares (thousands)         |  |                    | 15,453 |                  |  |      | 10,722 |      |  |   | 15,437 |   |  |   | 9,047  |  
|                                            |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Basic earnings (loss) per share             |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations    |  | $                  | 0.05   |                  |  | $    | (0.37  | )    |  | $ | 0.08   |   |  | $ | (0.53  | )
|Income (loss) from discontinued operations  |  |                    |       |                  |  |      | 5.20   |      |  |   |       |   |  |   | 6.17   |  
|Cumulative effect of accounting change      |  |                    |       |                  |  |      |       |      |  |   | 0.02   |   |  |   |       |  
|                                            |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                           |  | $                  | 0.05   |                  |  | $    | 4.83   |      |  | $ | 0.10   |   |  | $ | 5.64   |  
|                                            |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  

8



---



##### Table of Contents



D&E Communications, Inc. and Subsidiaries
Part I  - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)

|                                                            |  |                             |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------- |  | --------------------------- | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                            |  | Three months ended June 30, |        | Six months ended
|                                                            |  | June 30,                    |        | June 30,        
|                                                            |  |                             |        |                 
|                                                            |  | 2003                        |        | 2002             |  | 2003 |        | 2002
|                                                            |  |                             |        |                  |  |      |        |     
|Diluted earnings (loss) per share computation               |  |                             |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations                    |  | $                           | 810    |                  |  | $    | (3,975 | )    |  | $ | 1,265  |   |  | $ | (4,781 | )
|Income (loss) from discontinued operations                  |  |                             | (46    | )                |  |      | 55,779 |      |  |   | (53    | ) |  |   | 55,776 |  
|Cumulative effect of accounting change                      |  |                             |       |                  |  |      |       |      |  |   | 260    |   |  |   |       |  
|                                                            |  |                             |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                           |  | $                           | 764    |                  |  | $    | 51,804 |      |  | $ | 1,472  |   |  | $ | 50,995 |  
|                                                            |  |                             |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Weighted average shares (thousands)                         |  |                             | 15,453 |                  |  |      | 10,722 |      |  |   | 15,437 |   |  |   | 9,047  |  
|Plus incremental shares from assumed stock
option exercises |  |                             | 45     |                  |  |      |       |      |  |   | 43     |   |  |   |       |  
|                                                            |  |                             |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Adjusted weighted average shares                            |  |                             | 15,498 |                  |  |      | 10,722 |      |  |   | 15,480 |   |  |   | 9,047  |  
|                                                            |  |                             |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Diluted earnings (loss) per share                           |  |                             |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations                    |  | $                           | 0.05   |                  |  | $    | (0.37  | )    |  | $ | 0.08   |   |  | $ | (0.53  | )
|Income (loss) from discontinued operations                  |  |                             |       |                  |  |      | 5.20   |      |  |   |       |   |  |   | 6.17   |  
|Cumulative effect of accounting change                      |  |                             |       |                  |  |      |       |      |  |   | 0.02   |   |  |   |       |  
|                                                            |  |                             |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                           |  | $                           | 0.05   |                  |  | $    | 4.83   |      |  | $ | 0.10   |   |  | $ | 5.64   |  
|                                                            |  |                             |        |                  |  |      |        |      |  |   |        |   |  |   |        |  



|(4) |  | ACQUISITION
|--- |  | -----------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On May 24, 2002, D&E completed the acquisition of Conestoga
Enterprises, Inc. (Conestoga), a neighboring rural local telephone
company providing integrated communications services throughout the
eastern half of Pennsylvania. The acquisition was completed through the
merger of Conestoga with and into D&E Acquisition Corp., a wholly-owned
subsidiary of D&E, pursuant to the Amended and Restated Agreement and
Plan of Merger, dated as of January 9, 2002.
|
| | The following unaudited pro forma combined results of operations is
provided for illustrative purposes only and assumes that this acquisition
had occurred as of the beginning of 2002. The following pro forma
information should not be relied upon as necessarily being indicative of
the historical results that would have been obtained if this acquisition
had occurred at the beginning of 2002, nor the results that may be
obtained in the future.         

|                                            |  |                    |        |                  |  |   |        | 
|------------------------------------------- |  | ------------------ | ------ | ---------------- |  | - | ------ | 
|                                            |  | Three months ended |        | Six months ended
|                                            |  | June 30, 2002      |        | June 30, 2002   
|                                            |  |                    |        |                 
|Pro forma operating revenues                |  | $                  | 42,470 |                  |  | $ | 85,948 | 
|Pro forma income before extraordinary items |  |                    | 46,434 |                  |  |   | 46,720 | 
|Pro forma net income                        |  |                    | 46,434 |                  |  |   | 46,720 | 
|Pro forma income per share                  |  | $                  | 2.91   |                  |  | $ | 3.00   | 

9



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##### Table of Contents



D&E Communications, Inc. and Subsidiaries
Part I  - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)



|(5) |  | INTANGIBLE ASSETS
|--- |  | -----------------



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | The intangible assets and related accumulated amortization recorded
on our balance sheets are as follows:

|                              |  |                     |         |                         |  |          |        |              |  |   |         |  |  |   |        |  
|----------------------------- |  | ------------------- | ------- | ----------------------- |  | -------- | ------ | ------------ |  | - | ------- |  |  | - | ------ | -
|                              |  | As of June 30, 2003 |         | As of December 31, 2002
|                              |  |                     |         |                        
|                              |  | Gross               |         |                         |  |          |        | Gross        |  |   |         | 
|                              |  | Carrying            |         | Accumulated             |  | Carrying |        | Accumulated 
|                              |  | amount              |         | amortization            |  | amount   |        | amortization
|                              |  |                     |         |                         |  |          |        |             
|Indefinite-lived
intangibles: |  |                     |         |                         |  |          |        |              |  |   |         |  |  |   |        |  
|Franchises                    |  | $                   | 104,800 |                         |  | $        |       |              |  | $ | 104,800 |  |  | $ |       |  
|Finite-lived intangibles:     |  |                     |         |                         |  |          |        |              |  |   |         |  |  |   |        |  
|Customer relationships        |  |                     | 75,700  |                         |  |          | (5,973 | )            |  |   | 75,700  |  |  |   | (3,217 | )
|Trademarks and
Trade names    |  |                     | 1,200   |                         |  |          | (433   | )            |  |   | 1,200   |  |  |   | (233   | )
|Non-compete agreements        |  |                     | 1,424   |                         |  |          | (853   | )            |  |   | 1,424   |  |  |   | (710   | )
|                              |  |                     |         |                         |  |          |        |              |  |   |         |  |  |   |        |  
|Total intangible assets       |  | $                   | 183,124 |                         |  | $        | (7,259 | )            |  | $ | 183,124 |  |  | $ | (4,160 | )
|                              |  |                     |         |                         |  |          |        |              |  |   |         |  |  |   |        |  



| |                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Aggregate amortization expense related to these intangible assets
recorded for the three months ended June 30, 2003 and 2002, and the six
months ended June 30, 2003 and 2002, was $1,554, $585, $3,109 and $657,
respectively.



|(6) |  | DISCONTINUED OPERATIONS
|--- |  | -----------------------

D&E Wireless



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | D&E owned a fifty percent partnership interest in PCS ONE and
performed related contract services to PCS ONE, which constituted a
separate segment of D&Es business. On October 17, 2001, D&E entered into
a definitive agreement to sell its interest in PCS ONE to VoiceStream
Wireless Corporation.                                                                                                                                                                
|
| | The assets and liabilities and results of operations of D&E Wireless
were reported as discontinued operations in accordance with APB Opinion
No. 30 with a measurement date of December 31, 2001. In accordance with
EITF 85-36, beginning January 1, 2002, through disposal date (the
phase-out period), losses from PCS ONE were deferred because it was
reasonably assured that the ultimate disposition of this business would
result in the recognition of a gain.
|
| | On April 1, 2002, D&E consummated the sale of PCS ONE. The related
contract services D&E provided to PCS ONE were terminated subsequent to
the sale, after a six-month post closing period.                                                                                                                                                                                                                                                                            
|
| | Upon completion of the sale, D&E received $74,168 in cash, subject
to post closing adjustments as set forth in the sale agreement. These
adjustments were finalized in the third quarter of 2002 and resulted in
additional cash proceeds of $2,294, which were collected in October 2002.
In addition, we received equipment with a fair value of approximately
$2,014.                                                                                               

10



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##### Table of Contents



D&E Communications, Inc. and Subsidiaries
Part I  - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)



| |                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Selling and other estimated costs were
approximately $3,836 and the gain on sale was $84,738 after
eliminating the $10,098 liability for the equity in net losses of
discontinued D&E Wireless operations in excess of investments and
advances. The associated income taxes were $29,301 resulting in an after
tax gain of $55,437.
|
| | During the three-month period ended March 31, 2003, D&E paid $20,500
in taxes related to gain on sale of PCS ONE which are included in cash
used in operating activities of discontinued operations in the statement
of cash flows.                                                                                                 
|
| | Summarized financial information for the discontinued operations of
our wireless business is as follows:                                                                                                                                                                                                                            

|                                     |                                                   |   |                    |        |                  |   |        |        | 
|------------------------------------ | ------------------------------------------------- | - | ------------------ | ------ | ---------------- | - | ------ | ------ | 
|                                     |                                                   |   | Three months ended |        | Six months ended
|                                     |                                                   |   | June 30, 2002      |        | June 30, 2002   
|                                     |                                                   |   |                    |        |                 
|Revenue                              |                                                   | $ | 1,230              |        |                  | $ | 4,012  |       
|Expenses                             |                                                   |   | 1,146              |        |                  |   | 3,591  |       
|                                     |                                                   |   |                    |        |                  |   |        |       
|                                     | Operating income                                  |   |                    | 84     |                  |   |        | 421    | 
|Equity in net loss of PCS ONE        |                                                   |   |                   |        |                  |   | (1,605 | )     
|Phase-out losses deferred until sale |                                                   |   |                   |        |                  |   | 1,268  |       
|Gain on sale of PCS ONE              |                                                   |   | 84,900             |        |                  |   | 84,900 |       
|                                     |                                                   |   |                    |        |                  |   |        |       
|                                     | Income from D&E Wireless operations
before taxes  |   |                    | 84,984 |                  |   |        | 84,984 | 
|Income taxes                         |                                                   |   | 29,199             |        |                  |   | 29,199 |       
|                                     |                                                   |   |                    |        |                  |   |        |       
|                                     | Income from discontinued operations, net of taxes |   | $                  | 55,785 |                  |   | $      | 55,785 | 
|                                     |                                                   |   |                    |        |                  |   |        |       



| |                                                                 
| | ----------------------------------------------------------------
| | The summarized results of operations of PCS ONE were as follows:

|                  |  |                    |   |                  |  |   |        |  
|----------------- |  | ------------------ | - | ---------------- |  | - | ------ | -
|                  |  | Three months ended |   | Six months ended
|                  |  | June 30, 2002      |   | June 30, 2002   
|                  |  |                    |   |                 
|Net sales         |  | $                  |  |                  |  | $ | 12,312 |  
|Net loss          |  |                    |  |                  |  | $ | (3,211 | )
|Our share of loss |  |                    |  |                  |  | $ | (1,605 | )

Paging Services



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

11



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##### Table of Contents



D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)



| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | asset impairment. This was caused by a smaller
customer base on the date of sale than anticipated when the agreement was
entered into. No liabilities were included as part of the sale.               
|
| | Summarized income statement information for the discontinued
operations of the paging services, including Conestoga Mobile Systems
operations post D&Es acquisition on May 24, 2002, were as follows:

|                                          |  |                    |     |                  |  |      |    |      |  |   |     |   |  |   |     |  
|----------------------------------------- |  | ------------------ | --- | ---------------- |  | ---- | -- | ---- |  | - | --- | - |  | - | --- | -
|                                          |  | Three months ended |     | Six months ended
|                                          |  | June 30,           |     | June 30,        
|                                          |  |                    |     |                 
|                                          |  | 2003               |     | 2002             |  | 2003 |    | 2002
|                                          |  |                    |     |                  |  |      |    |     
|Revenue                                   |  | $                  | 64  |                  |  | $    | 84 |      |  | $ | 236 |   |  | $ | 110 |  
|Expenses                                  |  |                    | 134 |                  |  |      | 93 |      |  |   | 316 |   |  |   | 124 |  
|                                          |  |                    |     |                  |  |      |    |      |  |   |     |   |  |   |     |  
|Operating loss                            |  |                    | (70 | )                |  |      | (9 | )    |  |   | (80 | ) |  |   | (14 | )
|Income taxes                              |  |                    | (24 | )                |  |      | (3 | )    |  |   | (27 | ) |  |   | (5  | )
|                                          |  |                    |     |                  |  |      |    |      |  |   |     |   |  |   |     |  
|Loss from paging operations, net of taxes |  | $                  | (46 | )                |  | $    | (6 | )    |  | $ | (53 | ) |  | $ | (9  | )
|                                          |  |                    |     |                  |  |      |    |      |  |   |     |   |  |   |     |  



|(7) |  | SALE OF CONESTOGA WIRELESS ASSETS
|--- |  | ---------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In connection with the acquisition of Conestoga, the Company had
committed to a plan to sell the assets of Conestogas wireless segment.
As such, these assets were reported as held for sale in accordance with
SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived
Assets. The assets were not depreciated while they were held for sale.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | On November 12, 2002, D&E entered into a definitive agreement to
sell substantially all of the assets of the Conestoga wireless segment to
Keystone Wireless, LLC (Keystone), a Delaware limited liability
company. Keystone is an affiliate of PC Management, Inc., a Ft. Myers,
Florida-based company that owns and manages wireless communications
systems throughout the United States. The sale was completed on January
14, 2003. Upon completion of the sale, and subject to certain purchase
price adjustments determined after closing, D&E received $10,000 in cash
and a $10,000 face value secured promissory note issued by Keystone. The
promissory note requires monthly principal payments for 48 months
beginning in January 2005. The note bears interest from the date of the
note, at the 60-day LIBOR rate plus 5% and is receivable beginning on
December 31, 2003 and on the last day of each quarter thereafter. As this
note receivable is from a highly leveraged entity and the business sold
has not generated positive cash flows, D&E will record value to the note
when cash recoveries are received. The note carries certain rights where
we can convert a portion or all of the principal balance of the note into
equity interests of Keystone. The conversion period begins on December
31, 2004 and ends May 1, 2005.
|
| | The results of operations of the Conestoga wireless segment held for
sale are not reported in discontinued operations because D&E has
continuing involvement after the sale as a result of D&Es continued
guarantees on wireless tower site leases and D&Es responsibilities under
a Build-to-Suit Agreement. No gain or loss was recorded as a result of
the sale. However a loss of $675 related to D&Es estimated commitments
in the Build-to-Suit Agreement has been recorded                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

12



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##### Table of Contents



D&E Communications, Inc. and Subsidiaries
Part I  - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)



| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | in communication
services expenses in 2002. The fair value of the Conestoga wireless
segment of $6,450 included in the final purchase price allocation was
determined as follows:

|                                                   |  |   |        |  
|-------------------------------------------------- |  | - | ------ | -
|Cash                                               |  | $ | 10,000 |  
|Less: costs to sell and purchase price adjustments |  |   | (350   | )
|Fair value of lease guarantees                     |  |   | (3,200 | )
|                                                   |  |   |        |  
|Total                                              |  | $ | 6,450  |  
|                                                   |  |   |        |  



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

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



|(8) |  | 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.                                                                                                                                                                                                                                                                                                                                                                              
|
| | 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. The suit was dismissed by the United States District Court for
the Southern District of New York and PenneCom has appealed that decision
to the Second Circuit Court of Appeals. 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.

13



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##### Table of Contents



D&E Communications, Inc. and Subsidiaries
Part I  - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)



| |                                                                 
| | ----------------------------------------------------------------
| | The summarized results of operations of EuroTel were as follows:

|                  |  |                    |      |                  |  |      |      |      |  |   |        |   |  |   |        |  
|----------------- |  | ------------------ | ---- | ---------------- |  | ---- | ---- | ---- |  | - | ------ | - |  | - | ------ | -
|                  |  | Three months ended |      | Six months ended
|                  |  | June 30,           |      | June 30,        
|                  |  |                    |      |                 
|                  |  | 2003               |      | 2002             |  | 2003 |      | 2002
|                  |  |                    |      |                  |  |      |      |     
|Net sales         |  | $                  |     |                  |  | $    |     |      |  | $ |       |   |  | $ |       |  
|Net loss          |  |                    | (919 | )                |  |      | (354 | )    |  |   | (1,878 | ) |  |   | (1,047 | )
|Our share of loss |  |                    | (306 | )                |  |      | (118 | )    |  |   | (626   | ) |  |   | (349   | )



| |                                                                 
| | ----------------------------------------------------------------
| | The summarized results of operations of Pilicka were as follows:

|                        |  |                    |       |                  |  |      |        |      |  |   |        |   |  |   |        |  
|----------------------- |  | ------------------ | ----- | ---------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                        |  | Three months ended |       | Six months ended
|                        |  | June 30,           |       | June 30,        
|                        |  |                    |       |                 
|                        |  | 2003               |       | 2002             |  | 2003 |        | 2002
|                        |  |                    |       |                  |  |      |        |     
|Net sales               |  | $                  | 2,633 |                  |  | $    | 2,415  |      |  | $ | 4,983  |   |  | $ | 4,723  |  
|Net loss                |  |                    | (900  | )                |  |      | (1,136 | )    |  |   | (1,738 | ) |  |   | (1,924 | )
|Our share of loss       |  |                    | (260  | )                |  |      | (352   | )    |  |   | (502   | ) |  |   | (596   | )
|Investment amortization |  |                    | (116  | )                |  |      | (232   | )    |  |   | (232   | ) |  |   | (232   | )
|Total loss              |  |                    | (376  | )                |  |      | (584   | )    |  |   | (734   | ) |  |   | (828   | )



|(9) |  | LONG-TERM DEBT
|--- |  | --------------



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

|                                         |  |          |      |          |  |      |      |          |  |              |         |  |  |   |         | 
|---------------------------------------- |  | -------- | ---- | -------- |  | ---- | ---- | -------- |  | ------------ | ------- |  |  | - | ------- | 
|                                         |  | Interest |      |          |  |      |      | June 30, |  | December 31,
|                                         |  | Rate     |      | Maturity |  | 2003 |      | 2002    
|                                         |  |          |      |          |  |      |      |         
|Senior Secured Revolving
Credit Facility |  |          | 4.89 | %        |  |      | 2009 |          |  | $            | 41,550  |  |  | $ | 32,250  | 
|Senior Secured Term Loan B               |  |          | 5.34 | %        |  |      | 2010 |          |  |              | 119,000 |  |  |   | 125,000 | 
|Senior Secured Term Loan A               |  |          | 5.44 | %        |  |      | 2011 |          |  |              | 47,500  |  |  |   | 50,000  | 
|Secured Term Loan                        |  |          | 9.34 | %        |  |      | 2014 |          |  |              | 20,000  |  |  |   | 20,000  | 
|Secured Term Loan                        |  |          | 9.36 | %        |  |      | 2014 |          |  |              | 15,000  |  |  |   | 15,000  | 
|Capital lease obligations                |  |          |      |          |  |      |      |          |  |              | 2,783   |  |  |   | 2,848   | 
|                                         |  |          |      |          |  |      |      |          |  |              |         |  |  |   |         | 
|                                         |  |          |      |          |  |      |      |          |  |              | 245,833 |  |  |   | 245,098 | 
|Less current maturities                  |  |          |      |          |  |      |      |          |  |              | 1,203   |  |  |   | 132     | 
|                                         |  |          |      |          |  |      |      |          |  |              |         |  |  |   |         | 
|Total long-term debt                     |  |          |      |          |  |      |      |          |  | $            | 244,630 |  |  | $ | 244,966 | 
|                                         |  |          |      |          |  |      |      |          |  |              |         |  |  |   |         | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Senior Secured Credit Facility includes a mandatory repayment of
principal from any single asset sale or series of related transactions,
which total more than $1,000 if the proceeds are not reinvested in assets
used in the business within 180 days. Consequently, as a result of the
collection of $10,000 from the sale of Conestoga Wireless, D&E made the
following payments in the first quarter of 2003 that permanently reduced
the total loan availability:

14



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##### Table of Contents



D&E Communications, Inc. and Subsidiaries
Part I - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollars in thousands, except per-share amounts)
(Unaudited)

|                                         |  |   |       | 
|---------------------------------------- |  | - | ----- | 
|Senior Secured Revolving Credit Facility |  | $ | 1,500 | 
|Senior Secured Term B                    |  |   | 6,000 | 
|Senior Secured Term A                    |  |   | 2,500 | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | D&Es indebtedness requires the Company to maintain compliance with
certain financial and operational covenants. The most restrictive
covenant is the total leverage ratio. The tax liability incurred by D&E
in connection with the sale of its PCS ONE partnership interest in April
2002, $20,500, was originally scheduled to be paid prior to the closing
of the credit agreement. The payment was deferred and paid in March 2003.
As a result, for the purposes of calculating compliance with the debt
service coverage ratio in the credit agreement, with the consent of the
lenders, such tax liability will be excluded in each quarter through
December 31, 2003. As such, D&E was in compliance with all covenants at
March 31, 2003 and at June 30, 2003. Further, based on the excess cash
flow generated during the second quarter of 2003, D&E has classified
$1,066 of the revolving credit as short-term debt and will reduce that
loan with a payment in August 2003.



|(10) |  | BUSINESS SEGMENT DATA
|---- |  | ---------------------



| |                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our segments, excluding the Paging segment, which is now reported as
a discontinued segment, are RLEC, CLEC, Internet Services, Systems
Integration and Conestoga Wireless. The measure of profitability for our
segments is operating income.

15



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##### Table of Contents



D&E Communications, Inc. and Subsidiaries
Part I  - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollars amounts are in thousands)
(Unaudited)



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

|                                  |  |                    |        |                       |  |                         |        |      |  |      |        |      |  |   |        |   |  |   |        |   |  |   |        |  
|--------------------------------- |  | ------------------ | ------ | --------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                  |  | External Revenues  |        | Intersegment Revenues |  | Operating Income (Loss)
|                                  |  |                    |        |                       |  |                        
|                                  |  | Three months ended |        | Three months ended    |  | Three months ended     
|                                  |  | June 30,           |        | June 30,              |  | June 30,               
|                                  |  | 2003               |        | 2002                  |  | 2003                    |        | 2002 |  | 2003 |        | 2002
|                                  |  |                    |        |                       |  |                         |        |      |  |      |        |     
|Segment                           |  |                    |        |                       |  |                         |        |      |  |      |        |      |  |   |        |   |  |   |        |   |  |   |        |  
|RLEC                              |  | $                  | 25,982 |                       |  | $                       | 14,867 |      |  | $    | 1,869  |      |  | $ | 955    |   |  | $ | 8,588  |   |  | $ | 1,131  |  
|CLEC                              |  |                    | 8,697  |                       |  |                         | 3,903  |      |  |      | 175    |      |  |   | 120    |   |  |   | (906   | ) |  |   | (1,068 | )
|Internet Services                 |  |                    | 1,328  |                       |  |                         | 981    |      |  |      | 169    |      |  |   | 37     |   |  |   | (143   | ) |  |   | (182   | )
|Systems Integration               |  |                    | 6,227  |                       |  |                         | 5,996  |      |  |      | 4      |      |  |   | 18     |   |  |   | (1,151 | ) |  |   | (658   | )
|Conestoga Wireless                |  |                    |       |                       |  |                         | 765    |      |  |      |       |      |  |   | 6      |   |  |   |       |   |  |   | (404   | )
|Corporate, Other
and Eliminations |  |                    | 1,053  |                       |  |                         | 318    |      |  |      | (2,217 | )    |  |   | (1,136 | ) |  |   | 79     |   |  |   | 490    |  
|                                  |  |                    |        |                       |  |                         |        |      |  |      |        |      |  |   |        |   |  |   |        |   |  |   |        |  
|Total                             |  | $                  | 43,287 |                       |  | $                       | 26,830 |      |  | $    |       |      |  | $ |       |   |  | $ | 6,467  |   |  | $ | (691   | )
|                                  |  |                    |        |                       |  |                         |        |      |  |      |        |      |  |   |        |   |  |   |        |   |  |   |        |  

|                                  |  |                   |        |                       |  |                         |        |      |  |      |        |      |  |   |        |   |  |   |        |   |  |   |        |  
|--------------------------------- |  | ----------------- | ------ | --------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                  |  | External Revenues |        | Intersegment Revenues |  | Operating Income (Loss)
|                                  |  |                   |        |                       |  |                        
|                                  |  | Six months ended  |        | Six months ended      |  | Six months ended       
|                                  |  | June 30,          |        | June 30,              |  | June 30,               
|                                  |  | 2003              |        | 2002                  |  | 2003                    |        | 2002 |  | 2003 |        | 2002
|                                  |  |                   |        |                       |  |                         |        |      |  |      |        |     
|Segment                           |  |                   |        |                       |  |                         |        |      |  |      |        |      |  |   |        |   |  |   |        |   |  |   |        |  
|RLEC                              |  | $                 | 51,728 |                       |  | $                       | 25,467 |      |  | $    | 3,825  |      |  | $ | 1,801  |   |  | $ | 16,300 |   |  | $ | 3,421  |  
|CLEC                              |  |                   | 17,083 |                       |  |                         | 5,592  |      |  |      | 325    |      |  |   | 227    |   |  |   | (1,867 | ) |  |   | (1,941 | )
|Internet Services                 |  |                   | 2,597  |                       |  |                         | 1,860  |      |  |      | 320    |      |  |   | 43     |   |  |   | (319   | ) |  |   | (471   | )
|Systems Integration               |  |                   | 11,397 |                       |  |                         | 11,486 |      |  |      | 15     |      |  |   | 25     |   |  |   | (2,314 | ) |  |   | (1,355 | )
|Conestoga Wireless                |  |                   | 456    |                       |  |                         | 765    |      |  |      | 4      |      |  |   | 6      |   |  |   | (380   | ) |  |   | (404   | )
|Corporate, Other
and Eliminations |  |                   | 2,111  |                       |  |                         | 1,237  |      |  |      | (4,489 | )    |  |   | (2,102 | ) |  |   | 250    |   |  |   | 296    |  
|                                  |  |                   |        |                       |  |                         |        |      |  |      |        |      |  |   |        |   |  |   |        |   |  |   |        |  
|Total                             |  | $                 | 85,372 |                       |  | $                       | 46,407 |      |  | $    |       |      |  | $ |       |   |  | $ | 11,670 |   |  | $ | (454   | )
|                                  |  |                   |        |                       |  |                         |        |      |  |      |        |      |  |   |        |   |  |   |        |   |  |   |        |  

|                                  |  |                |         |              |  |   |         | 
|--------------------------------- |  | -------------- | ------- | ------------ |  | - | ------- | 
|                                  |  | Segment Assets
|                                  |  |               
|                                  |  | June 30,       |         | December 31,
|                                  |  | 2003           |         | 2002        
|                                  |  |                |         |             
|Segment                           |  |                |         |              |  |   |         | 
|RLEC                              |  | $              | 488,740 |              |  | $ | 489,950 | 
|CLEC                              |  |                | 63,644  |              |  |   | 62,973  | 
|Internet Services                 |  |                | 6,625   |              |  |   | 8,068   | 
|Systems Integration               |  |                | 19,861  |              |  |   | 20,358  | 
|Conestoga Wireless                |  |                |        |              |  |   | 8,511   | 
|Corporate, Other
and Eliminations |  |                | 6,249   |              |  |   | 11,958  | 
|                                  |  |                |         |              |  |   |         | 
|Total                             |  | $              | 585,119 |              |  | $ | 601,818 | 
|                                  |  |                |         |              |  |   |         | 

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:

16



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##### Table of Contents



D&E Communications, Inc. and Subsidiaries
Part I  - Financial Information (continued)

Item 1. Notes to Consolidated Financial Statements
(Dollars amounts are in thousands)
(Unaudited)

|                                                                                                      |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                      |  | Three months ended |        | Six months ended
|                                                                                                      |  | June 30,           |        | June 30,        
|                                                                                                      |  | 2003               |        | 2002             |  | 2003 |        | 2002
|                                                                                                      |  |                    |        |                  |  |      |        |     
|Operating income from reportable segments                                                             |  | $                  | 6,388  |                  |  | $    | (1,181 | )    |  | $ | 11,420 |   |  | $ | (750   | )
|Corporate, other and eliminations                                                                     |  |                    | 79     |                  |  |      | 490    |      |  |   | 250    |   |  |   | 296    |  
|Equity in net losses of affiliates                                                                    |  |                    | (682   | )                |  |      | (702   | )    |  |   | (1,360 | ) |  |   | (1,177 | )
|Interest expense                                                                                      |  |                    | (4,602 | )                |  |      | (2,048 | )    |  |   | (9,197 | ) |  |   | (2,756 | )
|Loss on investments                                                                                   |  |                    |       |                  |  |      | (2,999 | )    |  |   |       |   |  |   | (2,999 | )
|Other, net                                                                                            |  |                    | 72     |                  |  |      | 194    |      |  |   | 928    |   |  |   | 201    |  
|                                                                                                      |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations before income
taxes and dividends on utility preferred stock |  | $                  | 1,255  |                  |  | $    | (6,246 | )    |  | $ | 2,041  |   |  | $ | (7,185 | )
|                                                                                                      |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |        |  

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)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following discussion should be read in conjunction with our
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, 2002 as
filed on Form 10-K with the SEC. Monetary amounts presented in the
following discussion are rounded to the nearest thousand dollars. Certain
items in the financial statements for the three months and six months
ended June 30, 2002 have been reclassified for comparative purposes.                                                                                                                                                                                                                                                                                                                                                                                           
|
| | Overview                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | On May 24, 2002, we completed our acquisition of Conestoga
Enterprises, Inc. (Conestoga), a neighboring rural local exchange
carrier providing integrated communications services in central and
eastern Pennsylvania. The acquisition was completed through the merger of
Conestoga with and into D&E Acquisition Corp. (the Merger Sub), a
wholly-owned subsidiary of D&E, pursuant to the Amended and Restated
Agreement and Plan of Merger, dated as of January 9, 2002 (the Merger
Agreement), by and among D&E, Conestoga and the Merger Sub (the
Merger). We paid cash consideration of $149,422 and issued 7,876,655
shares of D&E common stock to Conestoga shareholders pursuant to the
Merger Agreement. We also assumed existing indebtedness of Conestoga and
outstanding options issued pursuant to Conestoga equity compensation
plans.                                                                                                     
|
| | We are a provider of integrated communications services to
residential and business customers throughout the eastern half of
Pennsylvania. We operate rural telephone companies, or rural local
exchange carriers, or (RLECs), in parts of Berks, Lancaster, Union
counties and smaller portions of three other adjacent counties in
Pennsylvania, and competitive local telephone companies, or (CLECs), 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,
high speed data, and Internet access services. We also provide business
customers with integrated voice and data network solutions including the
related communications and computer equipment in areas that extend beyond
the markets listed above.
|
| | Our segments, excluding our paging services, which, as discussed
below, was reported, until its sale on May 29, 2003, as a discontinued
business, are RLEC, CLEC, Internet Services, Systems Integration and
Conestoga Wireless. The measure of profitability for our segments is
operating income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | Our RLEC revenue is derived primarily from network access charges,
local telephone service, enhanced telephone services and regional toll
service. Network access revenue consists of charges paid by long
distance, wireless and other telecommunications companies for access to
our network in connection with the completion of long distance telephone
calls. It also includes revenues from T-1 or direct special access
service. Local telephone service revenue consists of charges for local
telephone services, including monthly charges for basic local service.
Enhanced telephone services revenue is derived from providing special
calling features, such as call waiting, caller ID, voicemail and a
telemarketer call-blocking service. Regional long distance revenue is
derived                                                                                                                                                                

18



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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)



| |                                                                      
| | ---------------------------------------------------------------------
| | from providing regional long distance services to our RLEC customers.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our CLEC revenue is derived primarily from network access charges,
local telephone service, enhanced telephone services and long distance
service revenue. Network access revenue consists of charges paid by long
distance and other telecommunication companies for access to our network
in connection with the completion of long distance telephone and local
calls. It also includes revenues from T-1 or direct special access
service. Local telephone service revenue consists of charges for local
telephone services, including monthly charges for basic local service.
Enhanced telephone services revenue is derived from providing special
calling features, such as call waiting, caller ID, voicemail and a
telemarketer call-blocking service. Long distance revenue consists of
charges for both national and regional long distance services, a portion
of which is provided on a resale basis.



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



| |                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Systems Integration revenue is derived from sales of services
that support the design, implementation and maintenance of local and wide
area networks and telecommunications systems. In addition, we sell data
and voice communications equipment and provide custom computer
programming service. We market these products and services primarily in
our RLEC and CLEC service areas.



| |                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Conestoga Wireless revenue was derived from providing wireless
Personal Communication Service, including local and long distance
telephone services, and from the sale of wireless communications
equipment. We market these products and services in certain of our RLEC
and CLEC markets. We sold this segment on January 14, 2003.



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

administrative expenses. Our RLEC segment incurs costs related to network
access charges, directory expense and other operations expenses such as
digital electronic switch expense, engineering and testing costs. Our
CLEC incurs costs related to leased network facilities associated with
providing local telephone service to customers, engineering costs and
network access costs for local calls and long distance expense. Our
Internet Services segment incurs leased network facilities costs for our
dial-up and DSL Internet services. 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. Our Conestoga Wireless Segment
incurred costs related to network facilities to provide wireless Personal
Communication Service, engineering costs, network access costs and costs
of wireless communications equipment sold.
|
| | We incur capital expenditures associated with access line additions,
expenditures for upgrading existing facilities and costs related to the
provision of DSL and dial-up Internet services in our RLEC and CLEC
territories. We believe that our capital expenditures related to CLEC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

19



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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)



| |                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | access line growth are generally associated with providing service to new
customers or transferring existing customers to our own facilities and
therefore tend to result in incremental revenue or reduced expenditures.
We believe that our additional capital expenditures relating to our
investment in software and systems will maintain our competitive position
in the marketplace.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We own a one-third investment in EuroTel L.L.C. (EuroTel), a
domestic corporate joint venture. EuroTel holds a 27.85% investment in
Pilicka Telefonia, Sp.zo.o (Pilicka), a telecommunications company
located in Poland. Also, we own 28.88% and the other EuroTel founders own
43.27% of Pilicka. As such, we have a 28.88% direct ownership in Pilicka
and a 9.28% indirect ownership in Pilicka, through our one-third interest
in EuroTel. We account for both our investment in EuroTel and Pilicka
using the equity method of accounting. We currently are exploring
strategic alternatives with regard to these investments.



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Upon completion of the sale, D&E received $74,168 in cash, subject
to post closing adjustments as set forth in the sale agreement. These
adjustments were finalized in the third quarter of 2002 and resulted in
additional cash proceeds of $2,294, which were collected in October 2002.
In addition, we received equipment with a fair value of approximately
$2,014. Selling and other estimated costs were approximately $3,836 and
the gain on sale was $84,738 after eliminating the $10,098 liability for
the equity in net losses of PCS One in excess of investments and
advances. The associated income taxes were $29,301 resulting in an after
tax gain of $55,437.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Conestogas wireless business was sold on January 14, 2003, and
Conestoga and D&Es paging businesses were classified as assets held for
sale on the balance sheet prior to the completion of the sales. The
paging business has been reported as a discontinued operation. On January
28, 2003, we entered into a definitive sales agreement to sell Conestoga
and D&Es paging businesses and the sale closed on May 29, 2003.
Conestoga Wireless is included as part of operating activity and not as a
discontinued operation because under accounting rules there is deemed to
be continuing involvement as a result of our commitment to building out
tower sites and a continuing lease guarantee related to certain tower
sites.

20



---



##### 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)

Results of Operations



| |  | The following table is a summary of our operating results by segment for
the three months ended June 30, 2003 and 2002:
| |  | -----------------------------------------------------------------------------------------------------------------------

|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |   | 
|----------------------------- | ----------------- | - | ------ |  | ---- | - | -------- | - | ----------- | - | -------- | - | ------------ | - | --------- | - | --------- | - | ----- | - |  | - | ---------- | - |  | - | ------ | - | 
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   | Corporate, |   |  |   |       
|                              |                   |   |        |  |      |   |          |   |             |   | Internet |   | Systems      |   | Conestoga |   | Other and |   | Total
|                              |                   |   | RLEC   |  | CLEC |   | Services |   | Integration |   | Wireless |   | Eliminations |   | Company  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |          
|                              | June 30, 2003 (1) |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |   | 
|Revenues  External           |                   | $ | 25,982 |  |      | $ | 8,697    |   |             | $ | 1,328    |   |              | $ | 6,227     |   |           | $ |      |   |  | $ | 1,053      |   |  | $ | 43,287 |  
|Revenues  Intercompany       |                   |   | 1,869  |  |      |   | 175      |   |             |   | 169      |   |              |   | 4         |   |           |   |      |   |  |   | (2,217     | ) |  |   |       |  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  
|Total Revenues                |                   |   | 27,851 |  |      |   | 8,872    |   |             |   | 1,497    |   |              |   | 6,231     |   |           |   |      |   |  |   | (1,164     | ) |  |   | 43,287 |  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  
|Depreciation and Amortization |                   |   | 7,784  |  |      |   | 994      |   |             |   | 182      |   |              |   | 416       |   |           |   |      |   |  |   | 200        |   |  |   | 9,576  |  
|Other Operating Expense       |                   |   | 11,479 |  |      |   | 8,784    |   |             |   | 1,458    |   |              |   | 6,966     |   |           |   |      |   |  |   | (1,448     | ) |  |   | 27,244 |  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  
|Total Operating Expenses      |                   |   | 19,263 |  |      |   | 9,778    |   |             |   | 1,640    |   |              |   | 7,382     |   |           |   |      |   |  |   | (1,243     | ) |  |   | 36,820 |  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  
|Operating Income (Loss)       |                   | $ | 8,588  |  |      | $ | (906     | ) |             | $ | (143     | ) |              | $ | (1,151    | ) |           | $ |      |   |  | $ | 79         |   |  | $ | 6,467  |  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  
|                              | June 30, 2002 (1) |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |   | 
|Revenues  External           |                   | $ | 14,867 |  |      | $ | 3,903    |   |             | $ | 981      |   |              | $ | 5,996     |   |           | $ | 765   |   |  | $ | 318        |   |  | $ | 26,830 |  
|Revenues  Intercompany       |                   |   | 955    |  |      |   | 120      |   |             |   | 37       |   |              |   | 18        |   |           |   | 6     |   |  |   | (1,136     | ) |  |   |       |  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  
|Total Revenues                |                   |   | 15,822 |  |      |   | 4,023    |   |             |   | 1,018    |   |              |   | 6,014     |   |           |   | 771   |   |  |   | (818       | ) |  |   | 26,830 |  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  
|Depreciation and Amortization |                   |   | 4,740  |  |      |   | 479      |   |             |   | 113      |   |              |   | 359       |   |           |   |      |   |  |   | 156        |   |  |   | 5,847  |  
|Other Operating Expenses      |                   |   | 9,951  |  |      |   | 4,612    |   |             |   | 1,087    |   |              |   | 6,313     |   |           |   | 1,175 |   |  |   | (1,464     | ) |  |   | 21,674 |  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  
|Total Operating Expenses      |                   |   | 14,691 |  |      |   | 5,091    |   |             |   | 1,200    |   |              |   | 6,672     |   |           |   | 1,175 |   |  |   | (1,308     | ) |  |   | 27,521 |  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  
|Operating Income (Loss)       |                   | $ | 1,131  |  |      | $ | (1,068   | ) |             | $ | (182     | ) |              | $ | (658      | ) |           | $ | (404  | ) |  | $ | 490        |   |  | $ | (691   | )
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  



---

|(1) |  | We acquired Conestoga Enterprises, Inc. on May 24, 2002.
|--- |  | --------------------------------------------------------

21



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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, 2003 and 2002:
| |  | ---------------------------------------------------------------------------------------------------------------------

|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |   | 
|----------------------------- | ----------------- | - | ------ |  | ---- | - | -------- | - | ----------- | - | -------- | - | ------------ | - | --------- | - | --------- | - | ----- | - |  | - | ---------- | - |  | - | ------ | - | 
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   | Corporate, |   |  |   |       
|                              |                   |   |        |  |      |   |          |   |             |   | Internet |   | Systems      |   | Conestoga |   | Other and |   | Total
|                              |                   |   | RLEC   |  | CLEC |   | Services |   | Integration |   | Wireless |   | Eliminations |   | Company  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |          
|                              | June 30, 2003 (1) |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |   | 
|Revenues  External           |                   | $ | 51,728 |  |      | $ | 17,083   |   |             | $ | 2,597    |   |              | $ | 11,397    |   |           | $ | 456   |   |  | $ | 2,111      |   |  | $ | 85,372 |  
|Revenues  Intercompany       |                   |   | 3,825  |  |      |   | 325      |   |             |   | 320      |   |              |   | 15        |   |           |   | 4     |   |  |   | (4,489     | ) |  |   |       |  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  
|Total Revenues                |                   |   | 55,553 |  |      |   | 17,408   |   |             |   | 2,917    |   |              |   | 11,412    |   |           |   | 460   |   |  |   | (2,378     | ) |  |   | 85,372 |  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  
|Depreciation and Amortization |                   |   | 15,550 |  |      |   | 1,969    |   |             |   | 351      |   |              |   | 840       |   |           |   |      |   |  |   | 417        |   |  |   | 19,127 |  
|Other Operating Expense       |                   |   | 23,703 |  |      |   | 17,306   |   |             |   | 2,885    |   |              |   | 12,886    |   |           |   | 840   |   |  |   | (3,045     | ) |  |   | 54,575 |  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  
|Total Operating Expenses      |                   |   | 39,253 |  |      |   | 19,275   |   |             |   | 3,236    |   |              |   | 13,726    |   |           |   | 840   |   |  |   | (2,628     | ) |  |   | 73,702 |  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  
|Operating Income (Loss)       |                   | $ | 16,300 |  |      | $ | (1,867   | ) |             | $ | (319     | ) |              | $ | (2,314    | ) |           | $ | (380  | ) |  | $ | 250        |   |  | $ | 11,670 |  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  
|                              | June 30, 2002 (1) |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |   | 
|Revenues  External           |                   | $ | 25,467 |  |      | $ | 5,592    |   |             | $ | 1,860    |   |              | $ | 11,486    |   |           | $ | 765   |   |  | $ | 1,237      |   |  | $ | 46,407 |  
|Revenues  Intercompany       |                   |   | 1,801  |  |      |   | 227      |   |             |   | 43       |   |              |   | 25        |   |           |   | 6     |   |  |   | (2,102     | ) |  |   |       |  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  
|Total Revenues                |                   |   | 27,268 |  |      |   | 5,819    |   |             |   | 1,903    |   |              |   | 11,511    |   |           |   | 771   |   |  |   | (865       | ) |  |   | 46,407 |  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  
|Depreciation and Amortization |                   |   | 7,856  |  |      |   | 725      |   |             |   | 211      |   |              |   | 673       |   |           |   |      |   |  |   | 263        |   |  |   | 9,728  |  
|Other Operating Expenses      |                   |   | 15,991 |  |      |   | 7,035    |   |             |   | 2,163    |   |              |   | 12,193    |   |           |   | 1,175 |   |  |   | (1,424     | ) |  |   | 37,133 |  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  
|Total Operating Expenses      |                   |   | 23,847 |  |      |   | 7,760    |   |             |   | 2,374    |   |              |   | 12,866    |   |           |   | 1,175 |   |  |   | (1,161     | ) |  |   | 46,861 |  
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  
|Operating Income (Loss)       |                   | $ | 3,421  |  |      | $ | (1,941   | ) |             | $ | (471     | ) |              | $ | (1,355    | ) |           | $ | (404  | ) |  | $ | 296        |   |  | $ | (454   | )
|                              |                   |   |        |  |      |   |          |   |             |   |          |   |              |   |           |   |           |   |       |   |  |   |            |   |  |   |        |  



---

|(1) |  | We acquired Conestoga Enterprises, Inc. on May 24, 2002.
|--- |  | --------------------------------------------------------

Consolidated Operations



| |  | Three months ended June 30, 2003 compared
to three months ended June 30, 2002
| |  | -----------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Consolidated operating revenues from continuing operations increased
$16,457, or 61.3%, to $43,287 for the second quarter ended June 30, 2003,
from $26,830 in the same period of 2002. The revenue increase was
primarily due to the inclusion of Conestogas revenues for a full quarter
in 2003, compared to only one month in 2002, after the May 24, 2002
acquisition. Two notable offsets to the increase were, (i) the sale of
Conestoga Wireless in January 2003, resulted in decreased revenue of
$771, and (ii) a decrease of $1,621 in the Systems Integration Segment
attributable to the slow economy.
|
| | Consolidated operating income from continuing operations increased
$7,158, to $6,467, for                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

22



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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 second quarter of 2003, from a loss of $691 in
the same period of 2002. Operating income as a percentage of revenue
increased to 14.9% in the second quarter of 2003 compared to a negative
2.6% in the same period of 2002. The improvement was primarily
attributable to the Conestoga acquisition.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Other income and expense was a net expense of $5,212 in the second
quarter of 2003 compared to a net expense of $5,555 in the same period of
2002. Our equity in the losses of our European affiliates decreased to
$682 in the second quarter of 2003 from $702 in the same period of 2002.
Interest expense increased to $4,602 in the second quarter of 2003,
compared to $2,048 in the same period of 2002, primarily as a result of
increased borrowings to complete the Conestoga acquisition on May 24,
2002. Finally, in the second quarter of 2002 a loss of $2,999 was
recognized as an other-than-temporary loss on investments.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Income taxes were $428 in the second quarter of 2003 compared to a
benefit of $2,288 in the same period of 2002 that was related to a loss
from continuing operations. In April 2002, we sold our D&E Wireless joint
venture interest for a gain of $55,785 after taxes with no similar
transaction in 2003. Discontinued paging operations resulted in a loss of
$46 after taxes in the second quarter of 2003 versus a loss of $6 in the
second quarter of 2002, which did not include Conestogas paging business
before the acquisition. Our net income was $764, or $0.05 per share in
the second quarter of 2003 compared to $51,804, or $4.83 per share, in
the second quarter of 2002. The $4.83 per share amount is made up of a
loss from continuing operations of $0.37 and an income from discontinued
operations of $5.20.



| |  | Six months ended June 30, 2003 compared
to six months ended June 30, 2002
| |  | -------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Consolidated operating revenues from continuing operations increased
$38,965, or 84.0%, to $85,372 for the six months ended June 30, 2003,
from $46,407 in the same period of 2002. The revenue increase was
primarily due to the inclusion of Conestogas revenues for all six months
in 2003, compared to only one month in 2002, after the May 24, 2002
acquisition. Two notable offsets to the increase were, (i) the sale of
Conestoga Wireless in January 2003, resulted in decreased revenue of
$311, and (ii) a decrease of $3,748 in the Systems Integration Segment
attributable to the slow economy.



| |                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Consolidated operating income from continuing operations increased
$12,124, to $11,670, for the first half of 2003, from a loss of $454 in
the same period of 2002. Operating income as a percentage of revenue
increased to 13.7% in the first half of 2003 compared to a negative 1.0%
in the same period of 2002. The improvement was primarily attributable to
the Conestoga acquisition.



| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Other income and expense was a net expense of $9,629 in the first
half of 2003 compared to a net expense of $6,731 in the same period of
2002. Our equity in the losses of our European

23



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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)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | affiliates increased to
$1,360 in the first half of 2003 from $1,177 in the same period of 2002.
Interest expense increased to $9,197 in the first half of 2003, compared
to $2,756 in the same period of 2002, primarily as a result of increased
borrowings to complete the Conestoga acquisition on May 24, 2002. Other
income increased $727 in 2003 from the prior year, primarily from a
dividend received with a fair value of $801, on our investment in our
primary lender compared with $94
received in the first half of 2002. Finally, in the second quarter of
2002 a loss of $2,999 was recognized as an other-than-temporary loss on
investments.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Income taxes were $743 in the first half of 2003 compared to a
benefit of $2,437 in the same period of 2002 that was related to a loss
from continuing operations. In April 2002, we sold our D&E Wireless joint
venture interest for a gain of $55,785 after taxes with no similar
transaction in 2003. Discontinued paging operations resulted in a loss of
$53 after taxes in the first half of 2002 versus a loss of $9 in the
first half of 2002, which did not include Conestogas paging business
before the acquisition. In 2003 we recorded $260 of income after taxes
for the cumulative effect of adopting Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations
effective January 1, 2003. The adjustment represents the cumulative
estimate of cost of removal charged to depreciation expense in earlier
years. Our net income was $1,472, or $0.10 per share (including $0.02 for
the cumulative effect of SFAS No. 143), in the first half of 2003
compared to $50,995, or $5.64 per share, in the first half of 2002, made
up of a loss from continuing operations of $0.53 and an income from
discontinued operations of $6.17.
|
| | RLEC Segment Results                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                              |                         |   |                             |        |                           |   |          |       |      |  |       |       |          |   |         |        |  |   |         |        |  |  |       |       | 
|----------------------------- | ----------------------- | - | --------------------------- | ------ | ------------------------- | - | -------- | ----- | ---- |  | ----- | ----- | -------- | - | ------- | ------ |  | - | ------- | ------ |  |  | ----- | ----- | 
|                              |                         |   | Three months ended June 30, |        | Six months ended June 30,
|                              |                         |   | 2003                        |        | 2002                      |   | % Change |       | 2003 |  | 2002  |       | % Change
|                              |                         |   |                             |        |                           |   |          |       |      |  |       |       |         
|Revenues:                     |                         |   |                             |        |                           |   |          |       |      |  |       |       |          |   |         |        |  |   |         |        |  |  |       |      
|                              | Local Telephone Service |   | $                           | 8,210  |                           |   | $        | 4,889 |      |  |       | 67.9  |          |   | $       | 16,295 |  |   | $       | 8,425  |  |  |       | 93.4  | 
|                              | Network Access          |   |                             | 14,162 |                           |   |          | 8,248 |      |  |       | 71.7  |          |   |         | 28,180 |  |   |         | 13,957 |  |  |       | 101.9 | 
|                              | Other                   |   |                             | 5,479  |                           |   |          | 2,685 |      |  |       | 104.1 |          |   |         | 11,078 |  |   |         | 4,886  |  |  |       | 126.7 | 
|                              |                         |   |                             |        |                           |   |          |       |      |  |       |       |          |   |         |        |  |   |         |        |  |  |       |      
|Total Revenues                |                         |   | 27,851                      |        |                           |   | 15,822   |       |      |  | 76.0  |       |          |   | 55,553  |        |  |   | 27,268  |        |  |  | 103.7 |      
|                              |                         |   |                             |        |                           |   |          |       |      |  |       |       |          |   |         |        |  |   |         |        |  |  |       |      
|Depreciation and Amortization |                         |   | 7,784                       |        |                           |   | 4,740    |       |      |  | 64.2  |       |          |   | 15,550  |        |  |   | 7,856   |        |  |  | 97.9  |      
|Other Operating Expenses      |                         |   | 11,479                      |        |                           |   | 9,951    |       |      |  | 15.4  |       |          |   | 23,703  |        |  |   | 15,991  |        |  |  | 48.2  |      
|                              |                         |   |                             |        |                           |   |          |       |      |  |       |       |          |   |         |        |  |   |         |        |  |  |       |      
|Total Operating Expenses      |                         |   | 19,263                      |        |                           |   | 14,691   |       |      |  | 31.1  |       |          |   | 39,253  |        |  |   | 23,847  |        |  |  | 64.6  |      
|                              |                         |   |                             |        |                           |   |          |       |      |  |       |       |          |   |         |        |  |   |         |        |  |  |       |      
|Operating Income              |                         | $ | 8,588                       |        |                           | $ | 1,131    |       |      |  | 659.3 |       |          | $ | 16,300  |        |  | $ | 3,421   |        |  |  | 376.5 |      
|                              |                         |   |                             |        |                           |   |          |       |      |  |       |       |          |   |         |        |  |   |         |        |  |  |       |      
|Access Lines at June 30       |                         |   |                             |        |                           |   |          |       |      |  |       |       |          |   | 144,374 |        |  |   | 146,902 |        |  |  | (1.7  | )    
|                              |                         |   |                             |        |                           |   |          |       |      |  |       |       |          |   |         |        |  |   |         |        |  |  |       |      



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | RLEC segment revenues increased $12,029, or 76.0%, to $27,851 in the
three months ended June 30, 2003, from $15,822 in the three months ended
June 30, 2002. The revenue increase was primarily due to the inclusion of
Conestogas revenues for a full quarter in 2003, compared to only one
month in the second quarter of 2002 after the May 24, 2002 acquisition.
The increase included $10,783 from the two extra months included in 2003.
The one month of June 2003 revenue for the

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)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Conestoga portion, increased
$628 compared to June 2002, primarily from increases in local telephone
service and network access revenue. In our original D&E RLEC division, we
experienced an increase of $227 in basic local telephone service, an
increase of $414 in network access, an increase of $101 in billing and
collection revenue offset by decreases of $110 in regional long distance
toll service and decreases of $14 in other revenues.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | RLEC operating expenses increased $4,572, or 31.1%, to $19,263 in
the second quarter of 2003, from $14,691 in the same period of the prior
year. The second quarter of 2003 expenses included three months from
Conestoga compared to one month in 2002 after the acquisition. Conestoga expenses increased $6,954 over the prior years quarter,
while our D&E RLEC experienced a decrease of $2,382. The most significant
decreases were from financing costs expensed during the second quarter of
2002 related to an abandoned debt offering, severance costs and a charge
to bad debt expense of $428 for WorldCom receivables due as of June 30,
2002 as a result of their bankruptcy filing. Additionally, $260 was
recovered from WorldCom in the second quarter of 2003.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | RLEC segment revenues increased $28,285, or 103.7%, to $55,553 in
the six months ended June 30, 2003, from $27,268 in the first half of
2002. The revenue increase was primarily due to the inclusion of
Conestogas revenues for a full six months in 2003, compared to only one
month in 2002 after the May 24, 2002 acquisition. The increase included
$26,766 from the five extra months included in 2003. The one month of
June 2003 revenue for the Conestoga portion, increased $628 compared to
June 2002, primarily from increases in local telephone service and
network access revenue. In our original D&E RLEC division, we experienced
an increase of $438 in basic local telephone service, an increase of $713
in network access, an increase of $108 in billing and collection revenue
offset by decreases of $294 in regional long distance toll service and
decreases of $74 in other revenues.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | RLEC operating expenses increased $15,406, or 64.6%, to $39,253 in
the first half of 2003, from $23,847 in the same period of the prior
year. The first half of 2003 expenses included six months from Conestoga
compared to one month in 2002 after the acquisition. Conestoga expenses
increased $18,193 over the first half of 2002, while our D&E RLEC
experienced a decrease of $2,787. The most significant decreases were
from financing costs expensed during the second quarter of 2002 related
to an abandoned debt offering, severance costs and a charge to bad debt
expense of $428 for WorldCom receivables as a result of their bankruptcy
filing. Additionally, $260 was recovered from WorldCom in the second
quarter of 2003.

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)

CLEC Segment Results

|                              |                         |   |                             |       |                           |   |          |       |      |  |       |       |          |   |        |       |  |   |        |       |  |  |       |       | 
|----------------------------- | ----------------------- | - | --------------------------- | ----- | ------------------------- | - | -------- | ----- | ---- |  | ----- | ----- | -------- | - | ------ | ----- |  | - | ------ | ----- |  |  | ----- | ----- | 
|                              |                         |   | Three months ended June 30, |       | Six months ended June 30,
|                              |                         |   | 2003                        |       | 2002                      |   | % Change |       | 2003 |  | 2002  |       | % Change
|                              |                         |   |                             |       |                           |   |          |       |      |  |       |       |         
|Revenues:                     |                         |   |                             |       |                           |   |          |       |      |  |       |       |          |   |        |       |  |   |        |       |  |  |       |      
|                              | Local Telephone Service |   | $                           | 2,367 |                           |   | $        | 1,041 |      |  |       | 127.4 |          |   | $      | 4,575 |  |   | $      | 1,601 |  |  |       | 185.8 | 
|                              | Network Access          |   |                             | 1,418 |                           |   |          | 611   |      |  |       | 132.1 |          |   |        | 2,656 |  |   |        | 995   |  |  |       | 166.9 | 
|                              | Long Distance           |   |                             | 4,899 |                           |   |          | 2,279 |      |  |       | 115.0 |          |   |        | 9,827 |  |   |        | 3,054 |  |  |       | 221.8 | 
|                              | Other                   |   |                             | 188   |                           |   |          | 92    |      |  |       | 104.3 |          |   |        | 350   |  |   |        | 169   |  |  |       | 107.1 | 
|                              |                         |   |                             |       |                           |   |          |       |      |  |       |       |          |   |        |       |  |   |        |       |  |  |       |      
|Total Revenues                |                         |   | 8,872                       |       |                           |   | 4,023    |       |      |  | 120.5 |       |          |   | 17,408 |       |  |   | 5,819  |       |  |  | 199.2 |      
|                              |                         |   |                             |       |                           |   |          |       |      |  |       |       |          |   |        |       |  |   |        |       |  |  |       |      
|Depreciation and Amortization |                         |   | 994                         |       |                           |   | 479      |       |      |  | 107.5 |       |          |   | 1,969  |       |  |   | 725    |       |  |  | 171.6 |      
|Other Operating Expenses      |                         |   | 8,784                       |       |                           |   | 4,612    |       |      |  | 90.5  |       |          |   | 17,306 |       |  |   | 7,035  |       |  |  | 146.0 |      
|                              |                         |   |                             |       |                           |   |          |       |      |  |       |       |          |   |        |       |  |   |        |       |  |  |       |      
|Total Operating Expenses      |                         |   | 9,778                       |       |                           |   | 5,091    |       |      |  | 92.1  |       |          |   | 19,275 |       |  |   | 7,760  |       |  |  | 148.4 |      
|                              |                         |   |                             |       |                           |   |          |       |      |  |       |       |          |   |        |       |  |   |        |       |  |  |       |      
|Operating Loss                |                         | $ | (906                        | )     |                           | $ | (1,068   | )     |      |  | (15.2 | )     |          | $ | (1,867 | )     |  | $ | (1,941 | )     |  |  | (3.8  | )    
|                              |                         |   |                             |       |                           |   |          |       |      |  |       |       |          |   |        |       |  |   |        |       |  |  |       |      
|Access Lines at June 30       |                         |   |                             |       |                           |   |          |       |      |  |       |       |          |   | 34,212 |       |  |   | 29,541 |       |  |  | 15.8  |      
|                              |                         |   |                             |       |                           |   |          |       |      |  |       |       |          |   |        |       |  |   |        |       |  |  |       |      



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | CLEC segment revenues increased $4,849, or 120.5%, to $8,872 in the
three months ended June 30, 2003, from $4,023 in the three months ended
June 30, 2002. The revenue increase was primarily due to the inclusion of
Conestogas revenues for a full quarter in 2003, compared to only one
month in the second quarter of 2002 after the May 24, 2002 acquisition.
Approximately $4,081 of the increase was from the two extra months
included in 2003. The one month of June 2003 revenue for the Conestoga
portion, decreased $74 from lower long distance revenue of $128 and
increases in local telephone service and network access revenues. The
increase was also related to our original D&E CLECs addition of access
lines for new customers that primarily increased local telephone service
revenues $333, increased network access revenues by $319, long distance
revenues by $131 and other miscellaneous revenues by $59.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Operating expenses for the CLEC segment increased $4,687, or 92.1%,
to $9,778 in the second quarter of 2003, from $5,091 in the same period
of 2002. The second quarter of 2003 expenses included three months from
Conestoga compared to one month in 2002 after the acquisition. Conestoga
expenses increased $4,647 over the prior years quarter, while our D&E
CLEC expenses increased $40. D&E expenses for network access,
depreciation, customer service and general and administrative expenses
increased $284 but were offset by a decrease of $244 in direct cost of
operations.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | CLEC segment revenues increased $11,589, or 199.2%, to $17,408 in
the six months ended June 30, 2003, from $5,819 in the first half of
2002. The revenue increase was primarily due to the inclusion of
Conestogas revenues for a full six months in 2003, compared to only one
month in 2002 after the May 24, 2002 acquisition. Approximately $10,062
of the increase was from the five extra months included in 2003. The one
month of June 2003 revenue for the Conestoga portion, decreased $74, from
lower long distance revenue of $128 and increases in local telephone
service

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)



| |                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | and network access revenues. The increase was also related to our
original D&E CLECs addition of access lines for new customers that
primarily increased local telephone service revenues $625, increased
network access revenues by $510, long distance revenues by $361 and other
miscellaneous revenues by $105.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Operating expenses for the CLEC segment increased $11,515, or
148.4%, to $19,275 in the first half of 2003, from $7,760 in the same
period of the prior year. The first half of 2003 expenses included six
months from Conestoga compared to one month in 2002 after the
acquisition. Conestoga expenses increased $11,124 over the prior years
first half, while our D&E CLEC expenses increased $391. D&E expenses for
network access, depreciation, customer service and general and
administrative expenses increased $705 but were offset by a decrease of
$314 in direct cost of operations.

Internet Services Segment Results

|                              |                      |   |                    |   |                  |   |          |   |      |  |       |   |          |   |       |        |  |   |       |        |  |  |       |       | 
|----------------------------- | -------------------- | - | ------------------ | - | ---------------- | - | -------- | - | ---- |  | ----- | - | -------- | - | ----- | ------ |  | - | ----- | ------ |  |  | ----- | ----- | 
|                              |                      |   | Three months ended |   | Six months ended
|                              |                      |   | June 30,           |   | June 30,        
|                              |                      |   |                    |   |                 
|                              |                      |   | 2003               |   | 2002             |   | % Change |   | 2003 |  | 2002  |   | % Change
|                              |                      |   |                    |   |                  |   |          |   |      |  |       |   |         
|Revenues                      |                      | $ | 1,497              |   |                  | $ | 1,018    |   |      |  | 47.1  |   |          | $ | 2,917 |        |  | $ | 1,903 |        |  |  | 53.3  |      
|Depreciation and Amortization |                      |   | 182                |   |                  |   | 113      |   |      |  | 61.1  |   |          |   | 351   |        |  |   | 211   |        |  |  | 66.4  |      
|Other Operating Expenses      |                      |   | 1,458              |   |                  |   | 1,087    |   |      |  | 34.1  |   |          |   | 2,885 |        |  |   | 2,163 |        |  |  | 33.4  |      
|                              |                      |   |                    |   |                  |   |          |   |      |  |       |   |          |   |       |        |  |   |       |        |  |  |       |      
|Total Operating Expenses      |                      |   | 1,640              |   |                  |   | 1,200    |   |      |  | 36.7  |   |          |   | 3,236 |        |  |   | 2,374 |        |  |  | 36.3  |      
|                              |                      |   |                    |   |                  |   |          |   |      |  |       |   |          |   |       |        |  |   |       |        |  |  |       |      
|Operating Loss                |                      | $ | (143               | ) |                  | $ | (182     | ) |      |  | (21.4 | ) |          | $ | (319  | )      |  | $ | (471  | )      |  |  | (32.3 | )    
|                              |                      |   |                    |   |                  |   |          |   |      |  |       |   |          |   |       |        |  |   |       |        |  |  |       |      
|Customers at June 30          |                      |   |                    |   |                  |   |          |   |      |  |       |   |          |   |       |        |  |   |       |        |  |  |       |      
|                              | DSL                  |   |                    |   |                  |   |          |   |      |  |       |   |          |   |       | 6,385  |  |   |       | 2,729  |  |  |       | 134.0 | 
|                              | Dial-up Access       |   |                    |   |                  |   |          |   |      |  |       |   |          |   |       | 13,022 |  |   |       | 11,906 |  |  |       | 9.4   | 
|                              | Web-hosting Services |   |                    |   |                  |   |          |   |      |  |       |   |          |   |       | 759    |  |   |       | 560    |  |  |       | 35.5  | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Internet Services segment revenues increased $479, or 47.1%, to
$1,497 in the three months ended June 30, 2003, from $1,018 in the three
months ended June 30, 2002. The revenue increase was primarily due to the
inclusion of Conestogas revenues for a full quarter in 2003, compared to
only one month in the second quarter of 2002 after the May 24, 2002
acquisition. The increase included $230 from the two extra months
recorded in 2003. The remaining increase resulted from an increase in the
number of dial-up single user residential and business customers, as well
as DSL customers and web hosting subscribers in our original market areas
and the expansion into Conestogas territory.



| |                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Operating expenses for the Internet Services segment increased $440,
or 36.7%, to $1,640 in the second quarter of 2003, from $1,200 in the
same period of 2002. The second quarter of 2003 expenses included three
months from Conestoga compared to one month in 2002 after the

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)



| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | acquisition. Conestoga expenses increased $282 over the prior years
quarter, while our D&E Internet Services expenses increased $158.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Internet Services segment revenues increased $1,014, or 53.3%, to
$2,917 in the six months ended June 30, 2003, from $1,903 in the first
half of 2002. The revenue increase was primarily due to the inclusion of
Conestogas revenues for the full six months in 2003, compared to only
one month in the first half of 2002 after the May 24, 2002 acquisition.
The increase included $561 from the five extra months included in 2003.
The remaining increase resulted from an increase in the number of dial-up
single user residential and business customers, as well as DSL customers
and web-hosting subscribers in our original market areas and the
expansion into Conestogas territory.



| |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Operating expenses for the Internet Services segment increased $862,
or 36.3%, to $3,236 in the first half of 2003, from $2,374 in the same
period of the prior year. The first half of 2003 expenses included six
months from Conestoga compared to one month in 2002 after the
acquisition. Conestoga expenses increased $627 over the prior years
first half, while our D&E Internet Services expenses increased $235.

Systems Integration Segment Results

|                              |  |                    |        |                  |  |          |       |      |  |      |      |          |  |   |        |   |  |   |        |   |  |  |      |  
|----------------------------- |  | ------------------ | ------ | ---------------- |  | -------- | ----- | ---- |  | ---- | ---- | -------- |  | - | ------ | - |  | - | ------ | - |  |  | ---- | -
|                              |  | Three months ended |        | Six months ended
|                              |  | June 30,           |        | June 30,        
|                              |  |                    |        |                 
|                              |  | 2003               |        | 2002             |  | % Change |       | 2003 |  | 2002 |      | % Change
|                              |  |                    |        |                  |  |          |       |      |  |      |      |         
|Revenues                      |  | $                  | 6,231  |                  |  | $        | 6,014 |      |  |      | 3.6  |          |  | $ | 11,412 |   |  | $ | 11,511 |   |  |  | (0.9 | )
|Depreciation and Amortization |  |                    | 416    |                  |  |          | 359   |      |  |      | 15.9 |          |  |   | 840    |   |  |   | 673    |   |  |  | 24.8 |  
|Other Operating Expenses      |  |                    | 6,966  |                  |  |          | 6,313 |      |  |      | 10.3 |          |  |   | 12,886 |   |  |   | 12,193 |   |  |  | 5.7  |  
|                              |  |                    |        |                  |  |          |       |      |  |      |      |          |  |   |        |   |  |   |        |   |  |  |      |  
|Total Operating Expenses      |  |                    | 7,382  |                  |  |          | 6,672 |      |  |      | 10.6 |          |  |   | 13,726 |   |  |   | 12,866 |   |  |  | 6.7  |  
|                              |  |                    |        |                  |  |          |       |      |  |      |      |          |  |   |        |   |  |   |        |   |  |  |      |  
|Operating Loss                |  | $                  | (1,151 | )                |  | $        | (658  | )    |  |      | 74.9 |          |  | $ | (2,314 | ) |  | $ | (1,355 | ) |  |  | 70.8 |  
|                              |  |                    |        |                  |  |          |       |      |  |      |      |          |  |   |        |   |  |   |        |   |  |  |      |  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Systems Integration segment revenues increased $217, or 3.6%, to
$6,231 in the three months ended June 30, 2003, from $6,014 in the three
months ended June 30, 2002. The revenue increase was primarily due to the
inclusion of Conestogas revenues for a full quarter in 2003, compared to
only one month in the second quarter of 2002 after the May 24, 2002
acquisition. The increase included $1,731 from the two extra months
recorded in 2003. The D&E Systems Integration decreases included a
reduction of $1,394 in telecommunications and computer equipment sold,
$213 in computer services revenue and $14 other miscellaneous revenues.
This decline was primarily related to reductions in customer spending for
communications related infrastructure that we believe is a result of the
slow economy.



| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Operating expenses for the Systems Integration segment increased
$710, or 10.6%, to $7,382 in the second quarter 2003, from $6,672 in the
same period of 2002. The second quarter of 2003

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)



| |                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | expenses included three
months from Conestoga compared to one month in 2002 after the
acquisition. Conestoga expenses increased $1,954 over the prior years
quarter, while our D&E Systems Integration expenses decreased $1,244
related to the decline in equipment sales.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Systems Integration segment revenues decreased $99, or 0.9%, to
$11,412 in the six months ended June 30, 2003, from $11,511 in the first
half of 2002. The revenue decrease was primarily due to a $3,748 decline
in D&E Networks, which more than offset the increase from inclusion of
Conestogas revenues for a full quarter in 2003, compared to only one
month in the first half of 2002 after the May 24, 2002 acquisition. The
increase included $3,542 from the two extra months included in 2003. The
D&E Networks decreases included a reduction of $2,949 in
telecommunications and computer equipment sold, $779 in computer services
revenue and $120 other miscellaneous revenues. These declines were
primarily related to reductions in customer spending for communications
related infrastructure that we believe is a result of the slow economy.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Operating expenses for the Systems Integration segment increased
$860, or 6.7%, to $13,726 in the first half of 2003, from $12,866 in the
same period of 2002. The first half of 2003 expenses included six months
from Conestoga compared to one month in 2002 after the acquisition.
Conestoga expenses increased $3,966 over the prior years first half,
while our D&E Systems Integration expenses decreased $3,106 primarily
from lower cost of products sold.

Conestoga Wireless Segment Results



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Conestoga Wireless segment revenues were $460 for the first quarter
of 2003, which was recorded in the two weeks before the business was sold
on January 14, 2003. There was no activity recorded in 2002 before the
May 24, 2002 Conestoga acquisition. Expenses for the six months ended
June 30, 2003 were $840 resulting in an operating loss of $380 for the
first half of 2003. The month
of June 2002 with one full month of revenue of $771 resulted in an
operating loss of $404 for the second quarter and first half of 2002. See
the Section titled Factors Affecting Our Prospects.

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



| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net cash provided by continuing operations was $20,021 in the first
half of 2003, compared with $2,721 in the same period of 2002. The
increase is primarily due to the inclusion of Conestogas cash flow
activity in 2003.

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)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net cash provided by investing activities was $1,520 in the first
half of 2003, compared with a net cash use of $167,623 in the same period
of 2002. The proceeds from the Conestoga Wireless and Paging sales were
$10,176, which more than covered the $7,951 of capital additions and $705
of net increase to investments and advances to affiliates. Capital
additions in 2003 were primarily for computer equipment and software for
upgrading the billing system and the Internet email system, outside plant
facilities and network infrastructure. The 2002 cash use was primarily
$156,143 for a portion of the Conestoga acquisition cost, $10,763 of
capital additions and a net increase of $717 in additional investments
and advances to affiliates. Capital additions in the first half of 2002
were primarily, $5,597 for network infrastructure expansion, plus $2,284
for CLEC additions and $1,537 for computers.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net cash used in financing activities was $2,365 in the first half
of 2003, compared with $95,963 of net cash provided in the same period of
2002. In the first half of 2003, payment of dividends of $3,689 was the
major financing use of funds while long-term debt borrowing net of
payments made on long-term debt provided $736 and common stock issuance
provided $588. On March 14, 2003, we borrowed $12,000 to use along with
cash from operations to pay $20,700 of federal taxes primarily related to
the sale of our D&E wireless investment. In the first half of 2002,
long-term debt was increased $160,000. The majority of the additional
debt was used to fund the Conestoga acquisition. Of remainder, $61,889
was used to repay other long-term loans and lines of credit and to pay
debt issuance costs. Quarterly dividends paid in the first six months of
2002 were $2,718, which included dividends paid on shares issued to
Conestoga shareholders in the merger.

Other



| |                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2002, we directly wrote off $632, related to the WorldCom
bankruptcy, in addition to our portion of losses that are shared through
the NECA settlement pool process. During April 2003 we sold our major
claims against WorldCom and recovered cash, $294 of which is a direct
recovery of our loss.



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have initiated plans for a trial to deliver a bundle of services
offered through DSL technology. As part of this trial our customers in
certain areas of Union County will be able to choose more services
provided by a joint effort between several of our subsidiaries. Capital
expenditures of
approximately $2,000 are anticipated during the second half of 2003
with no significant revenue impact in 2003.

External Sources of Capital at June 30, 2003



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of June 30, 2003, our credit facility consists of Term Loan A, (a
$50,000 single draw 10-year senior term loan with a remaining balance of
$47,500), Term Loan B, (a $125,000 single draw 8.5-year senior term loan
with a remaining balance of $119,000) and an 8.5-year senior reducing
revolving credit facility, with a reduced total availability of $73,500,
of which $41,550 is borrowed. The revolving credit facility, of which
$31,950 was available as of June 30, 2003, is available to fund capital
expenditures, acquisitions, general corporate purposes and working

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)



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | capital needs. In connection with the Conestoga acquisition, we acquired
their long-term loans of $35,000.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Term Loan A for $47,500 requires interest only payments for
three years, with increasing quarterly principal payments from the third
quarter of 2004 through the second quarter 2011. The Term Loan B for
$119,000 requires interest only payments for two years, with increasing
quarterly principal payments from the third quarter of 2004 through the
fourth of quarter 2010. The revolving credit facility requires interest
only payments for two years, with increasing quarterly principal
reductions of the amount available to borrow from the third quarter of
2004 through the fourth quarter of 2010. Interest on both the loan and
the revolving credit facility is payable at a base rate plus an
applicable margin or at LIBOR rates plus an applicable margin based on
our leverage ratio. A commitment fee must be paid on the unused portion
of the revolving credit facility. The $35,000 Conestoga loans require
interest only payments for three years with equal quarterly 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 expansion of our CLEC business into new markets,
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 and debt service coverage.



| |                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Upon completion of the sale of Conestoga Wireless on January 14,
2003, we received approximately $10,005 and, as required by the Senior
Secured Credit Facility mandatory repayment terms, subsequently repaid
$2,500 of the Term A loan, $6,000 of the Term B loan and $1,500 on our
revolving credit facility. As of June 30, 2003, we had no other unsecured
lines of credit.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our borrowing capacity at June 30, 2003, as limited by our
covenants, is $75,000 senior reducing revolving credit loan, reduced to
$73,500 for 8.5 years, of which $41,550 was drawn. As of June 30, 2003,
the full amount of the revolver was available for borrowing without
breaking any of the covenants. Based on the excess cash flow generated
during the second quarter of 2003, D&E has classified $1,066 of the
revolving credit as short term debt and will reduce that loan with a
payment in August 2003. Our ratio of total debt to total debt plus
capital increased to 55.1% at June 30, 2003 from 54.8% at December 31,
2002.

Commitments, Contingencies and Projected Uses of Capital



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We believe that our most significant commitments, contingencies and
projected uses of funds in 2003, other than for operations, include
capital expenditures, the payment of quarterly common stock
dividends and other contractual obligations. On July 24, 2003, we
declared a quarterly common stock dividend of $0.125 per share payable on
September 15, 2003 to holders of record on September 2, 2003. We expect
that this dividend will result in an aggregate payment of approximately
$1,900. We believe that we have adequate internal and external resources
available

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)



| |                                        
| | ---------------------------------------
| | 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 communications
towers for Conestogas wireless subsidiary, Conestoga Wireless Company
(CWC). In November 2002, D&E entered into an asset purchase agreement
with Keystone Wireless, LLC (Keystone Wireless) for the sale of the
wireless telephone assets of CWC. Although D&E sold the assets of this
business on January 14, 2003, its obligations under the BTS were not
assumed by Keystone Wireless. Under the BTS, D&E is obligated to work
with Mountain Union to find and develop 20 wireless tower sites, and
after construction of each tower, enter into a long-term operating lease
with Mountain Union for space on the tower. At closing on the sale of
CWC, Keystone Wireless assumed 9 leases of tower space under the BTS.
Keystone Wireless is also contractually obligated to enter into up to 6
additional operating leases for tower space under the BTS, provided that
sites therefore can be located and the towers built under the BTS.
Consequently, Keystone Wireless is committed to leasing space on a total
of 15 towers under the BTS, provided that sites therefore can be located
and the towers built under the BTS. Should any of the obligations under
the BTS to build 20 towers remain unfulfilled, D&E could be subject to
penalties for nonperformance. Because the underlying assets of CWC were
sold under the asset purchase agreement, we have considered any remaining
obligations and potential penalties under the BTS a contingent liability.
As of June 30, 2003, we have recorded an estimated $675 for its remaining
commitment under the BTS.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As part of the Companys acquisition of Conestoga, D&E assumed a
guarantee agreement with Mountain Union for lease obligations on the
wireless tower sites of Conestogas wireless subsidiary. When D&E entered
into the asset purchase agreement with Keystone Wireless, whereby
Keystone Wireless was assigned the responsibility for the leases,
Mountain Union declined to release D&E from its guarantee. In the event
of a default by Keystone Wireless, D&E continues to guarantee the
wireless tower site lease payments, which cover a 10-year period
commencing 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 majority of these tower
site leases and our guarantee will expire in 2011 and thereafter. We have
estimated and recorded the fair value of the liability for the lease
guarantees of $3,200 and that is presented as an offset to the fair value
of the Conestoga assets held for sale at December 31, 2002.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We hold a 33% interest in EuroTel and a 28.88% interest in Pilicka,
both of which we account for under the equity method of accounting.
Thus, neither the assets nor the liabilities of EuroTel or Pilicka are
presented on a consolidated basis on our balance sheets. We have also
committed to loan EuroTel, on an equal basis with the other investors in
EuroTel, certain of its operating cash needs. In the first half of 2003,
D&E made advances of $701 to EuroTel and we expect that our total 2003
advances will be approximately $1,200 in the aggregate. Additionally, we
have provided a letter of commitment to advance funds to Pilicka for 2003
however, management does not anticipate having to advance funds to
Pilicka during 2003.

32



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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)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the second quarter of 2003, we successfully won bids in the
Federal Communications Commission auction for licenses in five geographic
areas within our service territory. These licenses
will enable us to provide wireless data services in Lancaster,
Reading, Altoona, Williamsport and State College, Pennsylvania. We
currently have deposited $166 or 20% of the price with the remaining 80%,
or $662 anticipated to be payable before the end of the third quarter of
2003 upon the FCCs completion of post-auction procedures.

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
| |  | -------------------



| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Revenues for all of our business segments are generally recorded
when services are provided or products are delivered. Our RLEC and CLEC
pricing is subject to oversight by both state and federal regulatory
commissions.



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We receive a portion of our interstate access revenues in our RLEC
segments from settlement pools in which we participate with other
telephone companies through the National Exchange Carrier Association,
Inc. (NECA). These pools were established at the direction of the FCC and
are funded by interstate access service revenues, which the FCC
regulates. Revenues earned through this pooling process are initially
recognized based on estimates and are subject to adjustments that may
either increase or decrease the amount of interstate access revenues. If
the actual amounts that we receive from the settlement pools differ from
the amounts that we have recorded as accounts receivables on our balance
sheets, we would be required to record the amount

33



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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)



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | of such a reduction or increase as an adjustment to our earnings.
Historically, we have not experienced significant adjustments to our
revenues as a result of our participation in these pools.
|
| | Regulated Asset Depreciation                                                                                                                                                                    



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



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



| |                                
| | -------------------------------
| | Impairment of Long-Lived Assets



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. Recoverability is assessed based on future cash
flows expected to result from the use of the asset and its eventual
disposition. If the sum of the undiscounted cash flows is less than the
carrying value of the asset, an impairment loss is recognized. Any
impairment loss, if indicated, would be measured as the amount by which
the carrying amount of the asset exceeds the estimated fair value of the
asset. While we have never recorded a material impairment charge for
long-lived assets, future events or changes in circumstances could result
in a material charge to earnings.



| |                                                        
| | -------------------------------------------------------
| | Impairment of Goodwill and Indefinite-Lived Intangibles



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Upon the adoption of SFAS 142, Goodwill and Other Intangible
Assets, on January 1, 2002, goodwill and indefinite-lived intangibles
are no longer subject to amortization. Goodwill and indefinite-lived
intangibles are subject to at least an annual assessment for impairment
by comparing carrying value to fair value, which we will perform annually
as of April 30. There is a two-step process for assessment for impairment
of 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

34



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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)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | expected future cash
flows derived from such goodwill and indefinite-lived intangibles. Such
evaluations for impairment are significantly impacted by estimates of
future revenues, costs and expenses, the market price of our stock and
other factors. While we have never recorded a material impairment charge
for goodwill and indefinite-lived intangibles, future events or changes
in circumstances could result in a material charge to earnings.



| |                                        
| | ---------------------------------------
| | Investment in Unconsolidated Affiliates



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



| |                    
| | -------------------
| | Retirement Benefits



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



| |             
| | ------------
| | Income Taxes



| |                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We file a consolidated federal income tax return. We have two
categories of income taxes: current and deferred. Current taxes are those
amounts we expect to pay when we file our tax returns. Since we must
report some of our revenues and expenses differently for our financial
statements than we do for income tax purposes, we record the tax effects
of those differences as

35



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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)



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | deferred tax assets and liabilities in our consolidated balance
sheets. These deferred tax assets and liabilities are measured using the
enacted tax rates that are currently in effect.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Management judgment is required in determining the provision for
current income taxes, deferred tax assets and liabilities, and any
valuation allowance recorded against the net deferred tax assets. A
valuation allowance is established for any deferred tax asset that we may
not be able to use in the preparation and filing of our future tax
returns. We have recorded a valuation allowance due to uncertainties
related to the ability to utilize some of the deferred tax assets,
consisting primarily of equity income losses from affiliates carried
forward before they expire.

Recent Accounting Pronouncements



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In May 2003, the Financial Accounting Standards Board (FASB)
issued SFAS No. 150, Accounting for Certain financial Instruments with
Characteristics of both Liabilities and Equity (SFAS No. 150). SFAS
No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities
and equity. The preferred stock of utility subsidiary does not fall
within the guidance of SFAS No. 150 requiring classification as a
liability.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities (SFAS No. 149).
SFAS No. 149 amends and clarifies the accounting guidance on derivative
instruments (including certain derivative instruments embedded in other
contracts) and hedging activities that fall within the scope of SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 149 also amends certain other existing pronouncements, which will
result in more consistent reporting of contracts that are derivatives in
their entirety or that contain embedded derivatives that warrant separate
accounting. This Statement is effective for contracts entered into or
modified after June 30, 2003, with certain exceptions, and for hedging
relationships designated after June 30, 2003. The Company does not expect
the adoption of SFAS No. 149 to have a material impact on the Companys
financial position, results of operations or cash flows.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS No. 143). This Statement establishes
accounting practices relating to legal obligations associated with the
retirement of tangible long-lived assets that result from the
acquisition, construction, development or normal operation of a
long-lived asset. SFAS No. 143 requires that companies recognize the fair
value of a liability for asset retirement obligations in the period in
which the legal obligations are incurred and capitalize that amount as a
part of the book value of the long-lived asset. That cost is then
depreciated over the remaining life of the underlying long-lived asset.
D&E adopted SFAS No. 143 effective January 1, 2003 and recorded an
after-tax benefit of approximately $260 as a cumulative effect accounting
adjustment in the first quarter of 2003. The adjustment represents the
cumulative estimate of cost of removal charged to depreciation expense in
earlier years.

36



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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 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. D&E applied the initial
recognition and measurement provisions on a prospective basis effective
December 31, 2002. This interpretation requires that, at the time a
Company issues a guarantee, the Company must recognize a liability for
the fair value of that obligation under the guarantee. As part of the
Companys acquisition of Conestoga, D&E assumed a guarantee agreement
with Mountain Union Telecom for lease obligations on the wireless tower
sites of Conestogas wireless subsidiary. When D&E entered into the asset
purchase agreement with Keystone Wireless, whereby Keystone Wireless was
assigned the responsibility for the leases, Mountain Union declined to
release D&E from its guarantee. In the event of a default by Keystone
Wireless, D&E continues to guarantee the wireless tower site lease
payments, which cover a 10-year period commencing 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 majority of these tower site leases and our guarantee will
expire in 2011 and thereafter. D&E has estimated and recorded the fair
value of the liability for the lease guarantees of $3,200 and that is
presented as an offset to the fair value of the Conestoga assets held for
sale at December 31, 2002.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities  An Interpretation of
Accounting Research Bulletin (ARB) No. 51 (FIN 46). This
interpretation clarifies how to identify variable interest entities and
how a company should assess its interests in a variable interest entity
to decide whether to consolidate the entity. FIN 46 applies to variable
interest entities created after January 31, 2003, in which a company
obtains an interest after that date. Also, FIN 46 applies in the first
fiscal quarter or interim period beginning after June 15, 2003, to
variable interest entities in which a company holds a variable interest
that it acquired before February 1, 2003. D&E is currently evaluating the
impact of this interpretation on the Companys financial position,
results of operations or cash flows.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In January 2003, the Emerging Issues Task Force issued EITF 00-21
Revenue Arrangements with Multiple Deliverables (EITF 00-21). EITF
00-21 primarily addresses certain aspects of the accounting by a vendor
for arrangements under which it will perform multiple revenue-generating
activities. Specifically, it addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit
of accounting. In applying EITF 00-21, separate contracts with the same
entity or related parties that are entered into at or near the same time
are presumed to have been negotiated as a package and should, therefore,
be evaluated as a single arrangement in considering whether there are one
or more units of accounting. That presumption may be overcome if there is
sufficient evidence to the contrary. EITF 00-21 also addresses how
arrangement consideration should be measured and allocated to the
separate units of accounting in the arrangement. The provisions of EITF
00-21 are effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. D&E is currently evaluating the
impact this statement will have on its financial position or results of
operations.

37



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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.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

Factors Affecting Our Prospects



| |                                                          
| | ---------------------------------------------------------
| | Our increased indebtedness could restrict our operations.



| |                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of June 30, 2003, we had approximately $245,833 of total
indebtedness, including current maturities, which increased in connection
with the Conestoga acquisition. This increased indebtedness could
restrict our operations due to the following factors, among others:



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      we will use a substantial portion of our cash flow from operations, if
any, to pay principal and interest on our indebtedness, which would
reduce the funds available for working capital, capital expenditures,
acquisitions and other general corporate purposes;
|
| |      our indebtedness may limit our ability to obtain additional financing
on satisfactory terms, if at all;                                                                                                                                                            
|
| |      insufficient cash flow from operations may cause us to attempt to sell
assets, restructure or refinance our debt, or seek additional equity
capital, which we may be unable to do at all or on satisfactory terms;                                                 

38



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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)



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |      our level of indebtedness may make us more vulnerable to economic or
industry downturns;                                                     
|
| |      we may not have the ability to pay dividends to our shareholders; and                                                                        
|
| |      our debt service obligations increase our vulnerabilities to
competitive pressures, as we may be more leveraged than many of our
competitors.



| |                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The agreements governing our indebtedness could restrict our operations
and ability to make acquisitions.                                                                                                                                                                                                                                                                                              
|
| | 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, 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;                                                                                                                                                                                                                                                                                                                                                                      
|
| |      expand our CLEC marketing areas; and                                                                                                                                                                                                                                                                                                                                                             
|
| |      extend credit.                                                                                                                                                                                                                                                                                                                                                                                   



| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may be unable to integrate successfully the business operations of D&E
and Conestoga, and such inability could have an adverse impact on our
profitability.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The integration of the systems and operations of D&E and Conestoga
will involve significant risks. D&E and Conestoga have different
operating support systems, including billing, accounting, order
management, toll rating, trouble reporting and customer service systems,
which may be difficult to integrate. In addition, some of Conestogas
employees are members of a labor union and are subject to the terms of a
collective bargaining agreement. Because D&Es employees are not
unionized, management of the combined company may face difficulties in
integrating

39



---



##### 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)



| |                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | employees with different work rules. Even if integration of
the operating systems and employees is ultimately successful, the amount
of management attention diverted to integration efforts may limit their
ability to work on other business matters.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have continuing involvement in the Conestoga wireless segment after
its sale which may adversely affect the continuing operations of the
business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | In connection with the acquisition of Conestoga, we committed to a
plan to sell the assets of Conestogas wireless segment. The sale was
completed on January 14, 2003. We will have continuing involvement after
the sale as a result of our continued guarantees of lease obligations on
the wireless tower sites that were sold and our responsibilities under
build-to-suit agreements. Payments required under the build-to-suit
agreement and payments, if any, that become due under the wireless tower
site guarantees could restrict our operations by reducing the funds
available for working capital, capital expenditures, acquisitions and
other general corporate purposes.



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



| |                                                                    
| | -------------------------------------------------------------------
| | As an integrated communications provider, we face competition from:



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| |      competitive local exchange carriers, including TelCove, Commonwealth
Telephone Enterprises and XO Communications;                     
|
| |      wireless service providers, including Cingular, Verizon Wireless, AT&T
Wireless, Nextel and T-Mobile                                  
|
| |      internet service providers, including AOL, EarthLink and MSN;                                                                         
|
| |      cable television companies, including TelCove, Comcast and Pencor Services;                                                           
|
| |      providers of communications services such as long distance services,
including, AT&T, Sprint, WorldCom and Verizon Communications; and
|
| |      systems integration providers, including Morefield, Williams,
IntelliMark and Weidenhammer Systems Corp.                              



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

40



---



##### 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)



| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | Changes to Pennsylvania laws prescribing the regulatory treatment of
incumbent telephone companies may be changed.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 1993 the Pennsylvania Legislature enacted laws prescribing the
deployment of broadband technology and implementation of alternative
regulatory rules for incumbent telephone companies. This law was codified
and implemented by the Pennsylvania Public Utility Commission as Chapter
30. When enacted, Chapter 30 included a 10-year sunset provision, i.e.,

unless action is taken by the legislature before the end of 2003, the
current law will no longer exist. For this reason the Pennsylvania
Legislature is currently considering the development of replacement
legislation
to insure the continued deployment of broadband technology. Under
the current rules, our RLECs have committed to a network modernization
plan and are now regulated by the Pennsylvania PUC based on a price cap
form of rate regulation. New legislation and resulting Pennsylvania PUC
enactment could lead to increased capital deployment requirements and a
less favorable form of regulation.



| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may be unable to secure unbundled network elements at reasonable
rates, in which case our CLEC growth may be delayed and the quality of
service may decline.



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



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In February 2003, the Federal Communications Commission approved the
Triennial Review Order. Although the text of the order has not yet been
released, based on available information, the order eliminates the
requirement that line sharing be offered as an unbundled network element
(UNE). In addition, the order provides for the elimination of the
bundled group of network elements referred to as UNE-P service. The
elimination of these offerings could have a negative effect on our CLEC
segment. It is possible that when released, the FCCs order could be
subject to court challenges.

41



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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)



| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we expand our CLEC operations, the success of this expansion will be
dependent on interconnection agreements, permits and rights-of-way. The
failure to obtain these agreements and permits on favorable terms could
hamper any such expansion.



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



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The United States communications industry is subject to federal,
state and other regulations that are continually evolving. As new
communications laws and regulations are issued, we may be required to
modify our business plans or operations, and we may not be able to do so
in a cost-effective manner. Federal and state regulatory trends toward a
more competitive market place through reduced competitive entry standards
are likely to have negative effects on our business and our ability to
compete. For example, the FCC is currently considering the issue of
wireless local number portability. The final disposition of this issue is
unclear at this time; however, the potential exists for a ruling that
would have a negative impact on our RLEC and CLEC operations. In this
regard, the regulatory environment governing ILEC operations has been and
will likely continue to be very liberal in its approach to promoting
competition and network access, which may increase the likelihood of new
competitors offering similar services to our service areas. The
introduction of pro-competitive policies could have a negative effect on
our ILEC operating results yet at the same time present operating
opportunities to our CLEC business.



| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We no longer have a limited suspension from certain interconnection
requirements of the Telecommunications Act of 1996. As a result, we may
be subject to additional competition for telecommunications services.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our RLEC services held a limited suspension until January 2003 from
certain interconnection requirements of the Telecommunications Act of
1996. The suspension protected the interconnection services in 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 we, along with all other RLECs in Pennsylvania, did not receive
additional extensions of this suspension, competitors will be allowed to
seek removal of our rural exemption for the purposes of entering our
territory and using our services and facilities through interconnection
agreements to

42



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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)



| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | provide competitive services. The introduction of new
competitors could result in the loss of customers and have a negative
effect on our revenues and earnings.



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The sale of equipment and services in the Systems Integration
business is dependent upon the willingness of companies to invest in
improvements in their information and communications systems. General
economic conditions play a role in companies investment decisions that
directly affect the potential sales of Systems Integration equipment and
services. The current economic climate may negatively impact the
willingness of companies to make these types of investments.



| |                                                         
| | --------------------------------------------------------
| | Impairment of Goodwill and Indefinite-Lived Intangibles.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The annual tests for impairment of goodwill and indefinite-lived
intangibles which we will
perform as of April each year may result in an unplanned expense and
reduction of asset value if future cash flow estimates are insufficient
to justify the goodwill and indefinite-lived intangible assets carrying
values. Management performed a test for impairment as of April 30, 2003
and concluded that the fair value of each reporting unit and its related
goodwill and other indefinite-lived intangible assets exceeded its net
book value this year. Other events could cause impairments when tested in
future years.

43



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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. As of June 30, 2003, our
debt can be categorized as follows:

|                                       |                                          |  |   |         | 
|-------------------------------------- | ---------------------------------------- |  | - | ------- | 
|Fixed interest rates:                  |                                          |  |   |        
|                                       | Secured Term Loans                       |  | $ | 35,000  | 
|Subject to interest rate fluctuations: |                                          |  |   |        
|                                       | Senior Secured Revolving Credit Facility |  | $ | 41,550  | 
|                                       | Senior Secured Term Loans                |  | $ | 166,500 | 



| |                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As part of our loan covenant conditions, we have arranged interest
rate protection on one-half of the total amount of senior indebtedness
outstanding, with a weighted average life of at least 2 years. As of June
30, 2003, our bank debt is as follows:

|                                                        |  |           |         |      |  |            |      |   |  |   |         | 
|------------------------------------------------------- |  | --------- | ------- | ---- |  | ---------- | ---- | - |  | - | ------- | 
|                                                        |  |           |         |      |  | Average    |      |   |  |  
|                                                        |  | Principal |         | Rate |  | Fair Value
|                                                        |  |           |         |      |  |           
|Rates fixed for two years through interest rate swaps   |  | $         | 35,000  |      |  |            | 6.29 | % |  | $ | 35,000  | 
|Rates fixed for three years through interest rate
swaps |  | $         | 35,000  |      |  |            | 6.93 | % |  | $ | 35,000  | 
|Rates fixed for four years through interest rate
swaps  |  | $         | 35,000  |      |  |            | 7.23 | % |  | $ | 35,000  | 
|Fixed rate debt, rates fixed for twelve years           |  | $         | 35,000  |      |  |            | 9.35 | % |  | $ | 40,946  | 
|Total fixed rates 58% of total debt                     |  | $         | 140,000 |      |  |            | 6.37 | % |  | $ | 145,946 | 
|Variable rate debt 42% of total debt                    |  | $         | 103,050 |      |  |            | 5.33 | % |  | $ | 103,050 | 



| |                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If interest rates rise above the rates of the variable debt, we
could realize additional interest expense of $515 for each 50 basis
points above the variable rates. If rates were to decline, we would
realize less interest expense of approximately $515 for each 50 basis
point decrease in rates.



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

44



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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)

|                     |  |          |        |          |  |          |      |            |  |         |      |   |  |   |       | 
|-------------------- |  | -------- | ------ | -------- |  | -------- | ---- | ---------- |  | ------- | ---- | - |  | - | ----- | 
|                     |  |          |        |          |  |          |      |            |  | Average |      |   |  |  
|                     |  | Notional |        | Average  |  | Received |      |            |  |        
|Terms of Swaps       |  | Amounts  |        | Pay Rate |  | Rate     |      | Fair Value
|                     |  |          |        |          |  |          |      |           
|11/25/02 to 11/25/04 |  | $        | 35,000 |          |  |          | 6.29 | %          |  |         | 5.17 | % |  | $ | 666   | 
|12/04/02 to 12/04/05 |  | $        | 35,000 |          |  |          | 6.93 | %          |  |         | 5.30 | % |  | $ | 1,124 | 
|11/25/02 to 11/25/06 |  | $        | 35,000 |          |  |          | 7.23 | %          |  |         | 5.17 | % |  | $ | 1,702 | 



| |                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If interest rates rise above the rates fixed by these swaps, we
could realize other income of $525 for each 50 basis points above the
fixed rates. If rates were to decline, we would realize other expense of
approximately $525 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, 2003, 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. Based upon that evaluation, the Corporations Chief Executive
Officer and Chief Financial Officer concluded that the Corporations
disclosure controls and procedures are effective. 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.



| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There have been no significant changes in our internal controls or
in other factors that could significantly affect internal controls
subsequent to the date we carried out this evaluation.

45



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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. The suit was
dismissed by the United States District Court for the Southern District of New
York and PenneCom has appealed that decision to the Second Circuit Court of
Appeals. 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 4. Submission of Matters to a Vote of Security Holders



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | (a) Date of meeting. The Annual Meeting of Shareholders was held on May
22, 2003.



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) Matters Voted Upon at Annual Meeting. The vote tabulations in respect
to the two matters voted upon at the 2003 Annual Meeting were as follows:



| |     |                                                                                                                                  
| | --- | ---------------------------------------------------------------------------------------------------------------------------------
| | (1) | Election of the four directors to hold office for a three year term to
expire in 2006 and Mr. Weidner whose term expires in 2005.

|                   |  |     |            |         |  |  |         | 
|------------------ |  | --- | ---------- | ------- |  |  | ------- | 
|Director           |  | For |            | Witheld
|                   |  |     |            |        
|Thomas H. Bamford  |  |     | 13,021,463 |         |  |  | 156,634 | 
|Ronald E. Frisbie  |  |     | 12,686,157 |         |  |  | 491,940 | 
|Robert M. Lauman   |  |     | 12,753,510 |         |  |  | 424,587 | 
|D. Mark Thomas     |  |     | 12,731,051 |         |  |  | 447,046 | 
|Richard G. Weidner |  |     | 12,651,992 |         |  |  | 526,105 | 



| |     |                                                                                                                    
| | --- | -------------------------------------------------------------------------------------------------------------------
| | (2) | Ratification of the Board of Directors selection of
PricewaterhouseCoopers LLP
as independent accountants in 2003.

|           |  |         |        |         |  |  |        | 
|---------- |  | ------- | ------ | ------- |  |  | ------ | 
|For        |  | Against |        | Abstain
|           |  |         |        |        
|13,054,296 |  |         | 65,353 |         |  |  | 58,448 | 

46



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##### Table of Contents



D&E Communications, Inc. and Subsidiaries
Part II  - Other Information






| |                                         
| | ----------------------------------------
| | Item 6. Exhibits and Reports on Form 8-K



| |              
| | -------------
| | (a) Exhibits:

|        |  |                                                |  |                
|------- |  | ---------------------------------------------- |  | ---------------
|Exhibit |  | Identification of                              |  |                
|No.     |  | Exhibit                                        |  | Reference      
|        |  |                                                |  |                
|31      |  | Certification of the Chief Executive Officer   |  | Filed herewith.
|        |  | and the Chief Financial Officer Required by    |  |                
|        |  | Section 13a-15 of the Exchange Act             |  |                
|        |  |                                                |  |                
|32      |  | Certification of the Chief Executive Officer   |  | Filed herewith.
|        |  | and the Chief Financial Officer pursuant to    |  |                
|        |  | Section 906 of the Sarbanes-Oxley Act of 2002. |  |                



| |                         
| | ------------------------
| | (b) Reports on Form 8-K:



| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A current report on Form 8-K dated April 1, 2003, was filed during the
quarter ended June 30, 2003. The report announced the earnings for the year
ended December 31, 2002.



| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A current report on Form 8-K dated May 16, 2003, was filed during the
quarter ended June 30, 2003. The report announced the earnings for the three
months ended March 31, 2003.



| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A current report on Form 8-K dated May 22, 2003, was filed during the
quarter ended June 30, 2003. The report disclosed the material included in the
presentation to shareholders at the annual shareholders meeting.



| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A current report on Form 8-K dated June 13, 2003, was filed during the quarter
ended June 30, 2003. The report included a copy of the quarterly financial
report for the first quarter of 2003 mailed to shareholders.

47



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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 12, 2003 |                          |                        
|                      |                          |                        
|                      | By:                      | /s/   G. William Ruhl  
|                      |                          |                        
|                      |                          | G. William Ruhl        
|                      |                          | Chief Executive Officer

|                      |     |                                       |  | 
|--------------------- | --- | ------------------------------------- |  | 
|Date: August 12, 2003 | By: | /s/ Thomas E. Morell                 
|                      |     |                                      
|                      |     | Thomas E. Morell                     
|                      |     | Senior Vice President,               
|                      |     | Chief Financial Officer and Treasurer

48