##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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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 September 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



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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



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



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



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



|Class                                   |  | Outstanding at November 7, 2003
|--------------------------------------- |  | -------------------------------
|Common Stock, par value $0.16 per share |  | 15,536,955 Shares              



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Form 10-Q



TABLE OF CONTENTS



|Item No. |  |                                                                                                              |  | Page
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|         |  | PART I. FINANCIAL INFORMATION                                                                                |  |     
|         |  |                                                                                                             
|1.       |  | Financial Statements                                                                                         |  |     
|         |  |                                                                                                             
|         |  | Consolidated Statements of Operations For the three months and nine months endedSeptember 30, 2003 and 2002 |  | 1   
|         |  |                                                                                                             
|         |  | Consolidated Balance Sheets September 30, 2003 and December 31, 2002                                        |  | 2   
|         |  |                                                                                                             
|         |  | Consolidated Statements of Cash Flows For the nine months endedSeptember 30, 2003 and 2002                  |  | 3   
|         |  |                                                                                                             
|         |  | Consolidated Statements of Shareholders Equity For the nine months endedSeptember 30, 2003 and 2002        |  | 4   
|         |  |                                                                                                             
|         |  | Notes to Consolidated Financial Statements                                                                   |  | 5   
|         |  |                                                                                                             
|2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 19  
|         |  |                                                                                                             
|3.       |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 45  
|         |  |                                                                                                             
|4.       |  | Controls and Procedures                                                                                      |  | 46  
|         |  |                                                                                                             
|         |  | PART II. OTHER INFORMATION                                                                                   |  |     
|         |  |                                                                                                             
|1.       |  | Legal Proceedings                                                                                            |  | 47  
|         |  |                                                                                                             
|6.       |  | Exhibits and Reports on Form 8-K                                                                             |  | 47  
|         |  |                                                                                                             
|         |  | SIGNATURES                                                                                                   |  | 48  



i



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##### Table of Contents

Part I  Financial Information

Item 1. Financial Statements



D&E Communications, Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per-share amounts)

(Unaudited)



|                                                                                                                                                          |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | -
|                                                                                                                                                          |  | 2003                             |        |   | 2002                            |  
|OPERATING REVENUE                                                                                                                                         |  |                                  |        |   |                                 |  
|Communication service revenues                                                                                                                            |  | $                                | 39,764 |   |                                 | $
|Communication products sold                                                                                                                               |  |                                  | 2,778  |   |                                 |  
|Other                                                                                                                                                     |  |                                  | 489    |   |                                 |  
|                                                                                                                                                          |  |                                  |        |   |                                 |  
|Total operating revenues                                                                                                                                  |  |                                  | 43,031 |   |                                 |  
|                                                                                                                                                          |  |                                  |        |   |                                 |  
|OPERATING EXPENSES                                                                                                                                        |  |                                  |        |   |                                 |  
|Communication service expenses (exclusive of depreciation and amortization below)                                                                         |  |                                  | 15,822 |   |                                 |  
|Cost of communication products sold                                                                                                                       |  |                                  | 1,979  |   |                                 |  
|Depreciation and amortization                                                                                                                             |  |                                  | 9,645  |   |                                 |  
|Marketing and customer services                                                                                                                           |  |                                  | 4,149  |   |                                 |  
|Merger related costs                                                                                                                                      |  |                                  |       |   |                                 |  
|General and administrative services                                                                                                                       |  |                                  | 6,138  |   |                                 |  
|                                                                                                                                                          |  |                                  |        |   |                                 |  
|Total operating expenses                                                                                                                                  |  |                                  | 37,733 |   |                                 |  
|                                                                                                                                                          |  |                                  |        |   |                                 |  
|Operating income                                                                                                                                          |  |                                  | 5,298  |   |                                 |  
|                                                                                                                                                          |  |                                  |        |   |                                 |  
|OTHER INCOME (EXPENSE)                                                                                                                                    |  |                                  |        |   |                                 |  
|Equity in net losses of affiliates                                                                                                                        |  |                                  | (513   | ) |                                 |  
|Interest expense                                                                                                                                          |  |                                  | (4,492 | ) |                                 |  
|Other-than-temporary loss on investments                                                                                                                  |  |                                  |       |   |                                 |  
|Other, net                                                                                                                                                |  |                                  | (6     | ) |                                 |  
|                                                                                                                                                          |  |                                  |        |   |                                 |  
|Total other income (expense)                                                                                                                              |  |                                  | (5,011 | ) |                                 |  
|                                                                                                                                                          |  |                                  |        |   |                                 |  
|Income (loss) from continuing operations before income taxes and dividends on utility preferred stock                                                     |  |                                  | 287    |   |                                 |  
|INCOME TAXES AND DIVIDENDS ON UTILITY PREFERRED STOCK                                                                                                     |  |                                  |        |   |                                 |  
|Income taxes (benefit)                                                                                                                                    |  |                                  | 116    |   |                                 |  
|Dividends on utility preferred stock                                                                                                                      |  |                                  | 16     |   |                                 |  
|                                                                                                                                                          |  |                                  |        |   |                                 |  
|Total income taxes and dividends on utility preferred stock                                                                                               |  |                                  | 132    |   |                                 |  
|                                                                                                                                                          |  |                                  |        |   |                                 |  
|Income (loss) from continuing operations                                                                                                                  |  |                                  | 155    |   |                                 |  
|Discontinued operations:                                                                                                                                  |  |                                  |        |   |                                 |  
|Gain (loss) on disposal of discontinued D&E Wireless Segment, net of operating losses during phase-out period and net of
income taxes of $138 and $29,337 |  |                                  |       |   |                                 |  
|Income (loss) from operations of discontinued Paging business, net of income tax benefit of $0, $7, $27 and $2                                            |  |                                  |       |   |                                 |  
|                                                                                                                                                          |  |                                  |        |   |                                 |  
|Income before cumulative effect of change in accounting principle                                                                                         |  |                                  | 155    |   |                                 |  
|Cumulative effect of change in accounting principle, net of income taxes of $177 (See Note 2)                                                             |  |                                  |       |   |                                 |  
|                                                                                                                                                          |  |                                  |        |   |                                 |  
|NET INCOME (LOSS)                                                                                                                                         |  | $                                | 155    |   |                                 | $
|                                                                                                                                                          |  |                                  |        |   |                                 |  
|Weighted average common shares outstanding                                                                                                                |  |                                  | 15,522 |   |                                 |  
|BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE                                                                                                        |  |                                  |        |   |                                 |  
|Income (loss) from continuing operations                                                                                                                  |  | $                                | 0.01   |   |                                 | $
|Income (loss) from discontinued operations                                                                                                                |  |                                  | 0.00   |   |                                 |  
|Cumulative effect of accounting change (See Note 2)                                                                                                       |  |                                  | 0.00   |   |                                 |  
|                                                                                                                                                          |  |                                  |        |   |                                 |  
|Net income (loss) per common share                                                                                                                        |  | $                                | 0.01   |   |                                 | $
|                                                                                                                                                          |  |                                  |        |   |                                 |  
|Dividends per common share                                                                                                                                |  | $                                | 0.13   |   |                                 | $
|                                                                                                                                                          |  |                                  |        |   |                                 |  



See notes to
consolidated financial statements.



1



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except per-share amounts)

(Unaudited)



|                                                                                                                                                                                     |  | September 30, 2003 |         |   | December 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------- | - | ----------------- | -
|ASSETS                                                                                                                                                                               |  |                    |         |   |                   |  
|CURRENT ASSETS                                                                                                                                                                       |  |                    |         |   |                   |  
|Cash and cash equivalents                                                                                                                                                            |  | $                  | 17,138  |   |                   | $
|Accounts receivable, net of reserves of $1,253 and $1,416                                                                                                                            |  |                    | 16,883  |   |                   |  
|Inventories, lower of cost or market, at average cost                                                                                                                                |  |                    | 3,456   |   |                   |  
|Prepaid expenses                                                                                                                                                                     |  |                    | 8,085   |   |                   |  
|Other                                                                                                                                                                                |  |                    | 1,321   |   |                   |  
|                                                                                                                                                                                     |  |                    |         |   |                   |  
|TOTAL CURRENT ASSETS                                                                                                                                                                 |  |                    | 46,883  |   |                   |  
|                                                                                                                                                                                     |  |                    |         |   |                   |  
|INVESTMENTS                                                                                                                                                                          |  |                    |         |   |                   |  
|Investments in and advances to affiliated companies                                                                                                                                  |  |                    | 4,279   |   |                   |  
|Investments available-for-sale                                                                                                                                                       |  |                    | 2,066   |   |                   |  
|                                                                                                                                                                                     |  |                    |         |   |                   |  
|                                                                                                                                                                                     |  |                    | 6,345   |   |                   |  
|                                                                                                                                                                                     |  |                    |         |   |                   |  
|PROPERTY, PLANT AND EQUIPMENT                                                                                                                                                        |  |                    |         |   |                   |  
|In service                                                                                                                                                                           |  |                    | 315,246 |   |                   |  
|Under construction                                                                                                                                                                   |  |                    | 8,258   |   |                   |  
|                                                                                                                                                                                     |  |                    |         |   |                   |  
|                                                                                                                                                                                     |  |                    | 323,504 |   |                   |  
|Less accumulated depreciation                                                                                                                                                        |  |                    | 130,615 |   |                   |  
|                                                                                                                                                                                     |  |                    |         |   |                   |  
|                                                                                                                                                                                     |  |                    | 192,889 |   |                   |  
|                                                                                                                                                                                     |  |                    |         |   |                   |  
|OTHER ASSETS                                                                                                                                                                         |  |                    |         |   |                   |  
|Assets held for sale                                                                                                                                                                 |  |                    |        |   |                   |  
|Goodwill                                                                                                                                                                             |  |                    | 147,488 |   |                   |  
|Intangible assets, net of accumulated amortization                                                                                                                                   |  |                    | 174,315 |   |                   |  
|Other                                                                                                                                                                                |  |                    | 13,333  |   |                   |  
|                                                                                                                                                                                     |  |                    |         |   |                   |  
|                                                                                                                                                                                     |  |                    | 335,136 |   |                   |  
|                                                                                                                                                                                     |  |                    |         |   |                   |  
|TOTAL ASSETS                                                                                                                                                                         |  | $                  | 581,253 |   |                   | $
|                                                                                                                                                                                     |  |                    |         |   |                   |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                 |  |                    |         |   |                   |  
|CURRENT LIABILITIES                                                                                                                                                                  |  |                    |         |   |                   |  
|Long-term debt maturing within one year                                                                                                                                              |  | $                  | 7,445   |   |                   | $
|Accounts payable and accrued liabilities                                                                                                                                             |  |                    | 22,169  |   |                   |  
|Accrued taxes                                                                                                                                                                        |  |                    | 942     |   |                   |  
|Accrued interest and dividends                                                                                                                                                       |  |                    | 1,786   |   |                   |  
|Advance billings, customer deposits and other                                                                                                                                        |  |                    | 6,013   |   |                   |  
|                                                                                                                                                                                     |  |                    |         |   |                   |  
|TOTAL CURRENT LIABILITIES                                                                                                                                                            |  |                    | 38,355  |   |                   |  
|                                                                                                                                                                                     |  |                    |         |   |                   |  
|LONG-TERM DEBT                                                                                                                                                                       |  |                    | 237,288 |   |                   |  
|                                                                                                                                                                                     |  |                    |         |   |                   |  
|OTHER LIABILITIES                                                                                                                                                                    |  |                    |         |   |                   |  
|Deferred income taxes                                                                                                                                                                |  |                    | 83,850  |   |                   |  
|Other                                                                                                                                                                                |  |                    | 22,459  |   |                   |  
|                                                                                                                                                                                     |  |                    |         |   |                   |  
|                                                                                                                                                                                     |  |                    | 106,309 |   |                   |  
|                                                                                                                                                                                     |  |                    |         |   |                   |  
|PREFERRED STOCK OF UTILITY SUBSIDIARY, Series A 41/2%, par value $100, cumulative, callable at par at the option of the Company, authorized 20,000 shares, outstanding 14,456 shares |  |                    | 1,446   |   |                   |  
|                                                                                                                                                                                     |  |                    |         |   |                   |  
|COMMITMENTS                                                                                                                                                                          |  |                    |         |   |                   |  
|SHAREHOLDERS EQUITY                                                                                                                                                                 |  |                    |         |   |                   |  
|Common stock, par value $0.16, authorized shares 30,000,000                                                                                                                          |  |                    | 2,531   |   |                   |  
|Outstanding shares: 15,534,759 at September 30, 2003 and 15,413,640 at December 31, 2002                                                                                             |  |                    |         |   |                   |  
|Additional paid-in capital                                                                                                                                                           |  |                    | 159,292 |   |                   |  
|Accumulated other comprehensive income (loss)                                                                                                                                        |  |                    | (6,862  | ) |                   |  
|Retained earnings                                                                                                                                                                    |  |                    | 48,176  |   |                   |  
|Treasury stock at cost, 306,917 shares at September 30, 2003 and 306,910 shares at December 31, 2002                                                                                 |  |                    | (5,282  | ) |                   |  
|                                                                                                                                                                                     |  |                    |         |   |                   |  
|                                                                                                                                                                                     |  |                    | 197,855 |   |                   |  
|                                                                                                                                                                                     |  |                    |         |   |                   |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                           |  | $                  | 581,253 |   |                   | $
|                                                                                                                                                                                     |  |                    |         |   |                   |  



See notes to
consolidated financial statements.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)



|                                                                               |  | Nine Months Ended September 30, |        
|------------------------------------------------------------------------------ |  | ------------------------------- | -------
|                                                                               |  | 2003                            |        
|CASH FLOWS FROM OPERATING ACTIVITIES OF CONTINUING OPERATIONS                  |  | $                               | 32,109 
|                                                                               |  |                                 |        
|CASH FLOWS FROM INVESTING ACTIVITIES                                           |  |                                 |        
|Capital expenditures, net of proceeds from sales                               |  |                                 | (14,139
|Business acquisition costs                                                     |  |                                 |       
|Proceeds from Conestoga Wireless and Paging sales                              |  |                                 | 10,176 
|Increase in investments and advances to affiliates                             |  |                                 | (1,199 
|Decrease in investments and repayments from affiliates                         |  |                                 | 189    
|                                                                               |  |                                 |        
|Net Cash Provided By (Used In) Investing Activities from Continuing Operations |  |                                 | (4,973 
|                                                                               |  |                                 |        
|CASH FLOWS FROM FINANCING ACTIVITIES                                           |  |                                 |        
|Dividends on common stock                                                      |  |                                 | (5,546 
|Payments on long-term debt                                                     |  |                                 | (12,364
|Proceeds from long-term debt financing                                         |  |                                 | 12,000 
|Payment of debt issuance costs                                                 |  |                                 |       
|Net proceeds from (payments on) revolving lines of credit                      |  |                                 |       
|Proceeds from issuance of common stock                                         |  |                                 | 951    
|                                                                               |  |                                 |        
|Net Cash Provided By (Used In) Financing Activities from Continuing Operations |  |                                 | (4,959 
|                                                                               |  |                                 |        
|CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS                               |  |                                 | 22,177 
|CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS                             |  |                                 |        
|Cash Provided by (Used in) Operating Activities of Discontinued Operations     |  |                                 | (20,553
|Cash Provided by Investing Activities of Discontinued Operations               |  |                                 |       
|                                                                               |  |                                 |        
|Net Cash Provided by (Used In) Discontinued Operations                         |  |                                 | (20,553
|                                                                               |  |                                 |        
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                               |  |                                 | 1,624  
|CASH AND CASH EQUIVALENTS                                                      |  |                                 |        
|BEGINNING OF PERIOD                                                            |  |                                 | 15,514 
|                                                                               |  |                                 |        
|END OF PERIOD                                                                  |  | $                               | 17,138 
|                                                                               |  |                                 |        



See notes to
consolidated financial statements.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Consolidated Statements of Shareholders Equity and
Comprehensive Income

For the nine months ended September 30, 2003 and 2002

(in thousands)

(Unaudited)



|                                                                                                     |  | 2003                             |        |   | 2002                            |  
|---------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | -
|                                                                                                     |  | Shares                           |        |   | Amount                          |  
|COMMON STOCK                                                                                         |  |                                  |        |   |                                 |  
|Balance at beginning of year                                                                         |  |                                  | 15,721 |   |                                 | $
|Common stock issued for acquisition                                                                  |  |                                  |       |   |                                 |  
|Common stock issued for Employee Stock Purchase, Long-term Incentive and Dividend Reinvestment Plans |  |                                  | 49     |   |                                 |  
|Common stock issued for stock options exercised                                                      |  |                                  | 72     |   |                                 |  
|                                                                                                     |  |                                  |        |   |                                 |  
|Balance at September 30                                                                              |  |                                  | 15,842 |   |                                 |  
|                                                                                                     |  |                                  |        |   |                                 |  
|ADDITIONAL PAID-IN CAPITAL                                                                           |  |                                  |        |   |                                 |  
|Balance at beginning of year                                                                         |  |                                  |        |   |                                 |  
|Common stock issued for acquisition                                                                  |  |                                  |        |   |                                 |  
|Common stock issued for Employee Stock Purchase, Long-term Incentive and Dividend Reinvestment Plans |  |                                  |        |   |                                 |  
|Common stock issued for stock options exercised                                                      |  |                                  |        |   |                                 |  
|                                                                                                     |  |                                  |        |   |                                 |  
|Balance at September 30                                                                              |  |                                  |        |   |                                 |  
|                                                                                                     |  |                                  |        |   |                                 |  
|ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)                                                        |  |                                  |        |   |                                 |  
|Balance at beginning of year                                                                         |  |                                  |        |   |                                 |  
|Unrealized gain (loss) on investments, net of tax                                                    |  |                                  |        |   |                                 |  
|Loss realized on other-than-temporary decline, net of tax                                            |  |                                  |        |   |                                 |  
|Unrealized loss on interest rate swap agreements, net of tax                                         |  |                                  |        |   |                                 |  
|                                                                                                     |  |                                  |        |   |                                 |  
|Balance at September 30                                                                              |  |                                  |        |   |                                 |  
|                                                                                                     |  |                                  |        |   |                                 |  
|RETAINED EARNINGS                                                                                    |  |                                  |        |   |                                 |  
|Balance at beginning of year                                                                         |  |                                  |        |   |                                 |  
|Net income                                                                                           |  |                                  |        |   |                                 |  
|Dividends on common stock: $0.38 per share for each period                                           |  |                                  |        |   |                                 |  
|                                                                                                     |  |                                  |        |   |                                 |  
|Balance at September 30                                                                              |  |                                  |        |   |                                 |  
|                                                                                                     |  |                                  |        |   |                                 |  
|TREASURY STOCK                                                                                       |  |                                  |        |   |                                 |  
|Balance at beginning of year                                                                         |  |                                  | (307   | ) |                                 |  
|Treasury stock acquired                                                                              |  |                                  |       |   |                                 |  
|                                                                                                     |  |                                  |        |   |                                 |  
|Balance at September 30                                                                              |  |                                  | (307   | ) |                                 |  
|                                                                                                     |  |                                  |        |   |                                 |  
|TOTAL SHAREHOLDERS EQUITY                                                                           |  |                                  | 15,535 |   |                                 | $
|                                                                                                     |  |                                  |        |   |                                 |  
|                                                                                                     |  |                                 
|                                                                                                     |  | Three months ended September 30, |        |   | Nine months ended September 30, |  
|                                                                                                     |  | 2003                             |        |   | 2002                            |  
|COMPREHENSIVE INCOME (LOSS)                                                                          |  |                                  |        |   |                                 |  
|Net income (loss)                                                                                    |  | $                                | 155    |   |                                 | $
|Unrealized gain (loss) on investments, net of income taxes of $0,($105), $284 and ($1,303)           |  |                                  | 6      |   |                                 |  
|Unrealized gain (loss) on interest rate swap agreements, net of income taxes of $314 and ($179)      |  |                                  | 459    |   |                                 |  
|Loss realized on other-than-temporary decline, net of tax of $1,174                                  |  |                                  |       |   |                                 |  
|                                                                                                     |  |                                  |        |   |                                 |  
|Total comprehensive income (loss)                                                                    |  | $                                | 620    |   |                                 | $
|                                                                                                     |  |                                  |        |   |                                 |  



See notes to
consolidated financial statements.



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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 nine months ended September 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. Operating results for the three and nine-month periods ended September 30, 2003 are not necessarily indicative of the results for the year ended December 31, 2003.



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)



Stock Compensation



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



|(In thousands, except per share amounts)                                                                             |  | Three months ended September 30, |      |   | Nine months ended September 30,
|-------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ---- | - | -------------------------------
|                                                                                                                     |  | 2003                             |      |   | 2002                           
|Net income (loss), as reported                                                                                       |  | $                                | 155  |   |                                
|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 |  |                                  | (15  | ) |                                
|                                                                                                                     |  |                                  |      |   |                                
|Pro forma net income (loss)                                                                                          |  | $                                | 140  |   |                                
|                                                                                                                     |  |                                  |      |   |                                
|Basic and diluted income (loss) per share:                                                                           |  |                                  |      |   |                                
|As reported                                                                                                          |  | $                                | 0.01 |   |                                
|Pro forma                                                                                                            |  | $                                | 0.01 |   |                                



The fair value of options granted and
options converted at the Conestoga acquisition of $7.20 is estimated using the Black-Scholes option price model with the following assumptions, which have not changed because no options were granted in 2003. Employee Stock Purchase Plan purchases
were made each month at a 10% discount from market price with separate Black-Scholes assumptions.



|                        |  | OptionPlan |  | Stock PurchasePlan
|----------------------- |  | ---------- |  | ------------------
|Dividend yield          |  | 2.55%      |  | 4.28%             
|Expected life           |  | 5 years    |  | 0.16 years        
|Expected volatility     |  | 60.30%     |  | 10.00%            
|Risk-free interest rate |  | 4.47%      |  | 1.00%             



(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 the utility subsidiary does not fall within the guidance of SFAS No. 150 requiring
classification as a liability. The adoption of SFAS No. 150 had no impact on the Companys financial position, results of operations or cash flows.



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.



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)



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 adoption of SFAS No. 149 had no 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 for at
September 30, 2003.



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 September 30, 2003 |        |   | Nine months endedSeptember 30, 2003 
|--------------------------------- |  | ------------------------------------- | ------ | - | ------------------------------------
|                                  |  | As Reported                           |        |   | Pro forma                           
|Net income                        |  | $                                     | 155    |   |                                     
|Basic earnings per share          |  | $                                     | 0.01   |   |                                     
|Diluted earnings per share        |  | $                                     | 0.01   |   |                                     
|                                  |  |                                      
|                                  |  | Three months ended September 30, 2002 |        |   | Nine months ended September 30, 2002
|                                  |  | As Reported                           |        |   | Pro forma                           
|Net income (loss)                 |  | $                                     | (1,333 | ) |                                     
|Basic earnings (loss) per share   |  | $                                     | (0.09  | ) |                                     
|Diluted earnings (loss) per share |  | $                                     | (0.09  | ) |                                     



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 the 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



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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)



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 maximum potential amount of future payments undiscounted that D&E could be required to make under the guarantee as of September 30, 2003 is $14,797. The majority of these tower site leases and our guarantee will expire
between 2011 and 2013. D&E has estimated and recorded the fair value of the liability for the lease guarantees of $3,200. D&E will recognize release from risk for the guarantee upon expiration or settlement of the guarantee.



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 immediately to variable interest entities created after January 31, 2003, in which a company obtains an interest after that date. Because of additional issues raised, the
FASB delayed implementation of FIN 46 for variable interest entities created before February 1, 2003. Currently, FIN 46 may be deferred until the first fiscal quarter or interim period ending after December 15, 2003. D&E is currently evaluating
the impact of this interpretation on the Companys financial position, results of operations and 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. The adoption of EITF 00-21 did not have
a material impact on the Companys financial position, results of operations or cash flow.



(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



8



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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)



assumed conversions of employee stock options. The following table shows how earnings per share were computed for the periods presented:



|                                                            |  | Three months ended September 30, |        |      | Nine months ended September 30, |       
|----------------------------------------------------------- |  | -------------------------------- | ------ | ---- | ------------------------------- | ------
|                                                            |  | 2003                             |        | 2002 |                                 |       
|Basic earnings (loss) per share computation                 |  |                                  |        |      |                                 |       
|Income (loss) from continuing operations                    |  | $                                | 155    |      | $                               | (1,064
|Income (loss) from discontinued operations                  |  |                                  |       |      |                                 | (269  
|Cumulative effect of accounting change                      |  |                                  |       |      |                                 |      
|                                                            |  |                                  |        |      |                                 |       
|Net income (loss)                                           |  | $                                | 155    |      | $                               | (1,333
|                                                            |  |                                  |        |      |                                 |       
|Weighted average shares (thousands)                         |  |                                  | 15,522 |      |                                 | 15,401
|                                                            |  |                                  |        |      |                                 |       
|Basic earnings (loss) per share                             |  |                                  |        |      |                                 |       
|Income (loss) from continuing operations                    |  | $                                | 0.01   |      | $                               | (0.07 
|Income (loss) from discontinued operations                  |  |                                  |       |      |                                 | (0.02 
|Cumulative effect of accounting change                      |  |                                  |       |      |                                 |      
|                                                            |  |                                  |        |      |                                 |       
|Net income (loss)                                           |  | $                                | 0.01   |      | $                               | (0.09 
|                                                            |  |                                  |        |      |                                 |       
|Diluted earnings (loss) per share computation               |  |                                  |        |      |                                 |       
|Income (loss) from continuing operations                    |  | $                                | 155    |      | $                               | (1,064
|Income (loss) from discontinued operations                  |  |                                  |       |      |                                 | (269  
|Cumulative effect of accounting change                      |  |                                  |       |      |                                 |      
|                                                            |  |                                  |        |      |                                 |       
|Net income (loss)                                           |  | $                                | 155    |      | $                               | (1,333
|                                                            |  |                                  |        |      |                                 |       
|Weighted average shares (thousands)                         |  |                                  | 15,522 |      |                                 | 15,401
|Plus incremental shares from assumed stock option exercises |  |                                  | 69     |      |                                 |      
|                                                            |  |                                  |        |      |                                 |       
|Adjusted weighted average shares                            |  |                                  | 15,591 |      |                                 | 15,401
|                                                            |  |                                  |        |      |                                 |       
|Diluted earnings (loss) per share                           |  |                                  |        |      |                                 |       
|Income (loss) from continuing operations                    |  | $                                | 0.01   |      | $                               | (0.07 
|Income (loss) from discontinued operations                  |  |                                  |       |      |                                 | (0.02 
|Cumulative effect of accounting change                      |  |                                  |       |      |                                 |      
|                                                            |  |                                  |        |      |                                 |       
|Net income (loss)                                           |  | $                                | 0.01   |      | $                               | (0.09 
|                                                            |  |                                  |        |      |                                 |       



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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)



(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. D&E paid $273,000 in stock and cash for the acquisition. 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.



|                                            |  | Nine months ended September 30, 2002
|------------------------------------------- |  | ------------------------------------
|Pro forma operating revenues                |  | $                                   
|Pro forma income before extraordinary items |  |                                     
|Pro forma net income                        |  |                                     
|Pro forma income per share                  |  | $                                   



(5)
INTANGIBLE ASSETS



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



|                              |  | As of September 30, 2003 |         |                         | As of December 31, 2002 |       
|----------------------------- |  | ------------------------ | ------- | ----------------------- | ----------------------- | ------
|                              |  | GrossCarryingamount      |         | Accumulatedamortization |                         |       
|Indefinite-lived intangibles: |  |                          |         |                         |                         |       
|Franchises                    |  | $                        | 104,800 |                         | $                       |      
|Finite-lived intangibles:     |  |                          |         |                         |                         |       
|Customer relationships        |  |                          | 75,700  |                         |                         | (7,351
|Trademarks and Trade names    |  |                          | 1,200   |                         |                         | (533  
|Non-compete agreements        |  |                          | 1,424   |                         |                         | (925  
|                              |  |                          |         |                         |                         |       
|Total intangible assets       |  | $                        | 183,124 |                         | $                       | (8,809
|                              |  |                          |         |                         |                         |       



Aggregate amortization expense related
to these intangible assets recorded for the three months ended September 30, 2003 and 2002, and the nine months ended September 30, 2003 and 2002, was $1,550, $1,554, $4,649 and $2,211, respectively.



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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)



(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 the disposal date (the phase-out period), losses from PCS ONE were deferred
because it was reasonably assured that the ultimate disposition of this business would result in the recognition of a gain.



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



Upon completion of the
sale, D&E received $74,168 in cash, subject to post closing adjustments as set forth in the sale agreement. These adjustments were finalized in the third quarter of 2002 and resulted in additional cash proceeds of $2,294, which were collected in
October 2002. In addition, 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 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.



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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)



Summarized financial information for the discontinued operations of D&Es wireless business is as follows:



|                                                         |  | Three months endedSeptember 30, 2002 |      |   | Nine months endedSeptember 30, 2002 |  
|-------------------------------------------------------- |  | ------------------------------------ | ---- | - | ----------------------------------- | -
|Revenue                                                  |  | $                                    | 729  |   |                                     | $
|Expenses                                                 |  |                                      | 709  |   |                                     |  
|                                                         |  |                                      |      |   |                                     |  
|Operating income                                         |  |                                      | 20   |   |                                     |  
|Equity in net loss of PCS ONE                            |  |                                      |     |   |                                     |  
|Phase-out losses deferred until sale                     |  |                                      |     |   |                                     |  
|Gain (loss) on sale of PCS ONE                           |  |                                      | (162 | ) |                                     |  
|                                                         |  |                                      |      |   |                                     |  
|Income (loss) from D&E Wireless operations before taxes  |  |                                      | (142 | ) |                                     |  
|Income taxes                                             |  |                                      | 138  |   |                                     |  
|                                                         |  |                                      |      |   |                                     |  
|Income (loss) from discontinued operations, net of taxes |  | $                                    | (280 | ) |                                     | $
|                                                         |  |                                      |      |   |                                     |  



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



|                  |  | Three months ended September 30, 2002 |   | Nine months ended September 30, 2002 |  
|----------------- |  | ------------------------------------- | - | ------------------------------------ | -
|Net sales         |  | $                                     |  |                                      | $
|Net loss          |  |                                       |  |                                      | $
|Our share of loss |  |                                       |  |                                      | $



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 net of tax 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.



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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)



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 September 30, |   | Nine months ended September 30,
|-------------------------------------------------- |  | -------------------------------- | - | -------------------------------
|                                                   |  | 2003                             |   | 2002                           
|Revenue                                            |  | $                                |  |                                
|Expenses                                           |  |                                  |  |                                
|                                                   |  |                                  |   |                                
|Operating income (loss)                            |  |                                  |  |                                
|Income taxes (benefit)                             |  |                                  |  |                                
|                                                   |  |                                  |   |                                
|Income (loss) from paging operations, net of taxes |  | $                                |  |                                
|                                                   |  |                                  |   |                                



(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 under which 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 an expense of $675 related to
D&Es estimated commitments in the Build-to-Suit Agreement was recorded in communication services expenses in 2002 and an additional $300 was recorded in the third quarter



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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)



of 2003. The fair value of the Conestoga wireless segment of $6,450 included in the final purchase price allocation was determined as follows:



|Cash                                               |  | $ | 10,000 |  
|-------------------------------------------------- |  | - | ------ | -
|Less: Costs to sell 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 were 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.



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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 September 30, |      |   | Nine months ended September 30, |  
|----------------- |  | -------------------------------- | ---- | - | ------------------------------- | -
|                  |  | 2003                             |      |   | 2002                            |  
|Net sales         |  | $                                |     |   |                                 | $
|Net loss          |  |                                  | (798 | ) |                                 |  
|Our share of loss |  |                                  | (266 | ) |                                 |  



The summarized results of operations
of Pilicka were as follows:



|                        |  | Three months ended September 30, |       |   | Nine months ended September 30, |  
|----------------------- |  | -------------------------------- | ----- | - | ------------------------------- | -
|                        |  | 2003                             |       |   | 2002                            |  
|Net sales               |  | $                                | 2,579 |   |                                 | $
|Net loss                |  |                                  | (450  | ) |                                 |  
|Our share of loss       |  |                                  | (130  | ) |                                 |  
|Investment amortization |  |                                  | (117  | ) |                                 |  
|Total loss              |  |                                  | (247  | ) |                                 |  



(9)
LONG-TERM DEBT



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



|                                         |  | InterestRate |   |  | Maturity |  | September 30,2003 |         | December 31,2002
|---------------------------------------- |  | ------------ | - |  | -------- |  | ----------------- | ------- | ----------------
|Senior Secured Revolving Credit Facility |  | 4.88         | % |  | 2009     |  | $                 | 40,484  |                 
|Senior Secured Term Loan B               |  | 6.00         | % |  | 2010     |  |                   | 119,000 |                 
|Senior Secured Term Loan A               |  | 6.42         | % |  | 2011     |  |                   | 47,500  |                 
|Secured Term Loan                        |  | 9.34         | % |  | 2014     |  |                   | 20,000  |                 
|Secured Term Loan                        |  | 9.36         | % |  | 2014     |  |                   | 15,000  |                 
|Capital lease obligations                |  |              |   |  |          |  |                   | 2,749   |                 
|                                         |  |              |   |  |          |  |                   |         |                 
|                                         |  |              |   |  |          |  |                   | 244,733 |                 
|Less current maturities                  |  |              |   |  |          |  |                   | 7,445   |                 
|                                         |  |              |   |  |          |  |                   |         |                 
|Total long-term debt                     |  |              |   |  |          |  | $                 | 237,288 |                 
|                                         |  |              |   |  |          |  |                   |         |                 



The Senior Secured Credit Facilities
include a mandatory repayment of principal from any single asset sale or series of related transactions, which total more than $1,000. 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:



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



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 in thousands, except per-share amounts)

(Unaudited)



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, June 30, 2003 and at September 30, 2003. The first scheduled principal repayment of $4,375 due in
September of 2004 was reclassified to current debt. Further, based on the excess cash flow generated during the third quarter of 2003, D&E has classified $2,907 of the revolving credit facility as short-term debt and will reduce that loan with a
payment in November 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.



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

(Dollar 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 September 30, |         | Three months ended September 30, |   |        | Three months ended September 30, |  
|Segment                           |  | 2003                             |         | 2002                             |   | 2003   |                                  |  
|RLEC                              |  | $                                | 26,499  |                                  | $ | 25,518 |                                  | $
|CLEC                              |  |                                  | 8,761   |                                  |   | 7,716  |                                  |  
|Internet Services                 |  |                                  | 1,398   |                                  |   | 1,226  |                                  |  
|Systems Integration               |  |                                  | 5,484   |                                  |   | 6,201  |                                  |  
|Conestoga Wireless                |  |                                  |        |                                  |   | 3,245  |                                  |  
|Corporate, Other and Eliminations |  |                                  | 889     |                                  |   | 1,331  |                                  |  
|                                  |  |                                  |         |                                  |   |        |                                  |  
|Total                             |  | $                                | 43,031  |                                  | $ | 45,237 |                                  | $
|                                  |  |                                  |         |                                  |   |        |                                  |  
|                                  |  |                                  |        
|                                  |  | External Revenues                |         | Intersegment Revenues            |   |        | Operating Income (Loss)          |  
|                                  |  | Nine months ended September 30,  |         | Nine months ended September 30,  |   |        | Nine months ended September 30,  |  
|Segment                           |  | 2003                             |         | 2002                             |   | 2003   |                                  |  
|RLEC                              |  | $                                | 78,227  |                                  | $ | 50,985 |                                  | $
|CLEC                              |  |                                  | 25,844  |                                  |   | 13,308 |                                  |  
|Internet Services                 |  |                                  | 3,995   |                                  |   | 3,086  |                                  |  
|Systems Integration               |  |                                  | 16,881  |                                  |   | 17,687 |                                  |  
|Conestoga Wireless                |  |                                  | 456     |                                  |   | 4,010  |                                  |  
|Corporate, Other and Eliminations |  |                                  | 3,000   |                                  |   | 2,568  |                                  |  
|                                  |  |                                  |         |                                  |   |        |                                  |  
|Total                             |  | $                                | 128,403 |                                  | $ | 91,644 |                                  | $
|                                  |  |                                  |         |                                  |   |        |                                  |  



|                                  |  | Segment Assets    
|--------------------------------- |  | ------------------
|Segment                           |  | September 30, 2003
|RLEC                              |  | $                 
|CLEC                              |  |                   
|Internet Services                 |  |                   
|Systems Integration               |  |                   
|Conestoga Wireless                |  |                   
|Corporate, Other and Eliminations |  |                   
|                                  |  |                   
|Total                             |  | $                 
|                                  |  |                   



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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

(Dollar amounts are in
thousands)

(Unaudited)



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



|                                                                                                      |  | Three months ended September 30, |        |   | Nine months ended September 30, |  
|----------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | -
|                                                                                                      |  | 2003                             |        |   | 2002                            |  
|Operating income from reportable segments                                                             |  | $                                | 5,397  |   |                                 | $
|Corporate, other and eliminations                                                                     |  |                                  | (99    | ) |                                 |  
|Equity in net losses of affiliates                                                                    |  |                                  | (513   | ) |                                 |  
|Interest expense                                                                                      |  |                                  | (4,492 | ) |                                 |  
|Loss on investments                                                                                   |  |                                  |       |   |                                 |  
|Other, net                                                                                            |  |                                  | (6     | ) |                                 |  
|                                                                                                      |  |                                  |        |   |                                 |  
|Income (loss) from continuing operations before income taxes and dividends on utility preferred stock |  | $                                | 287    |   |                                 | $
|                                                                                                      |  |                                  |        |   |                                 |  



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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 nine months ended September 30, 2002 have been
reclassified for comparative purposes.



Overview



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 (RLECs), in parts of Berks, Lancaster and Union counties and smaller portions of three other adjacent counties
in Pennsylvania, and competitive local telephone companies, or (CLECs), in the Lancaster, Harrisburg, Reading, Pottstown, State College, Altoona 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. We are actively involved in a common branding campaign throughout these market areas. New products and
enhanced services are being tested to continue creating additional revenue sources with new technologies.



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.



Our segments are RLEC, CLEC, Internet Services, Systems Integration and Conestoga Wireless, excluding our paging services, which, as
discussed below, was reported, until its sale on May 29, 2003, as a discontinued business. 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 direct special access service.
Local telephone service revenue consists of monthly charges for basic



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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)



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 is derived from providing regional long distance services to our RLEC customers.



Our CLEC revenue is derived primarily from network access charges, local telephone service, enhanced telephone services and long distance service revenue. Network access
revenue consists 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 direct special access
service. Local telephone service revenue consists of 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 and throughout eastern Pennsylvania.



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 marketed 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



20



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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 our RLEC and CLEC territories. We believe that our capital expenditures related to CLEC 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 there is a deemed continuing involvement as a result of our commitment to building out tower sites and a continuing
lease guarantee related to certain tower sites. An additional accrual of $300 was recorded during the third quarter 2003 to reflect the revised estimated cost to satisfy the tower site build-out commitment, which was agreed upon during the fourth
quarter of 2003.



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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)



Results of Operations



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



|                              |  | RLEC |        | CLEC |   |        | Internet Services |  |   | Systems Integration |   |  | Conestoga Wireless |        |   | Corporate, Other and Eliminations |   |       | Total Company
|----------------------------- |  | ---- | ------ | ---- | - | ------ | ----------------- |  | - | ------------------- | - |  | ------------------ | ------ | - | --------------------------------- | - | ----- | -------------
|September 30, 2003 (1)        |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Revenues  External           |  | $    | 26,499 |      | $ | 8,761  |                   |  | $ | 1,398               |   |  | $                  | 5,484  |   |                                   | $ |      |              
|Revenues  Intercompany       |  |      | 1,749  |      |   | 218    |                   |  |   | 154                 |   |  |                    | 7      |   |                                   |   |      |              
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Total Revenues                |  |      | 28,248 |      |   | 8,979  |                   |  |   | 1,552               |   |  |                    | 5,491  |   |                                   |   |      |              
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Depreciation and Amortization |  |      | 7,882  |      |   | 1,011  |                   |  |   | 181                 |   |  |                    | 375    |   |                                   |   |      |              
|Other Operating Expenses      |  |      | 12,225 |      |   | 9,125  |                   |  |   | 1,592               |   |  |                    | 6,182  |   |                                   |   | 300   |              
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Total Operating Expenses      |  |      | 20,107 |      |   | 10,136 |                   |  |   | 1,773               |   |  |                    | 6,557  |   |                                   |   | 300   |              
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Operating Income (Loss)       |  | $    | 8,141  |      | $ | (1,157 | )                 |  | $ | (221                | ) |  | $                  | (1,066 | ) |                                   | $ | (300  | )            
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|September 30, 2002 (1)        |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Revenues  External           |  | $    | 25,518 |      | $ | 7,716  |                   |  | $ | 1,226               |   |  | $                  | 6,201  |   |                                   | $ | 3,245 |              
|Revenues  Intercompany       |  |      | 2,384  |      |   | 146    |                   |  |   | 107                 |   |  |                    | 7      |   |                                   |   | 36    |              
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Total Revenues                |  |      | 27,902 |      |   | 7,862  |                   |  |   | 1,333               |   |  |                    | 6,208  |   |                                   |   | 3,281 |              
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Depreciation and Amortization |  |      | 7,685  |      |   | 1,021  |                   |  |   | 118                 |   |  |                    | 405    |   |                                   |   |      |              
|Other Operating Expenses      |  |      | 13,266 |      |   | 7,891  |                   |  |   | 1,284               |   |  |                    | 6,477  |   |                                   |   | 3,728 |              
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Total Operating Expenses      |  |      | 20,951 |      |   | 8,912  |                   |  |   | 1,402               |   |  |                    | 6,882  |   |                                   |   | 3,728 |              
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Operating Income (Loss)       |  | $    | 6,951  |      | $ | (1,050 | )                 |  | $ | (69                 | ) |  | $                  | (674   | ) |                                   | $ | (447  | )            
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              

---

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



Consolidated Operations



Three months ended September 30, 2003 compared

to three months ended September 30, 2002



Consolidated operating revenues from continuing operations decreased $2,206, or 4.9%, to $43,031 for the third quarter ended September 30, 2003, from $45,237 in the
same period of 2002. The sale of Conestoga Wireless in January 2003, resulted in decreased revenue of $3,281, and a decrease of $717 in the Systems Integration segment was attributable to the slow economy. The revenue of the other three reportable
segments increased, with the most notable being $1,117 in the CLEC segment driven by a 23.7% growth in access lines.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)



Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Consolidated operating income from continuing operations increased $1,239, to $5,298, for the third quarter of 2003,
from $4,059 in the same period of 2002. Operating income as a percentage of revenue increased to 12.3% in the third quarter of 2003 compared to 9.0% in the same period of 2002. The improvement was primarily attributable to increased synergies
including personnel reductions associated with the Conestoga acquisition.



Other income and expense was a net expense of $5,011 in the third quarter of 2003 compared to a net expense of $5,206 in the same period of 2002. Our equity in the losses of our European affiliates decreased to $513 in the third quarter of
2003 from $914 in the same period of 2002. Interest expense increased to $4,492 in the third quarter of 2003, compared to $4,383 in the same period of 2002, primarily as a result of increased borrowings to pay taxes due in the first quarter of 2003.



Income taxes were $116 in the third quarter of 2003 compared to a benefit of
$99 in the same period of 2002 that was related to a loss from continuing operations. Discontinued paging operations had no activity in the third quarter of 2003 versus an income of $11 in the third quarter of 2002. Our net income was $155, or $0.01
per share, in the third quarter of 2003 compared to a loss of $1,333, or $0.09 per share, in the third quarter of 2002.



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)



The following table is a summary of our operating results by segment for the nine months ended September 30, 2003 and
2002:



|                              |  | RLEC |        | CLEC |   |        | Internet Services |  |   | Systems Integration |   |  | Conestoga Wireless |        |   | Corporate, Other and Eliminations |   |       | Total Company
|----------------------------- |  | ---- | ------ | ---- | - | ------ | ----------------- |  | - | ------------------- | - |  | ------------------ | ------ | - | --------------------------------- | - | ----- | -------------
|September 30, 2003 (1)        |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Revenues  External           |  | $    | 78,227 |      | $ | 25,844 |                   |  | $ | 3,995               |   |  | $                  | 16,881 |   |                                   | $ | 456   |              
|Revenues  Intercompany       |  |      | 5,574  |      |   | 544    |                   |  |   | 474                 |   |  |                    | 22     |   |                                   |   | 4     |              
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Total Revenues                |  |      | 83,801 |      |   | 26,388 |                   |  |   | 4,469               |   |  |                    | 16,903 |   |                                   |   | 460   |              
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Depreciation and Amortization |  |      | 23,431 |      |   | 2,981  |                   |  |   | 532                 |   |  |                    | 1,215  |   |                                   |   |      |              
|Other Operating Expenses      |  |      | 35,929 |      |   | 26,431 |                   |  |   | 4,477               |   |  |                    | 19,068 |   |                                   |   | 1,140 |              
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Total Operating Expenses      |  |      | 59,360 |      |   | 29,412 |                   |  |   | 5,009               |   |  |                    | 20,283 |   |                                   |   | 1,140 |              
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Operating Income (Loss)       |  | $    | 24,441 |      | $ | (3,024 | )                 |  | $ | (540                | ) |  | $                  | (3,380 | ) |                                   | $ | (680  | )            
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|September 30, 2002 (1)        |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Revenues  External           |  | $    | 50,985 |      | $ | 13,308 |                   |  | $ | 3,086               |   |  | $                  | 17,687 |   |                                   | $ | 4,010 |              
|Revenues  Intercompany       |  |      | 4,185  |      |   | 373    |                   |  |   | 150                 |   |  |                    | 32     |   |                                   |   | 42    |              
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Total Revenues                |  |      | 55,170 |      |   | 13,681 |                   |  |   | 3,236               |   |  |                    | 17,719 |   |                                   |   | 4,052 |              
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Depreciation and Amortization |  |      | 15,541 |      |   | 1,746  |                   |  |   | 328                 |   |  |                    | 1,078  |   |                                   |   |      |              
|Other Operating Expenses      |  |      | 29,257 |      |   | 14,926 |                   |  |   | 3,447               |   |  |                    | 18,670 |   |                                   |   | 4,903 |              
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Total Operating Expenses      |  |      | 44,798 |      |   | 16,672 |                   |  |   | 3,775               |   |  |                    | 19,748 |   |                                   |   | 4,903 |              
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              
|Operating Income (Loss)       |  | $    | 10,372 |      | $ | (2,991 | )                 |  | $ | (539                | ) |  | $                  | (2,029 | ) |                                   | $ | (851  | )            
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |                                   |   |       |              

---

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



Consolidated Operations



Nine months ended September 30, 2003 compared

to nine months ended September 30, 2002



Consolidated operating revenues from continuing operations increased $36,759,
or 40.1%, to $128,403 for the nine months ended September 30, 2003, from $91,644 in the same period of 2002. The revenue increase was primarily due to the inclusion of $72,771 Conestogas revenues for all nine months in 2003, compared to only
$34,274 for the four months in 2002, after the May 24, 2002 acquisition. Two notable offsets to the increase were, (i) the sale of Conestoga Wireless in January 2003, which resulted in decreased revenue of $3,592, and (ii) a decrease of $816 in the
Systems Integration Segment attributable to the slow economy.



Consolidated
operating income from continuing operations increased $13,364, to $16,968, for the nine months of 2003, from $3,604 in the same period of 2002. Operating income as a percentage of revenue increased to 13.2% in the first nine months of 2003 compared
to a 3.9% in the same period of 2002. The improvement was primarily attributable to the Conestoga acquisition.



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)



Other income and expense was a net expense of $14,640 in the first nine months of 2003 compared to a net expense of
$11,937 in the same period of 2002. Our equity in the losses of our European affiliates decreased to $1,873 in the nine months of 2003 from $2,091 in the same period of 2002. Interest expense increased to $13,689 in the nine months of 2003, compared
to $7,139 in the same period of 2002, primarily as a result of increased borrowings to complete the Conestoga acquisition on May 24, 2002 and to pay taxes due in the first quarter of 2003. Other income increased $630 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 $859 in the nine
months of 2003 compared to a benefit of $2,536 in the same period of 2002 that was related to a loss from continuing operations. In 2002, we sold our D&E Wireless joint venture interest for a gain of $55,506 after taxes with no similar
transaction in 2003. Discontinued paging operations resulted in a loss of $53 after taxes in 2003 versus an income of $2 in the nine months 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 $1,627, or $0.11 per share (including $0.02 for the cumulative effect of SFAS No. 143), in the nine months ended September 30, 2003 compared to $49,662,
or $4.44 per share, in the same period of 2002. The 2002 results included a loss from continuing operations of $0.52 and an income from discontinued operations of $4.96.



RLEC Segment Results



|                              |  | Three months ended September 30, |        |      | Nine months ended September 30, |         
|----------------------------- |  | -------------------------------- | ------ | ---- | ------------------------------- | --------
|                              |  | 2003                             |        | 2002 |                                 | % Change
|Revenues:                     |  |                                  |        |      |                                 |         
|Local Telephone Service       |  | $                                | 8,546  |      | $                               | 8,270   
|Network Access                |  |                                  | 14,102 |      |                                 | 13,723  
|Other                         |  |                                  | 5,600  |      |                                 | 5,909   
|                              |  |                                  |        |      |                                 |         
|Total Revenues                |  |                                  | 28,248 |      |                                 | 27,902  
|                              |  |                                  |        |      |                                 |         
|Depreciation and Amortization |  |                                  | 7,882  |      |                                 | 7,685   
|Other Operating Expenses      |  |                                  | 12,225 |      |                                 | 13,266  
|                              |  |                                  |        |      |                                 |         
|Total Operating Expenses      |  |                                  | 20,107 |      |                                 | 20,951  
|                              |  |                                  |        |      |                                 |         
|Operating Income              |  | $                                | 8,141  |      | $                               | 6,951   
|                              |  |                                  |        |      |                                 |         
|Access Lines at September 30  |  |                                  |        |      |                                 |         
|                              |  |                                  |        |      |                                 |         



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##### Table of Contents

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Part I - Financial Information (continued)



Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



RLEC segment revenues increased $346, or 1.2%, to $28,248 in the three months ended September 30, 2003, from $27,902
in the three months ended September 30, 2002. The revenue increase was due to the increases of $276 in local telephone service, driven by rate increases, and $379 in network access revenue, resulting from increased minutes of use and a favorable
change in the National Exchange Carrier Association (NECA) average schedule settlement formula for interstate access that took effect in July 2003. These increases were partially offset by decreases of $203 in regional long distance toll service and
decreases of $95 in equipment sales.



RLEC operating expenses decreased $844,
or 4.0%, to $20,107 in the third quarter of 2003, from $20,951 in the same period of the prior year. The most significant decrease was $663 lower customer service expense in the Conestoga divisions. This decrease is partially related to a
reallocation of costs for billing services that were expanded to include other segments.



RLEC segment revenues increased $28,631, or 51.9%, to $83,801 in the nine months ended September 30, 2003, from $55,170 in the nine months of 2002. The revenue increase was primarily due to the inclusion of
Conestogas revenues for a full nine months in 2003, compared to only four months in 2002 after the May 24, 2002 acquisition. The increase included $26,766 from the five extra months included in 2003 and $728 increase for the four comparable
months. In our original D&E RLEC division, we experienced increases of $566 in basic local telephone service, $721 in network access, $156 in billing and collection and $93 in other revenues offset by a decrease of $399 in regional long distance
toll service.



RLEC operating expenses increased $14,562, or 32.5%, to $59,360
in the nine months ended September 30, 2003, from $44,798 in the same period of the prior year. The nine months of 2003 expenses included nine months from Conestoga compared to four months in 2002 after the acquisition. Because of the five extra
months in the 2003 year to date, Conestoga expenses increased $17,993 over the year to date period of 2002, while our D&E RLEC experienced a decrease of $3,431. 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 $590 for WorldCom receivables as a result of their bankruptcy filing. Additionally, $260 was recovered from WorldCom in the second quarter of
2003.



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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 September 30, |        |   | Nine months ended September 30, |  
|----------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | -
|                              |  | 2003                             |        |   | 2002                            |  
|Revenues:                     |  |                                  |        |   |                                 |  
|Local Telephone Service       |  | $                                | 2,553  |   |                                 | $
|Network Access                |  |                                  | 1,328  |   |                                 |  
|Long Distance                 |  |                                  | 4,874  |   |                                 |  
|Other                         |  |                                  | 224    |   |                                 |  
|                              |  |                                  |        |   |                                 |  
|Total Revenues                |  |                                  | 8,979  |   |                                 |  
|                              |  |                                  |        |   |                                 |  
|Depreciation and Amortization |  |                                  | 1,011  |   |                                 |  
|Other Operating Expenses      |  |                                  | 9,125  |   |                                 |  
|                              |  |                                  |        |   |                                 |  
|Total Operating Expenses      |  |                                  | 10,136 |   |                                 |  
|                              |  |                                  |        |   |                                 |  
|Operating Loss                |  | $                                | (1,157 | ) |                                 | $
|                              |  |                                  |        |   |                                 |  
|Access Lines at September 30  |  |                                  |        |   |                                 |  
|                              |  |                                  |        |   |                                 |  



CLEC segment revenues increased
$1,117, or 14.2%, to $8,979 in the three months ended September 30, 2003, from $7,862 in the three months ended September 30, 2002. The increase was related to the addition of access lines for new customers that primarily increased local telephone
service revenues by $590, network access revenues by $240, long distance revenues by $216 and other revenues by $71.



Operating expenses for the CLEC segment increased $1,224, or 13.7%, to $10,136 in the third quarter of 2003, from $8,912 in the same period of 2002. Direct cost of
operations and network access expense increased $626 while customer service and general and administrative expenses increased $603.



CLEC segment revenues increased $12,707, or 92.9%, to $26,388 in the nine months ended September 30, 2003, from $13,681 in the nine months of 2002. The revenue increase
was primarily due to the inclusion of Conestogas revenues for a full nine months in 2003, compared to only four months in 2002 after the May 24, 2002 acquisition. Approximately $10,062 of the increase was from the five extra months included in
2003 and $319 of the increase is attributable to the comparable four months. The increase was also related to the D&E CLECs addition of access lines for new customers that primarily increased local telephone service revenues by $1,008,
increased network access revenues by $658, long distance revenues by $488 and other miscellaneous revenues by $172.



Operating expenses for the CLEC segment increased $12,740, or 76.4%, to $29,412 in the nine months ended September 30, 2003, from $16,672 in the same period of the prior
year. The nine months of 2003 expenses included nine months from Conestoga compared to four months in



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)



Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



2002 after the acquisition. Because of the five extra months in the 2003 year to date, Conestoga expenses increased $11,719 over the prior years nine
months, while our D&E CLEC expenses increased $1,021. D&E expenses increased $525 for network access, $163 for depreciation, $55 for customer service, $292 for general and administrative expenses and were offset by decreases of $14 in other
expenses.



Internet Services Segment Results



|                              |  | Three months ended September 30, |       |   | Nine months ended September 30, |  
|----------------------------- |  | -------------------------------- | ----- | - | ------------------------------- | -
|                              |  | 2003                             |       |   | 2002                            |  
|Revenues                      |  | $                                | 1,552 |   |                                 | $
|                              |  |                                  |       |   |                                 |  
|Depreciation and Amortization |  |                                  | 181   |   |                                 |  
|Other Operating Expenses      |  |                                  | 1,592 |   |                                 |  
|                              |  |                                  |       |   |                                 |  
|Total Operating Expenses      |  |                                  | 1,773 |   |                                 |  
|                              |  |                                  |       |   |                                 |  
|Operating Loss                |  | $                                | (221  | ) |                                 | $
|                              |  |                                  |       |   |                                 |  
|Customers at September 30     |  |                                  |       |   |                                 |  
|DSL                           |  |                                  |       |   |                                 |  
|Dial-up Access                |  |                                  |       |   |                                 |  
|Web-hosting Services          |  |                                  |       |   |                                 |  



Internet Services segment revenues
increased $219, or 16.4%, to $1,552 in the three months ended September 30, 2003, from $1,333 in the three months ended September 30, 2002. The increase resulted from an increase in the number of dial-up single user residential and business
customers, DSL customers and web hosting subscribers. The increase occurred in our original market areas and as a result of the expansion into Conestogas territory. The differences in customer growth rates demonstrate our success in marketing
the advantages of DSL over dial-up service.



Operating expenses for the
Internet Services segment increased $371, or 26.5%, to $1,773 in the third quarter of 2003, from $1,402 in the same period of 2002. The direct cost of operations and network access expenses increased $122, depreciation increased $63, while customer
service and general and administrative expenses increased $186. The general and administrative expenses grew from an increased percentage of corporate expenses allocated to this segment and to a bad debt expense for one major business customer.



Internet Services segment revenues increased $1,233, or 38.1%, to $4,469 in
the nine months ended September 30, 2003, from $3,236 in the nine months of 2002. The revenue increase was primarily due to the inclusion of Conestogas revenues for the full nine months in 2003, compared to only the four months in 2002 after
the May 24, 2002 acquisition. The increase included $561



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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 the five extra months that the Conestoga revenues were included in 2003 and $97 for the four comparable months. The remaining D&E increase of $575
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 D&Es original market areas and from expansion into Conestogas territory.



Operating expenses for the Internet Services segment increased $1,234, or
32.7%, to $5,009 in the nine months ended September 30, 2003, from $3,775 in the same period of the prior year. The nine months of 2003 expenses included nine months from Conestoga compared to four months in 2002 after the acquisition. Because of
the five extra months in the 2003 year to date, Conestoga expenses increased $824 over the prior years nine months, while our D&E Internet Services expenses increased $410.



Systems Integration Segment Results



|                              |  | Three months ended September 30, |        |   | Nine months ended September 30, |  
|----------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | -
|                              |  | 2003                             |        |   | 2002                            |  
|Revenues                      |  | $                                | 5,491  |   |                                 | $
|                              |  |                                  |        |   |                                 |  
|Depreciation and Amortization |  |                                  | 375    |   |                                 |  
|Other Operating Expenses      |  |                                  | 6,182  |   |                                 |  
|                              |  |                                  |        |   |                                 |  
|Total Operating Expenses      |  |                                  | 6,557  |   |                                 |  
|                              |  |                                  |        |   |                                 |  
|Operating Loss                |  | $                                | (1,066 | ) |                                 | $
|                              |  |                                  |        |   |                                 |  



Systems Integration segment revenues
decreased $717, or 11.5%, to $5,491 in the three months ended September 30, 2003, from $6,208 in the three months ended September 30, 2002. The decreases included a reduction of $532 in telecommunications and computer equipment sold and a $191
reduction in communication services revenue. The decline in equipment sales represented a 7% decrease in communication equipment and a 41% decrease in computer equipment sales. The decline was partially attributable to lower education spending at
the state and local school district levels and to a general business reduction in spending for infrastructure as a result of the slow economy.



Operating expenses for the Systems Integration segment decreased $325, or 4.7%, to $6,557 in the third quarter 2003, from $6,882 in the same period of 2002. The major
expense variances include the cost of products sold decreased $581 and direct cost of service decreased $107 while customer service increased $133 and other general and administrative expense increased $302.



Systems Integration segment revenues decreased $816, or 4.6%, to $16,903 in the nine months
ended September 30, 2003, from $17,719 in the nine months of 2002. The revenue decrease was primarily due to a $4,946 decline in D&E Networks sales, which more than offset the increase from the inclusion of Conestogas revenues of $4,130
for the nine months in 2003, compared to



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Part I - Financial Information (continued)



Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



only four months in the period of 2002 after the May 24, 2002 acquisition. The D&E Networks decrease included a reduction of $3,989 in telecommunications
and computer equipment sold, as well as a $943 reduction in computer services revenue. The decline in equipment sales was 34% in communications equipment and 57% in computer equipment sales. The decline was partially attributable to lower education
spending at the state and local school district levels and to a general business reduction in spending for infrastructure as a result of the slow economy.



Operating expenses for the Systems Integration segment increased $535, or 2.7%, to $20,283 in the nine months ended September 30, 2003, from $19,748 in the same period of
2002. The nine months of 2003 expenses included nine months from Conestoga compared to four months in 2002 after the acquisition. Because of the five extra months in the 2003 year to date, Conestoga expenses increased $4,368 over the prior
years nine months, while D&Es Systems Integration expenses decreased $3,833 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.
Expenses for the nine months ended September 30, 2003 were $840 in the first quarter, plus an additional $300 recorded during the third quarter of 2003, as a result of increasing the estimated amount necessary to satisfy the commitment to Mountain
Union Telecom under the Build-to-Suit agreement. This additional expense, which was agreed upon during the fourth quarter of 2003, increased the operating loss to $680 for the nine months ended September 30, 2003. The nine months ended September 30,
2002, which included only the period after the May 24, 2002 Conestoga acquisition, had revenue of $4,052 and an operating loss of $851. 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, partly through external sources, such as bank borrowings and offerings of debt or equity securities.



Net cash provided by continuing operations was $32,109 in the nine months ended September 30, 2003, compared with $13,380 in the same period of 2002. The increase is
primarily due to the inclusion of Conestogas cash flow activity in 2003.



Net cash used in investing activities was $4,973 in the nine months ended September 30, 2003, compared with a net cash use of $173,683 in the same period of 2002. The proceeds from



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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 Conestoga Wireless and Paging sales of $10,176, partially offset the $14,139 of capital additions and $1,010 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 $156,439
for a portion of the Conestoga acquisition cost, $16,227 of capital additions and a net increase of $1,017 in additional investments and advances to affiliates. Capital additions in the nine months of 2002 were primarily $8,279 for network
infrastructure expansion, $3,884 for CLEC switching equipment, and $1,818 for computers.



Net cash used in financing activities was $4,959 in the nine months ended September 30, 2003, compared with $91,418 of net cash provided in the same period of 2002. In the nine months of 2003, payment of dividends of
$5,546 was the major financing use of funds while long-term debt borrowing net of payments made on long-term debt used $364 and common stock issuance provided $951. 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 nine months of 2002, long-term debt was increased $160,000. The majority of the additional debt was used to fund the Conestoga acquisition. Of the
remainder, $64,747 was used to repay other long-term loans and lines of credit and to pay debt issuance costs. Quarterly dividends paid in the nine months of 2002 were $4,574, which included dividends paid on shares issued to Conestoga shareholders
in the merger.



Discontinued operations used $20,553 of cash in 2003 primarily
for paying the taxes due on the sale of D&E Wireless in 2002. That sale provided most of the $75,446 cash from discontinued operations in the previous year. The total cash provided by continuing operations in the nine months ended September 30,
2003 was sufficient to pay for the ongoing capital expenditure program, to pay our regular quarterly dividends and to provide excess cash used to repay bank borrowings under the terms of the covenants.



Other



During 2002, we wrote off $651, related to the WorldCom bankruptcy, in addition to our portion of losses that were 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.



During the third quarter, we continued our preparations for a trial project to deliver a bundle of services through DSL technology. As part of this trial, we plan to
offer digital entertainment services, including television programming, to our customers in certain areas of Union County. This trial project will involve delivering a triple play of voice, data and video services through a single line
to the customer. Capital expenditures of approximately $2,000 are anticipated during 2003 with a revenue impact beginning in the first quarter of 2004.



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##### Table of Contents

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Part I - Financial Information (continued)



Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



External Sources of Capital at September 30, 2003



As of September 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 $40,484 is borrowed. The revolving credit facility, of which $33,016 was available as of September 30, 2003, is available to fund capital expenditures, acquisitions, general corporate purposes and working capital
needs. In connection with the Conestoga acquisition, we acquired their long-term loans of $35,000.



The Term Loan A 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 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.



In light of the favorable market conditions and
opportunities, which appear to be available to D&E due to its performance, we are considering alternatives available to us to take advantage of low market interest rates and to amend existing amortization schedules and/or loan covenants. There
is no assurance that our evaluation of the alternatives will result in a favorable restructuring of our indebtedness.



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 September 30, 2003, we had no other unsecured lines of credit.



Our borrowing capacity at September 30, 2003, as limited by our covenants is $73,500, of
which $40,484 was drawn. As of September 30, 2003, the full amount of the revolving credit facility was available for borrowing without violating any of the covenants. Based on the excess



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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)



cash flow generated during the third quarter of 2003, D&E has classified $2,907 of the revolving credit facility as short-term debt and will reduce that
loan with a payment in November 2003. Our ratio of total debt to total debt plus capital increased to 55.1% at September 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 October 23, 2003, we declared a quarterly common stock dividend of $0.125 per share payable on December 15, 2003, to holders of record on
December 1, 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 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 for 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 therefor 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 will 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 September 30, 2003, we have recorded
an estimated $975 for D&Es remaining commitment under the BTS.



As
part of the Companys acquisition of Conestoga, D&E assumed a guarantee agreement with Mountain Union for lease obligations on the wireless tower sites of Conestogas wireless subsidiary. When D&E entered into the asset purchase
agreement with Keystone Wireless, whereby Keystone Wireless was assigned the responsibility for the leases, Mountain Union declined to release D&E from its guarantee. In the event of a default by Keystone Wireless, D&E continues to guarantee
the wireless tower site lease payments, which cover a 10-year period beginning on the commencement date of the lease of each tower. As such, the guarantee is a continuing guarantee provided on an individual tower site basis. The lease payments start
at $1.5 per site per month, with provision for an increase of 4% per year. The 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.



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Part I - Financial Information (continued)



Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



We hold a 33% interest in EuroTel and a 28.88% direct interest in Pilicka, both of which we account for under the
equity method of accounting. 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 nine months ended September 30, 2003, D&E made advances of $944 to EuroTel and we expect that our total 2003 advances will be less than $1,000 in the aggregate. Additionally, we have provided
a letter of commitment to advance an undetermined amount of funds to Pilicka for 2003. However, management does not anticipate having to advance funds to Pilicka during 2003.



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 fourth 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.



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##### Table of Contents

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Part I - Financial Information (continued)



Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



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 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.



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D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)



Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



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. 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



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D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)



Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



of the long-term returns on assets held by the plan. Changes in these key assumptions can have a significant impact on the projected benefit obligations,
funding requirements and periodic benefit costs that we incur.



Income Taxes



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



Management judgment is required in determining the
provision for current income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against the net deferred tax assets. A valuation allowance is 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 the utility subsidiary does not fall within the guidance of SFAS No. 150 requiring classification as a liability. The adoption of SFAS No. 150 had no
impact on the Companys financial position, results of operations or cash flows.



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 adoption of SFAS No. 149 had material impact on the
Companys financial position, results of operations or cash flows.



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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 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.



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 the 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 maximum potential amount of future payments undiscounted that
D&E could be required to make under the guarantee as of September 30, 2003 is $14,797. The majority of these tower site leases and our guarantee will expire between 2011 and 2013. D&E has estimated and recorded the fair value of the
liability for the lease guarantees of $3,200. D&E will recognize release from risk for the guarantee upon expiration or settlement of the guarantee.



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
immediately to variable interest entities created after January 31, 2003, in which a company obtains an interest after that date. Because of additional issues raised, the FASB delayed implementation of FIN 46 for variable interest entities created
before February 1, 2003. Currently, FIN 46 may be deferred until the first fiscal quarter or interim period ending after December 15, 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



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D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)



Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



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. The adoption of EITF 00-21 did not have a material impact on the Companys financial position, results of operations or cash flow.



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 September 30, 2003, we had approximately $244,733 of total
indebtedness, including current maturities, which arose primarily in connection with the Conestoga acquisition. See



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D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)



Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



External Sources of Capital at September 30, 2003 above. 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 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;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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;
| | - | ---------------------------



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D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)



Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



| |  | 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 continue to
involve 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
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 the build-to-suit agreement. 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:



| |  | incumbent local exchange carriers and competitive local exchange carriers, including TelCove, Commonwealth Telephone Enterprises, XO Communications, Verizon and Sprint;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | wireless service providers, including Cingular, Verizon Wireless, AT&T Wireless, Nextel and T-Mobile;
| | - | -----------------------------------------------------------------------------------------------------



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



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D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)



Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



| |  | cable television companies, including Adelphia Communications, 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.



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 as Chapter 30 and implemented by the Pennsylvania Public Utility Commission. 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 ensure 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 facilities and services of satisfactory quality from other telephone companies, or on satisfactory terms and conditions, in which case we may experience delays in the growth of our competitive local exchange carrier networks
and the degradation of the quality of our service to customers.



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D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)



Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



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
(the TRO). On August 31, 2003, the FCC released the TRO, establishing certain presumptions along with defined procedures for individual states to rebut or accept those presumptions. The Pennsylvania PUC has begun several proceedings in
response to the TRO and we are participating along with other Pennsylvania companies. If not rebutted and successfully overturned at the FCC, the TRO presumptions could lead to the elimination of various unbundled network elements (UNE)
such as UNE-P and line sharing. The elimination of these offerings could have a negative effect on our CLEC segment. The FCCs TRO is already undergoing judicial scrutiny and further challenges are likely throughout the course of the various
proceedings.



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 several key issues related to the implementation of wireline to wireless local number portability presently scheduled to
become effective November 24, 2003. An FCC ruling is anticipated in the very near future. Our RLECs



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D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)



Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



have also petitioned the Pennsylvania PUC for a temporary suspension of the requirement to provide wireline to wireless portability pending the resolution of
several key operational issues. 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 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 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.



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##### Table of Contents

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 September 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 |  | $ | 40,484 
|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 September 30, 2003, our bank debt is as follows:



|                                                        |  | Principal |         | AverageRate |      |   | Fair Value
|------------------------------------------------------- |  | --------- | ------- | ----------- | ---- | - | ----------
|Rates fixed for two years through interest rate swaps   |  | $         | 35,000  |             | 6.29 | % |           
|Rates fixed for three years through interest rate swaps |  | $         | 35,000  |             | 6.93 | % |           
|Rates fixed for four years through interest rate swaps  |  | $         | 35,000  |             | 7.23 | % |           
|Fixed rate debt, rates fixed for twelve years           |  | $         | 35,000  |             | 9.35 | % |           
|Total fixed rates 58% of total debt                     |  | $         | 140,000 |             | 7.45 | % |           
|Variable rate debt 42% of total debt                    |  | $         | 101,984 |             | 4.90 | % |           



If interest rates rise above the rates
of the variable debt, we could realize additional interest expense of $510 for each 50 basis points above the variable rates. If rates were to decline, we would realize less interest expense of approximately $510 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.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)



Item 3. Quantitative and Qualitative Disclosure

About Market Risks

(Dollar amounts are in thousands)



|Terms of Swaps       |  | Notional Amounts |  | Average Pay Rate |  | Average Received Rate |  | Fair Value
|-------------------- |  | ---------------- |  | ---------------- |  | --------------------- |  | ----------
|11/25/02 to 11/25/04 |  | $35,000          |  | 6.29%            |  | 5.17%                 |  | $568      
|12/04/02 to 12/04/05 |  | $35,000          |  | 6.93%            |  | 5.30%                 |  | $878      
|11/25/02 to 11/25/06 |  | $35,000          |  | 7.23%            |  | 5.17%                 |  | $1,273    



If interest rates rise above the rates
fixed by these swaps, we could realize other comprehensive income of $525 for each 50 basis points above the fixed rates. If rates were to decline, we would realize other comprehensive 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 September
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.



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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 6. Exhibits and Reports on Form 8-K



(a) Exhibits:



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



(b)
Reports on Form 8-K:



A current report on Form 8-K dated August 13, 2003, was
filed during the quarter ended September 30, 2003. The report announced the earnings for the three months ended June 30, 2003.



A current report on Form 8-K dated September 12, 2003, was filed during the quarter ended September 30, 2003. The report included a copy of the quarterly financial report
for the second quarter of 2003 mailed to shareholders.



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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: November 10, 2003 |  |                         
|                        |  | By:                     
|                        |  |                         
|                        |  |                         
|                        |  |                         
|Date: November 10, 2003 |  |                         
|                        |  | By:                     
|                        |  |                         
|                        |  |                         



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