##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







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

For the quarterly period ended June 30, 2008

or



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

For the transition period from  to

Commission File Number: 000-20709





D&E Communications, Inc.

(Exact name of registrant as specified in its
charter)





PENNSYLVANIA

(State or other
jurisdiction of

incorporation or organization)

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

Brossman Business Complex

124 East Main Street

P. O. Box 458

Ephrata, Pennsylvania 17522

(Address of principal executive offices)

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





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of accelerated filer, large accelerated
filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                                                                        |  |                              |  |  |  | 
|----------------------------------------------------------------------- |  | ---------------------------- |  |  |  | 
|Large accelerated filer   ̈                                              |  | Accelerated filer  x        
|                                                                        | 
|Non-accelerated filer   ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company   ̈

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

Yes   ̈    No  x

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



|                                        |  |                             
|--------------------------------------- |  | ----------------------------
|Class                                   |  | Outstanding at July 25, 2008
|Common Stock, par value $0.16 per share |  | 14,494,527 Shares           









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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Form 10-Q

TABLE OF CONTENTS



|         |  |                                                                                                                                            |  |   
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------ |  | --
|Item No. |  | Page                                                                                                                                      
|         |  | PART I. FINANCIAL INFORMATION                                                                                                              |  |   
|         |  |                                                                                                                                           
|1.       |  | Unaudited Financial Statements                                                                                                             |  | 1 
|         |  |                                                                                                                                           
|         |  | Condensed Consolidated Statements of Operations For the three and six months ended June 30, 2008 and
2007                                 |  | 1 
|         |  |                                                                                                                                           
|         |  | Condensed Consolidated Balance Sheets June 30, 2008 and December 31, 2007                                                                 |  | 2 
|         |  |                                                                                                                                           
|         |  | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2008 and
2007                                           |  | 3 
|         |  |                                                                                                                                           
|         |  | Condensed Consolidated Statements of ShareholdersEquity and Comprehensive Income (Loss) For the six
 months ended June 30, 2008 and 2007 |  | 4 
|         |  |                                                                                                                                           
|         |  | Notes to Condensed Consolidated Financial Statements                                                                                       |  | 5 
|         |  |                                                                                                                                           
|2.       |  | Managements Discussion and Analysis of FinancialCondition and Results of Operations                                                       |  | 17
|         |  |                                                                                                                                           
|3.       |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                 |  | 39
|         |  |                                                                                                                                           
|4.       |  | Controls and Procedures                                                                                                                    |  | 40
|         |  |                                                                                                                                           
|         |  | PART II. OTHER INFORMATION                                                                                                                 |  |   
|         |  |                                                                                                                                           
|1.       |  | Legal Proceedings                                                                                                                          |  | 41
|         |  |                                                                                                                                           
|1A.      |  | Risk Factors                                                                                                                               |  | 41
|         |  |                                                                                                                                           
|2.       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                |  | 41
|         |  |                                                                                                                                           
|3.       |  | Defaults Upon Senior Securities                                                                                                            |  | 41
|         |  |                                                                                                                                           
|4.       |  | Submissions of Matters to a Vote of Security Holders                                                                                       |  | 41
|         |  |                                                                                                                                           
|5.       |  | Other Information                                                                                                                          |  | 42
|         |  |                                                                                                                                           
|6.       |  | Exhibits                                                                                                                                   |  | 43
|         |  |                                                                                                                                           
|         |  | SIGNATURES                                                                                                                                 |  | 44



i



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##### Table of Contents

Form 10-Q Part I  Financial Information

|Item 1. | Financial Statements
|------- | --------------------

D&E
Communications, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per-share amounts)

(Unaudited)



|                                                                                  |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|--------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                  |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|                                                                                  |  | 2008                       |         |   | 2007                     |   |        | 2008 |  |   | 2007    |  
|OPERATING REVENUES                                                                |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Communication service revenues                                                    |  | $                          | 36,070  |   |                          | $ | 35,913 |      |  | $ | 72,683  |   |  | $ | 72,867 |  
|Communication products sold                                                       |  |                            | 742     |   |                          |   | 536    |      |  |   | 1,201   |   |  |   | 1,160  |  
|Other                                                                             |  |                            | 737     |   |                          |   | 752    |      |  |   | 1,462   |   |  |   | 1,538  |  
|                                                                                  |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Total operating revenues                                                          |  |                            | 37,549  |   |                          |   | 37,201 |      |  |   | 75,346  |   |  |   | 75,565 |  
|                                                                                  |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|OPERATING EXPENSES                                                                |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Communication service expenses (exclusive of depreciation and amortization below) |  |                            | 12,296  |   |                          |   | 12,045 |      |  |   | 24,552  |   |  |   | 25,138 |  
|Cost of communication products sold                                               |  |                            | 605     |   |                          |   | 426    |      |  |   | 977     |   |  |   | 940    |  
|Depreciation and amortization                                                     |  |                            | 7,768   |   |                          |   | 9,210  |      |  |   | 15,616  |   |  |   | 18,718 |  
|Marketing and customer services                                                   |  |                            | 3,494   |   |                          |   | 3,517  |      |  |   | 7,034   |   |  |   | 6,884  |  
|General and administrative services                                               |  |                            | 5,275   |   |                          |   | 5,477  |      |  |   | 10,934  |   |  |   | 11,853 |  
|Intangible asset impairment                                                       |  |                            | 26,200  |   |                          |   |       |      |  |   | 26,200  |   |  |   |       |  
|                                                                                  |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Total operating expenses                                                          |  |                            | 55,638  |   |                          |   | 30,675 |      |  |   | 85,313  |   |  |   | 63,533 |  
|                                                                                  |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Operating income (loss)                                                           |  |                            | (18,089 | ) |                          |   | 6,526  |      |  |   | (9,967  | ) |  |   | 12,032 |  
|                                                                                  |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|OTHER INCOME (EXPENSE)                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Interest expense, net of interest capitalized                                     |  |                            | (2,951  | ) |                          |   | (3,718 | )    |  |   | (6,300  | ) |  |   | (7,454 | )
|Other, net                                                                        |  |                            | 115     |   |                          |   | 400    |      |  |   | 3,533   |   |  |   | 2,116  |  
|                                                                                  |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Total other income (expense)                                                      |  |                            | (2,836  | ) |                          |   | (3,318 | )    |  |   | (2,767  | ) |  |   | (5,338 | )
|                                                                                  |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Income (loss) before income taxes and dividends on utility preferred stock        |  |                            | (20,925 | ) |                          |   | 3,208  |      |  |   | (12,734 | ) |  |   | 6,694  |  
|                                                                                  |  |                            |         |  
|INCOME TAXES AND DIVIDENDS ON UTILITY PREFERRED STOCK                             |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Income taxes (benefit)                                                            |  |                            | (9,000  | ) |                          |   | 905    |      |  |   | (5,957  | ) |  |   | 1,765  |  
|Dividends on utility preferred stock                                              |  |                            | 17      |   |                          |   | 17     |      |  |   | 33      |   |  |   | 33     |  
|                                                                                  |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Total income taxes and dividends on utility preferred stock                       |  |                            | (8,983  | ) |                          |   | 922    |      |  |   | (5,924  | ) |  |   | 1,798  |  
|                                                                                  |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|NET INCOME (LOSS)                                                                 |  | $                          | (11,942 | ) |                          | $ | 2,286  |      |  | $ | (6,810  | ) |  | $ | 4,896  |  
|                                                                                  |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Weighted average common shares outstanding (basic)                                |  |                            | 14,481  |   |                          |   | 14,413 |      |  |   | 14,472  |   |  |   | 14,406 |  
|Weighted average common shares outstanding (diluted)                              |  |                            | 14,481  |   |                          |   | 14,534 |      |  |   | 14,472  |   |  |   | 14,511 |  
|                                                                                  |  |                            |         |  
|BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE                                |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Earnings (loss) per common share                                                  |  | $                          | (0.82   | ) |                          | $ | 0.16   |      |  | $ | (0.47   | ) |  | $ | 0.34   |  
|                                                                                  |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Dividends per common share                                                        |  | $                          | 0.12    |   |                          | $ | 0.12   |      |  | $ | 0.25    |   |  | $ | 0.25   |  
|                                                                                  |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  

See notes to condensed consolidated financial statements.



1



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)



|                                                                                                                                                                                                            |  |              |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                                            |  | June 30,2008 |         |   | December 31,2007 |  
|ASSETS                                                                                                                                                                                                      |  |              |         |   |                  |   |         |  
|CURRENT ASSETS                                                                                                                                                                                              |  |              |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                                                   |  | $            | 10,807  |   |                  | $ | 17,845  |  
|Accounts and notes receivable, net of reserves of $367 and $500                                                                                                                                             |  |              | 14,105  |   |                  |   | 14,688  |  
|Inventories                                                                                                                                                                                                 |  |              | 2,627   |   |                  |   | 2,666   |  
|Prepaid expenses                                                                                                                                                                                            |  |              | 7,353   |   |                  |   | 2,887   |  
|Other                                                                                                                                                                                                       |  |              | 2,025   |   |                  |   | 2,520   |  
|                                                                                                                                                                                                            |  |              |         |   |                  |   |         |  
|TOTAL CURRENT ASSETS                                                                                                                                                                                        |  |              | 36,917  |   |                  |   | 40,606  |  
|                                                                                                                                                                                                            |  |              |         |   |                  |   |         |  
|PROPERTY, PLANT AND EQUIPMENT                                                                                                                                                                               |  |              |         |   |                  |   |         |  
|In service                                                                                                                                                                                                  |  |              | 404,769 |   |                  |   | 396,659 |  
|Under construction                                                                                                                                                                                          |  |              | 8,747   |   |                  |   | 6,648   |  
|                                                                                                                                                                                                            |  |              |         |   |                  |   |         |  
|                                                                                                                                                                                                            |  |              | 413,516 |   |                  |   | 403,307 |  
|Less accumulated depreciation                                                                                                                                                                               |  |              | 249,129 |   |                  |   | 237,243 |  
|                                                                                                                                                                                                            |  |              |         |   |                  |   |         |  
|                                                                                                                                                                                                            |  |              | 164,387 |   |                  |   | 166,064 |  
|                                                                                                                                                                                                            |  |              |         |   |                  |   |         |  
|OTHER ASSETS                                                                                                                                                                                                |  |              |         |   |                  |   |         |  
|Goodwill                                                                                                                                                                                                    |  |              | 137,609 |   |                  |   | 137,623 |  
|Intangible assets, net of accumulated amortization                                                                                                                                                          |  |              | 119,525 |   |                  |   | 148,376 |  
|Other                                                                                                                                                                                                       |  |              | 8,615   |   |                  |   | 8,512   |  
|                                                                                                                                                                                                            |  |              |         |   |                  |   |         |  
|                                                                                                                                                                                                            |  |              | 265,749 |   |                  |   | 294,511 |  
|                                                                                                                                                                                                            |  |              |         |   |                  |   |         |  
|TOTAL ASSETS                                                                                                                                                                                                |  | $            | 467,053 |   |                  | $ | 501,181 |  
|                                                                                                                                                                                                            |  |              |         |   |                  |   |         |  
|                                                                                                                                                                                                            |  |             
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                        |  |              |         |   |                  |   |         |  
|CURRENT LIABILITIES                                                                                                                                                                                         |  |              |         |   |                  |   |         |  
|Long-term debt maturing within one year                                                                                                                                                                     |  | $            | 7,073   |   |                  | $ | 7,071   |  
|Accounts payable and accrued liabilities                                                                                                                                                                    |  |              | 11,311  |   |                  |   | 17,188  |  
|Accrued taxes                                                                                                                                                                                               |  |              | 219     |   |                  |   | 1,093   |  
|Accrued interest and dividends                                                                                                                                                                              |  |              | 1,002   |   |                  |   | 816     |  
|Advance billings, customer deposits and other                                                                                                                                                               |  |              | 5,081   |   |                  |   | 4,709   |  
|                                                                                                                                                                                                            |  |              |         |   |                  |   |         |  
|TOTAL CURRENT LIABILITIES                                                                                                                                                                                   |  |              | 24,686  |   |                  |   | 30,877  |  
|                                                                                                                                                                                                            |  |              |         |   |                  |   |         |  
|LONG-TERM DEBT                                                                                                                                                                                              |  |              | 182,592 |   |                  |   | 186,879 |  
|                                                                                                                                                                                                            |  |              |         |   |                  |   |         |  
|OTHER LIABILITIES                                                                                                                                                                                           |  |              |         |   |                  |   |         |  
|Deferred income taxes                                                                                                                                                                                       |  |              | 60,961  |   |                  |   | 70,977  |  
|Defined benefit plans                                                                                                                                                                                       |  |              | 13,503  |   |                  |   | 15,465  |  
|Other                                                                                                                                                                                                       |  |              | 5,661   |   |                  |   | 7,663   |  
|                                                                                                                                                                                                            |  |              |         |   |                  |   |         |  
|                                                                                                                                                                                                            |  |              | 80,125  |   |                  |   | 94,105  |  
|                                                                                                                                                                                                            |  |              |         |   |                  |   |         |  
|PREFERRED STOCK OF UTILITY SUBSIDIARY, Series A 4 1/2%, par value $100, cumulative, callable at par at the option of the Company, authorized 20,000 shares, outstanding 14 shares                           |  |              | 1,446   |   |                  |   | 1,446   |  
|                                                                                                                                                                                                            |  |              |         |   |                  |   |         |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                               |  |              |         |   |                  |   |         |  
|                                                                                                                                                                                                            |  |             
|SHAREHOLDERS EQUITY                                                                                                                                                                                        |  |              |         |   |                  |   |         |  
|Common stock, par value $0.16, authorized shares-100,000; issued shares-16,161 at June 30, 2008 and 16,092 at December 31, 2007;
outstanding shares-14,494 at June 30, 2008 and 14,425 at December 31, 2007 |  |              | 2,586   |   |                  |   | 2,575   |  
|Additional paid-in capital                                                                                                                                                                                  |  |              | 164,088 |   |                  |   | 163,560 |  
|Accumulated other comprehensive loss                                                                                                                                                                        |  |              | (6,977  | ) |                  |   | (7,216  | )
|Retained earnings                                                                                                                                                                                           |  |              | 37,699  |   |                  |   | 48,147  |  
|Treasury stock at cost, 1,667 shares at June 30, 2008 and December 31, 2007                                                                                                                                 |  |              | (19,192 | ) |                  |   | (19,192 | )
|                                                                                                                                                                                                            |  |              |         |   |                  |   |         |  
|                                                                                                                                                                                                            |  |              | 178,204 |   |                  |   | 187,874 |  
|                                                                                                                                                                                                            |  |              |         |   |                  |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                  |  | $            | 467,053 |   |                  | $ | 501,181 |  
|                                                                                                                                                                                                            |  |              |         |   |                  |   |         |  

See notes to condensed consolidated financial statements.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                                         |  |                           |         |   |      |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                         |  | Six Months Ended June 30, |        
|                                                                                         |  | 2008                      |         |   | 2007 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                     |  |                           |         |   |      |   |         |  
|Net income (loss)                                                                        |  | $                         | (6,810  | ) |      | $ | 4,896   |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                           |         |   |      |   |         |  
|Depreciation and amortization                                                            |  |                           | 15,616  |   |      |   | 18,718  |  
|Bad debt expense                                                                         |  |                           | 203     |   |      |   | 318     |  
|Deferred income taxes                                                                    |  |                           | (9,852  | ) |      |   | (3,005  | )
|Gain from cash recovery of note receivable                                               |  |                           |        |   |      |   | (300    | )
|Gain from life insurance proceeds                                                        |  |                           |        |   |      |   | (588    | )
|Stock-based compensation expense                                                         |  |                           | 245     |   |      |   | 199     |  
|Gain on retirement of property, plant and equipment                                      |  |                           | (41     | ) |      |   | (86     | )
|Intangible asset impairment                                                              |  |                           | 26,200  |   |      |   |        |  
|Termination of lease guarantee                                                           |  |                           | (2,904  | ) |      |   |        |  
|Note receivable reserve                                                                  |  |                           | 200     |   |      |   |        |  
|Changes in operating assets and liabilities:                                             |  |                           |         |   |      |   |         |  
|Accounts receivable                                                                      |  |                           | 380     |   |      |   | 466     |  
|Inventories                                                                              |  |                           | 39      |   |      |   | 15      |  
|Prepaid expenses                                                                         |  |                           | (4,435  | ) |      |   | (3,287  | )
|Accounts payable and accrued liabilities                                                 |  |                           | (3,048  | ) |      |   | 319     |  
|Accrued taxes and accrued interest                                                       |  |                           | (688    | ) |      |   | (209    | )
|Advance billings, customer deposits and other                                            |  |                           | 373     |   |      |   | 419     |  
|Defined benefit plans                                                                    |  |                           | (1,454  | ) |      |   | (1,279  | )
|Other, net                                                                               |  |                           | (281    | ) |      |   | 307     |  
|                                                                                         |  |                           |         |   |      |   |         |  
|Net Cash Provided by Operating Activities                                                |  |                           | 13,743  |   |      |   | 16,903  |  
|                                                                                         |  |                           |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                     |  |                           |         |   |      |   |         |  
|Purchases of property, plant and equipment                                               |  |                           | (13,576 | ) |      |   | (12,313 | )
|Proceeds from sales of property, plant and equipment                                     |  |                           | 409     |   |      |   | 357     |  
|Collection of note receivable                                                            |  |                           | 49      |   |      |   | 679     |  
|Proceeds from sale of short-term investments                                             |  |                           |        |   |      |   | 9,946   |  
|Purchase of short-term investments                                                       |  |                           |        |   |      |   | (3,187  | )
|Life insurance proceeds                                                                  |  |                           |        |   |      |   | 1,000   |  
|Acquisition of customer list intangible asset                                            |  |                           |        |   |      |   | (606    | )
|                                                                                         |  |                           |         |   |      |   |         |  
|Net Cash Used In Investing Activities                                                    |  |                           | (13,118 | ) |      |   | (4,124  | )
|                                                                                         |  |                           |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                     |  |                           |         |   |      |   |         |  
|Dividends on common stock                                                                |  |                           | (3,475  | ) |      |   | (3,426  | )
|Payments on long-term debt                                                               |  |                           | (4,285  | ) |      |   | (6,033  | )
|Proceeds from issuance of common stock and stock options exercised                       |  |                           | 60      |   |      |   | 159     |  
|Excess tax benefits from stock compensation plans                                        |  |                           | 37      |   |      |   | 15      |  
|Purchase of treasury stock                                                               |  |                           |        |   |      |   | (48     | )
|                                                                                         |  |                           |         |   |      |   |         |  
|Net Cash Used In Financing Activities                                                    |  |                           | (7,663  | ) |      |   | (9,333  | )
|                                                                                         |  |                           |         |   |      |   |         |  
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                         |  |                           | (7,038  | ) |      |   | 3,446   |  
|                                                                                         |  |                          
|CASH AND CASH EQUIVALENTS                                                                |  |                           |         |   |      |   |         |  
|BEGINNING OF PERIOD                                                                      |  |                           | 17,845  |   |      |   | 3,101   |  
|                                                                                         |  |                           |         |   |      |   |         |  
|END OF PERIOD                                                                            |  | $                         | 10,807  |   |      | $ | 6,547   |  
|                                                                                         |  |                           |         |   |      |   |         |  
|Supplemental Disclosures of Cash Flow Information                                        |  |                           |         |   |      |   |         |  
|Cash paid for interest                                                                   |  | $                         | 6,021   |   |      | $ | 7,607   |  
|Cash paid for income taxes                                                               |  |                           | 6,769   |   |      |   | 4,300   |  

See notes to condensed consolidated financial statements.



3



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

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

For the six months ended June 30, 2008 and 2007

(In thousands)

(Unaudited)



|                                                                                                                                                           |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | - |  | ------ | ------- | - | ------ | ------ | - | ------ | - | ------- | -
|                                                                                                                                                           |  | 2008   |   |  | 2007   |        
|                                                                                                                                                           |  | Shares |   |  | Amount |         |   | Shares |        |   | Amount |  
|COMMON STOCK                                                                                                                                               |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at beginning of year                                                                                                                               |  | 16,092 |   |  | $      | 2,575   |   |        | 16,039 |   |        | $ | 2,566   |  
|Common stock issued for Employee Stock Purchase, Long-Term Incentive, Dividend Reinvestment, Stock Compensation Plan and Policy for
Non-Employee Directors |  | 69     |   |  |        | 11      |   |        | 23     |   |        |   | 4       |  
|Common stock issued for stock options exercised                                                                                                            |  |       |   |  |        |        |   |        | 8      |   |        |   | 1       |  
|                                                                                                                                                           |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at June 30                                                                                                                                         |  | 16,161 |   |  |        | 2,586   |   |        | 16,070 |   |        |   | 2,571   |  
|                                                                                                                                                           |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|ADDITIONAL PAID-IN CAPITAL                                                                                                                                 |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at beginning of year                                                                                                                               |  |        |   |  |        | 163,560 |   |        |        |   |        |   | 162,534 |  
|Common stock issued for Employee Stock Purchase, Long-Term Incentive, Dividend Reinvestment, Stock Compensation Plan and Policy for
Non-Employee Directors |  |        |   |  |        | 528     |   |        |        |   |        |   | 504     |  
|Common stock issued for stock options exercised                                                                                                            |  |        |   |  |        |        |   |        |        |   |        |   | 86      |  
|                                                                                                                                                           |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at June 30                                                                                                                                         |  |        |   |  |        | 164,088 |   |        |        |   |        |   | 163,124 |  
|                                                                                                                                                           |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)                                                                                                              |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at beginning of year                                                                                                                               |  |        |   |  |        | (7,216  | ) |        |        |   |        |   | (5,028  | )
|Reclassification adjustment for realized gain on derivative financial instruments, net of tax                                                              |  |        |   |  |        | (83     | ) |        |        |   |        |   | (171    | )
|Defined benefit plans, net of tax                                                                                                                          |  |        |   |  |        | 297     |   |        |        |   |        |   | 369     |  
|Unrealized gain (loss) on derivative financial instruments, net of tax                                                                                     |  |        |   |  |        | 25      |   |        |        |   |        |   | (100    | )
|                                                                                                                                                           |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at June 30                                                                                                                                         |  |        |   |  |        | (6,977  | ) |        |        |   |        |   | (4,930  | )
|                                                                                                                                                           |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|RETAINED EARNINGS                                                                                                                                          |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at beginning of year                                                                                                                               |  |        |   |  |        | 48,147  |   |        |        |   |        |   | 44,651  |  
|Adjustment to adopt FIN 48                                                                                                                                 |  |        |   |  |        |        |   |        |        |   |        |   | 173     |  
|Net income (loss)                                                                                                                                          |  |        |   |  |        | (6,810  | ) |        |        |   |        |   | 4,896   |  
|Dividends on common stock: $0.25 per share for each period                                                                                                 |  |        |   |  |        | (3,638  | ) |        |        |   |        |   | (3,610  | )
|                                                                                                                                                           |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at June 30                                                                                                                                         |  |        |   |  |        | 37,699  |   |        |        |   |        |   | 46,110  |  
|                                                                                                                                                           |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|TREASURY STOCK                                                                                                                                             |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at beginning of year                                                                                                                               |  | (1,667 | ) |  |        | (19,192 | ) |        | (1,663 | ) |        |   | (19,144 | )
|Treasury stock acquired                                                                                                                                    |  |       |   |  |        |        |   |        | (4     | ) |        |   | (48     | )
|                                                                                                                                                           |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|Balance at June 30                                                                                                                                         |  | (1,667 | ) |  |        | (19,192 | ) |        | (1,667 | ) |        |   | (19,192 | )
|                                                                                                                                                           |  |        |   |  |        |         |   |        |        |   |        |   |         |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                 |  | 14,494 |   |  | $      | 178,204 |   |        | 14,403 |   |        | $ | 187,683 |  
|                                                                                                                                                           |  |        |   |  |        |         |   |        |        |   |        |   |         |  



|                                                                                                                                         |  |                            |         |   |                          |   |       |      |  |   |        |   |  |   |       |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                                                                                                                         |  | Three months endedJune 30, |         |   | Six months endedJune 30, |  
|                                                                                                                                         |  | 2008                       |         |   | 2007                     |   |       | 2008 |  |   | 2007   |  
|COMPREHENSIVE INCOME (LOSS)                                                                                                              |  |                            |         |   |                          |   |       |      |  |   |        |   |  |   |       |  
|Net income (loss)                                                                                                                        |  | $                          | (11,942 | ) |                          | $ | 2,286 |      |  | $ | (6,810 | ) |  | $ | 4,896 |  
|Reclassification adjustment for realized gain on derivative financial instruments, net of income taxes of ($28), ($57), ($59) and
($122) |  |                            | (39     | ) |                          |   | (80   | )    |  |   | (83    | ) |  |   | (171  | )
|Defined benefit plans, net of income taxes of $105, $134, $210 and $262                                                                  |  |                            | 149     |   |                          |   | 188   |      |  |   | 297    |   |  |   | 369   |  
|Unrealized gain (loss) on derivative financial instruments, net of income taxes of $606, ($70), $18 and ($70)                            |  |                            | 855     |   |                          |   | (100  | )    |  |   | 25     |   |  |   | (100  | )
|                                                                                                                                         |  |                            |         |   |                          |   |       |      |  |   |        |   |  |   |       |  
|Total comprehensive income (loss)                                                                                                        |  | $                          | (10,977 | ) |                          | $ | 2,294 |      |  | $ | (6,571 | ) |  | $ | 4,994 |  
|                                                                                                                                         |  |                            |         |   |                          |   |       |      |  |   |        |   |  |   |       |  

See notes to condensed consolidated financial statements.



4



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per-share
amounts)

(Unaudited)



|1. | Summary of Significant Accounting Policies
|-- | ------------------------------------------

Basis of
Presentation

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

The accompanying financial statements are unaudited and have been prepared pursuant to generally accepted accounting principles (GAAP) and
the rules and regulations of the United States Securities and Exchange Commission (SEC). The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. In the opinion of management, the financial statements include all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Companys results of
operations, financial position and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted pursuant to SEC rules and regulations.

The use of accounting principles generally accepted in
the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Actual results could differ from those estimates. D&E believes that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read
in conjunction with D&Es financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. Operating results for the six months ended June 30, 2008 are not necessarily
indicative of the results for the year ended December 31, 2008.

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



|2. | Recent Accounting Pronouncements
|-- | --------------------------------

In September
2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value,
establishes a market-based hierarchy for measuring fair value, and expands disclosures about fair value measurements. In defining fair value, the Statement emphasizes a market-based measurement approach that is based on the assumptions that market
participants would use in pricing an asset or liability. The Statement does not require any new fair value measurements, but does generally apply to other accounting pronouncements that require or permit fair value measurements. In February 2008,
the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157, which delays for one year the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis. Nonfinancial



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per-share
amounts)

(Unaudited)



instruments affected by this deferral include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and
nonfinancial assets acquired and liabilities assumed in a business combination. Effective January 1, 2008, the Company adopted SFAS 157 for financial assets and financial liabilities recognized at fair value on a recurring basis, in particular
its interest rate swap derivatives. The partial adoption of SFAS 157 for these items did not have a material impact on the Companys financial position, results of operations and cash flows. The Company is currently evaluating the impact, if
any, SFAS 157 will have on its nonfinancial assets and liabilities.

The fair value hierarchy established in SFAS 157 prioritizes the
inputs to valuation techniques used in measuring fair value into three levels, as follows:



| |  |  | Level 1: Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with observable market data.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3: Unobservable inputs that represent an entitys own assumptions based about items that market participants would consider in determining fair value.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company measures the fair value of its interest rate swap derivatives using Level 2 (significant other observable)
inputs. See Note 6 for additional information on the fair value measurement of the interest rate swap derivatives.

In February 2007, the
FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits companies to choose to measure most financial assets and liabilities at fair value, with changes
in fair value recorded in earnings. The Company did not elect the fair value option for any of its existing financial instruments as of June 30, 2008 and the Company has not determined whether or not it will elect this option for financial
instruments it may acquire in the future.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141R). SFAS 141R defines a business combination as a transaction or other event in which an acquirer obtains control of one or more businesses. Under SFAS 141R, all business combinations are accounted for by
applying the acquisition method (previously referred to as the purchase method), under which the acquirer measures all identified assets acquired, liabilities assumed, and noncontrolling interests in the acquiree at their acquisition date fair
values. Certain forms of contingent consideration and certain acquired contingencies are also recorded at their acquisition date fair values. SFAS 141R also requires that most acquisition related costs be expensed in the period incurred. SFAS 141R
is effective for the Company in January 2009. The Company is currently evaluating the impact, if any, SFAS 141R will have on its financial position, results of operations and cash flows.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements  an amendment of ARB
No. 51 (SFAS 160). SFAS 160 requires a company to recognize noncontrolling interests (previously referred to as minority interests) as a separate component in the equity section of the consolidated statement of
financial position. It also requires the amount of consolidated net income specifically attributable to the noncontrolling interest be identified in the consolidated



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per-share
amounts)

(Unaudited)



statement of income. SFAS 160 also requires changes in ownership interest to be accounted for similarly, as equity transactions; and when a subsidiary is
deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. SFAS 160 is effective for the Company in January 2009. The Company is
currently evaluating the impact, if any, SFAS 160 will have on its financial position, results of operations and cash flows.

In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 requires a company with derivative instruments to disclose information that should enable financial
statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
and how derivative instruments and related hedged items affect a companys financial position, financial performance, and cash flows. SFAS 161 is effective for the Company in January 2009.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162
identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. SFAS 162 is effective
60 days following the SECs approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The adoption of SFAS
162 is not expected to have a material impact on the Companys financial position, results of operations and cash flows.



|3. | Note Receivable
|-- | ---------------

The Company entered into an
agreement on May 9, 2008 to restructure the terms of a note receivable, which was received as partial consideration for the sale of assets in September 2006. Based on the results of managements assessment of the initial negotiations for a
restructure of the note terms, the Company recorded a reserve of $125 on the note and interest receivable in the fourth quarter of 2007. Although the terms of the restructured note were not finalized at the time, the Company received a $34 payment
on March 11, 2008. As a result of subsequent negotiations of the restructured note terms, the Company recognized an additional reserve of $200 on the note receivable in the first quarter of 2008 based on the restructured terms of the note.
Additionally, effective January 1, 2008, interest income on the note will only be recognized after the note principal balance is fully repaid. The Company will continue to evaluate whether events and circumstances have occurred that indicate
that the note receivable may not be recoverable. The Company has received the scheduled payments due on this note since the date of the restructured agreement.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per-share
amounts)

(Unaudited)



The principal balance of the note at restructuring was $2,116 and the interest rate is fixed at 7%.
Monthly payments, including principal and interest, are due beginning in June 2008 and continuing through January 2014 and are scheduled as follows:



|     |  |              |    
|---- |  | ------------ | ---
|Year |  | AnnualAmount
|2008 |  | $            | 108
|2009 |  |              | 300
|2010 |  |              | 360
|2011 |  |              | 420
|2012 |  |              | 480
|2013 |  |              | 480
|2014 |  |              | 740

The amount due in 2014 includes accrued and unpaid interest of $122 for the period from
June 1, 2007 to December 31, 2007.

The principal balance of the note receivable is reported net of fair value discounts and
reserves in the Companys condensed consolidated balance sheets as follows:



|                              |  |              |       |                  |   |      
|----------------------------- |  | ------------ | ----- | ---------------- | - | -----
|                              |  | June 30,2008 |       | December 31,2007
|Accounts and notes receivable |  | $            | 209   |                  | $ | 317  
|Other long-term assets        |  |              | 1,466 |                  |   | 1,607
|                              |  |              |       |                  |   |      
|                              |  | $            | 1,675 |                  | $ | 1,924
|                              |  |              |       |                  |   |      



|4. | Goodwill and Intangible Assets
|-- | ------------------------------

Goodwill and
intangible assets are primarily the result of D&Es May 24, 2002 acquisition of Conestoga Enterprises, Inc. (CEI), a neighboring rural local telephone company providing integrated communications services in markets
throughout the eastern half of Pennsylvania, including two rural local exchange carriers, Conestoga Telephone and Telegraph Company and Buffalo Valley Telephone Company (CEI RLECs). The CEI RLECs are operating units included in the
Wireline segment and provide communication services to customers in specific franchise areas.

The franchise intangible assets
(franchises) represent the value attributed to the rights of the CEI RLECs to operate as telecommunications carriers in their franchise areas as certified by the Pennsylvania Public Utility Commission (PA PUC) and the
economic advantage of having an established network infrastructure to provide wireline telecommunications services in the specific franchise area. Franchise value largely reflects the (i) reasonable expectation that as a current customer
leaves, a new customer at the same address will likely take its place and (ii) as potential customers inhabit new construction within the RLECs franchise territory, there is a reasonable expectation that they will become customers of the
RLEC. At the acquisition date, the Company recognized the franchises at their estimated fair value and, based on the aforementioned regulatory, competitive, and economic factors, determined that the franchise intangible assets had indefinite lives
in accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS No. 142 requires that goodwill and intangible assets with indefinite lives be subject to at least an annual assessment for
impairment, and between annual tests in certain circumstances, by comparing carrying value to fair value. The franchise assets are evaluated each reporting period to determine whether events and circumstances continue to support an indefinite useful
life.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per-share
amounts)

(Unaudited)



The Company completed its annual impairment evaluation as of April 30, 2008 in conjunction with
the preparation of this Form 10-Q. In evaluating impairment, we estimate the sum of the expected future cash flows derived from such goodwill and intangible assets. The Company considers the effects of competition, the regulatory environment and
current economic factors in its estimates of the expected future cash flows derived from such intangibles. Such evaluations for impairment are significantly impacted by estimates of future cash flows, the market price of our stock and other factors.
Significant judgment is required to determine the fair value, the estimation of future cash flows, the estimation of discount rates and other assumptions. Changes in these estimates and assumptions could have a significant impact on the fair value
of the goodwill and intangible assets. If forecasts and assumptions used in the assessment analysis change in the future, significant impairment charges could result.

The annual impairment evaluation did not indicate an impairment of goodwill. However, a decline in the estimated future regulated cash flows of the CEI RLECs in the Wireline segment indicated that the estimated fair
value of the franchise intangible assets was less than their carrying amount. The reduction in the estimated future regulated cash flows is the result of managements most recent estimates of reductions in access lines, and corresponding
reductions in minutes of use, long distance revenues and network access revenues that are associated with access lines. The Company therefore recognized a non-cash intangible asset impairment charge of $26,200 ($15,329 after tax) in the second
quarter of 2008 to reduce the carrying amount of these assets to their estimated fair value.

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



|                              |  |              |         |   |                  |   |         |  
|----------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                              |  | June 30,2008 |         |   | December 31,2007 |  
|Indefinite-lived intangibles: |  |              |         |   |                  |   |         |  
|FCC licenses                  |  | $            | 828     |   |                  | $ | 828     |  
|Franchises                    |  |              | 78,600  |   |                  |   | 104,800 |  
|Finite-lived intangibles:     |  |              |         |   |                  |   |         |  
|Customer relationships:       |  |              |         |   |                  |   |         |  
|Gross carrying amount         |  |              | 72,006  |   |                  |   | 72,006  |  
|Accumulated amortization      |  |              | (31,909 | ) |                  |   | (29,258 | )
|                              |  |              |         |   |                  |   |         |  
|Net intangible assets         |  | $            | 119,525 |   |                  | $ | 148,376 |  
|                              |  |              |         |   |                  |   |         |  

Aggregate amortization expense related to the finite-lived intangible assets recorded for the
three and six months ended June 30, 2008 and 2007 was $1,326, $1,326, $2,651 and $2,651, respectively.



9



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per-share
amounts)

(Unaudited)



|5. | Long-Term Debt
|-- | --------------

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



|                           |  |                                  |   |  |          |  |              |         |                  |   |        
|-------------------------- |  | -------------------------------- | - |  | -------- |  | ------------ | ------- | ---------------- | - | -------
|                           |  | June 30,2008AverageInterest Rate |   |  | Maturity |  | June 30,2008 |         | December 31,2007
|Senior Secured Term Loan A |  | 4.32                             | % |  | 2011     |  | $            | 28,604  |                  | $ | 29,737 
|Senior Secured Term Loan B |  | 5.98                             | % |  | 2011     |  |              | 136,896 |                  |   | 138,263
|Secured Term Loans         |  | 9.00                             | % |  | 2014     |  |              | 22,750  |                  |   | 24,500 
|Capital lease obligation   |  |                                  |   |  |          |  |              | 1,415   |                  |   | 1,450  
|                           |  |                                  |   |  |          |  |              |         |                  |   |        
|                           |  |                                  |   |  |          |  |              | 189,665 |                  |   | 193,950
|Less current maturities    |  |                                  |   |  |          |  |              | 7,073   |                  |   | 7,071  
|                           |  |                                  |   |  |          |  |              |         |                  |   |        
|Total long-term debt       |  |                                  |   |  |          |  | $            | 182,592 |                  | $ | 186,879
|                           |  |                                  |   |  |          |  |              |         |                  |   |        

In the six months ended June 30, 2008, D&E made voluntary principal prepayments of $750,
of which $133 and $617 were applied to Term Loan A and Term Loan B, respectively. The non-cash intangible asset impairment incurred in the second quarter of 2008 did not have a material effect on the results of the financial covenant calculations
required by our credit facility.

On August 7, 2008, the annual limitation of $10,000 in dividends contained in the Companys
credit facility was amended to also include equity redemptions.



|6. | Derivative Financial Instruments
|-- | --------------------------------

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

At June 30, 2008 and December 31, 2007, the Company had interest rate swap agreements with a
total notional amount of $75,000 and maturity dates in September 2009. The Company recognizes all derivatives on the balance sheet at fair value. The Company measures the fair value of its interest rate swap derivatives on a recurring basis using
Level 2 (significant other observable) inputs as defined by SFAS 157. Changes in the fair value for the effective portion of the gain or loss on a derivative that is designated as, and meets all the required criteria for, a cash flow hedge are
recorded in Accumulated Other Comprehensive Income (Loss) and reclassified into earnings as the underlying hedged items affect earnings. Amounts reclassified into earnings related to interest rate swap agreements are included in interest expense.
The ineffective portion of the gain or loss on a derivative is recognized in earnings within other income or expense. As of June 30, 2008 and December 31, 2007, the fair value of the derivatives was recorded as a liability of $1,801 and
$1,844, respectively. Unrealized net losses of $1,801 ($1,054 net of tax) and $1,844 ($1,078 net of tax) at June 30, 2008 and December 31, 2007, respectively, related to the interest rate swaps were included in Accumulated Other
Comprehensive Income (Loss). No hedge ineffectiveness has been recorded for existing derivative instruments based on calculations in accordance with SFAS No. 133, as amended.



10



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per-share
amounts)

(Unaudited)



On July 29, 2008 the Company entered into an interest rate swap agreement with a total notional
amount of $15,000, a pay rate of 5.32%, an average received rate of 4.55% and a maturity date in July 2010.



|7. | Commitments and Contingencies
|-- | -----------------------------

D&E had a
guarantee agreement (Guarantee Agreement) with subsidiaries of Crown Castle International Corp. (Crown) for lease obligations on wireless tower sites until its termination in the first quarter of 2008. When D&E entered
into an asset purchase agreement with Keystone Wireless LLC (Keystone Wireless) in January 2003, under which Keystone Wireless purchased assets and assumed responsibility for the leases, Crown declined to release D&E from its
guarantee. In the event of a default by Keystone Wireless, D&E continued to guarantee the wireless tower site lease payments, which covered a 10-year period beginning on the commencement date of the lease of each tower. As such, the guarantee
was a continuing guarantee provided on an individual tower site basis. The maximum potential amount of undiscounted future payments that D&E could have been required to make under the guarantee as of December 31, 2007 was $7,685. The
majority of these tower site leases and the Companys guarantee were scheduled to expire between 2011 and 2013. As of December 31, 2007, D&E had recorded a liability for the lease guarantees of $3,200. It has been the Companys
historic policy to recognize release from the risk of guarantees upon expiration or settlement of the guarantee.

In the first quarter of
2008, D&E entered into an agreement with Crown releasing the Company from its obligations under the Guarantee Agreement. In connection with the termination of the Guarantee Agreement, D&E and Crown agreed to additional renewal periods
through June 2066 for a ground lease agreement under which D&E is the lessor. In the first quarter of 2008, the Company recognized non-operating income of $2,904 ($1,699 net of tax) based on the difference between the carrying value of the
guarantee liability of $3,200 and the fair value of the additional renewal periods of $296. The fair value of the additional renewal periods will be deferred and recognized over the original lease term and initial renewal periods that expire in June
2026.



|8. | Earnings per Share
|-- | ------------------

Basic earnings per share
amounts are based on net income or loss divided by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share amounts are based on net income or loss divided by the weighted average number of
shares of common stock outstanding during the period after giving effect to dilutive common stock equivalents from assumed exercises of employee stock options and contingently issuable shares. However, including potential common shares in the
denominator of a diluted per-share computation for continuing operations always will result in an antidilutive per-share amount when there is a loss from continuing operations. Options to purchase 338,027 shares for the three and six months ended
June 30, 2008 were not included in the computation of earnings per share assuming dilution because their effect on earnings per share would have



11



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per-share
amounts)

(Unaudited)



been antidilutive. For the three and six months ended June 30, 2007, there were no options to purchase shares and options to purchase 44,500 shares,
respectively, excluded from the computation of earnings per share assuming dilution.

The following table shows how earnings per share were
computed for the periods presented:



|                                                                                                    |  |                            |         |                          |      |   |        |  |   |        |   |  |   |       
|--------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | ------------------------ | ---- | - | ------ |  | - | ------ | - |  | - | ------
|                                                                                                    |  | Three months endedJune 30, |         | Six months endedJune 30,
|                                                                                                    |  | 2008                       |         |                          | 2007 |   | 2008   |  |   | 2007  
|Net income (loss)                                                                                   |  | $                          | (11,942 | )                        |      | $ | 2,286  |  | $ | (6,810 | ) |  | $ | 4,896 
|                                                                                                    |  |                            |         |                          |      |   |        |  |   |        |   |  |   |       
|Basic earnings (loss) per share:                                                                    |  |                            |         |                          |      |   |        |  |   |        |   |  |   |       
|Weighted average shares outstanding (thousands)                                                     |  |                            | 14,481  |                          |      |   | 14,413 |  |   | 14,472 |   |  |   | 14,406
|                                                                                                    |  |                            |         |                          |      |   |        |  |   |        |   |  |   |       
|Net income (loss) per common share                                                                  |  | $                          | (0.82   | )                        |      | $ | 0.16   |  | $ | (0.47  | ) |  | $ | 0.34  
|                                                                                                    |  |                            |         |                          |      |   |        |  |   |        |   |  |   |       
|Diluted earnings (loss) per share:                                                                  |  |                            |         |                          |      |   |        |  |   |        |   |  |   |       
|Weighted average shares outstanding (thousands)                                                     |  |                            | 14,481  |                          |      |   | 14,413 |  |   | 14,472 |   |  |   | 14,406
|Incremental shares from assumed stock option exercises and contingently issuable shares (thousands) |  |                            |        |                          |      |   | 121    |  |   |       |   |  |   | 105   
|                                                                                                    |  |                            |         |                          |      |   |        |  |   |        |   |  |   |       
|Adjusted weighted average shares outstanding (thousands)                                            |  |                            | 14,481  |                          |      |   | 14,534 |  |   | 14,472 |   |  |   | 14,511
|                                                                                                    |  |                            |         |                          |      |   |        |  |   |        |   |  |   |       
|Net income (loss) per common share                                                                  |  | $                          | (0.82   | )                        |      | $ | 0.16   |  | $ | (0.47  | ) |  | $ | 0.34  
|                                                                                                    |  |                            |         |                          |      |   |        |  |   |        |   |  |   |       



|9. | Stock-Based Compensation
|-- | ------------------------

Stock Options

The grant-date fair value of stock options awarded in the six months ended June 30, was estimated using the Black-Scholes option-pricing model with
the following assumptions:



|                        |  |      |         |   |      |   |         |  
|----------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                        |  | 2008 |         |   | 2007 |  
|Fair value              |  | $    | 3.48    |   |      | $ | 4.28    |  
|Dividend yield          |  |      | 4.41    | % |      |   | 3.86    | %
|Expected life           |  |      | 6 Years |   |      |   | 6 Years |  
|Expected volatility     |  |      | 45.00   | % |      |   | 45.00   | %
|Risk-free interest rate |  |      | 3.03    | % |      |   | 4.61    | %



12



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per-share
amounts)

(Unaudited)



A summary of stock option activity and related information for the six months ended June 30
follows:



|                                   |  |         |  |                              |       |         |         |   |                              |   |      
|---------------------------------- |  | ------- |  | ---------------------------- | ----- | ------- | ------- | - | ---------------------------- | - | -----
|                                   |  | 2008    |  | 2007                        
|                                   |  | Options |  | AverageWeightedExercisePrice |       | Options |         |   | AverageWeightedExercisePrice
|Outstanding at beginning of period |  | 270,352 |  | $                            | 10.60 |         | 221,405 |   |                              | $ | 10.06
|Granted                            |  | 67,675  |  |                              | 11.48 |         | 62,900  |   |                              |   | 12.51
|Exercised                          |  |        |  |                              |      |         | (7,953  | ) |                              |   | 9.00 
|Cancelled                          |  |        |  |                              |      |         | (6,000  | ) |                              |   | 12.51
|                                   |  |         |  |                              |       |         |         |   |                              |   |      
|Outstanding at end of period       |  | 338,027 |  | $                            | 10.77 |         | 270,352 |   |                              | $ | 10.60
|                                   |  |         |  |                              |       |         |         |   |                              |   |      

There were a total of 234,085 stock options exercisable at June 30, 2008 with a
weighted-average exercise price of $10.30. The weighted average remaining contractual term was approximately 5.0 years for stock options outstanding as of June 30, 2008. The total intrinsic value was approximately $66 for stock options
outstanding as of June 30, 2008.

Compensation expense related to stock options in the three and six months ended June 30, 2008
and 2007 was $35, $20, $70 and $41, respectively. The related tax benefits for the three and six months ended June 30, 2008 and 2007 were $14, $8, $29 and $17, respectively. As of June 30, 2008, there was $313 of total unrecognized
compensation expense related to stock options, which is expected to be recognized over the period from July 2008 to December 2010.

Performance
Restricted Shares

A summary of performance restricted share award activity and related information for the six months ended
June 30 follows:



|                                  |  |        |   |      |                                      |       |        |        |   |                                      |   |      
|--------------------------------- |  | ------ | - | ---- | ------------------------------------ | ----- | ------ | ------ | - | ------------------------------------ | - | -----
|                                  |  | 2008   |   | 2007
|                                  |  | Shares |   |      | Weighted-AverageGrant-DateFair Value |       | Shares |        |   | Weighted-AverageGrant-DateFair Value
|Non-vested at beginning of period |  | 51,667 |   |      | $                                    | 9.98  |        | 82,400 |   |                                      | $ | 8.87 
|Granted                           |  | 31,195 |   |      |                                      | 11.48 |        | 20,000 |   |                                      |   | 12.77
|Forfeited                         |  | (2,500 | ) |      |                                      | 3.20  |        | (9,266 | ) |                                      |   | 10.33
|                                  |  |        |   |      |                                      |       |        |        |   |                                      |   |      
|Non-vested at end of period       |  | 80,362 |   |      | $                                    | 10.77 |        | 93,134 |   |                                      | $ | 9.56 
|                                  |  |        |   |      |                                      |       |        |        |   |                                      |   |      

The service period for the grants is three years. During the performance period, each performance
restricted share is equal to one share of common stock for dividend (but not voting) purposes, and the participant is entitled to dividend equivalents, which are reinvested in additional performance restricted shares. At the end of the vesting
period, any performance restricted shares that have been earned will be converted to shares of common stock through the issuance of shares.

The fair value of non-vested performance restricted shares recognized as compensation expense in the three and six months ended June 30, 2008 and 2007 was $65, $53, $131 and $120, respectively. The related tax benefits for the three
and six months ended June 30, 2008 and 2007 were $27, $23, $54 and $50, respectively. As of June 30, 2008, there was $459 of total unrecognized compensation expense related to performance restricted shares, which is expected to be
recognized over the period from July 2008 to December 2010.



13



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per-share
amounts)

(Unaudited)



In the six months ended June 30, 2008, 38,468 vested performance restricted shares, including
dividend equivalents, were converted to shares of common stock. There were no vested performance restricted shares converted to common stock in the six months ended June 30, 2007.

2008 Long-Term Incentive Plan

The shareholders of the Company approved the 2008 Long-Term Incentive
Plan of D&E Communications, Inc. in April 2008. No awards have been granted under this plan as of June 30, 2008. Awards made under predecessor plans will continue to be outstanding in accordance with their terms, but no new awards shall be
made under the predecessor plans.

2001 Stock Compensation Plan and Policy for Non-Employee Directors

The Company issued 8,211 and 4,865 fully-vested common shares with a fair value of $74 and $70 to certain non-employee directors in the six months ended
June 30, 2008 and 2007, respectively. The fair value of shares issued to non-employee directors recognized as expense in the three and six months ended June 30, 2008 and 2007 was $26, $17, $44 and $35, respectively. The related tax
benefits for the three and six months ended June 30, 2008 and 2007 were $11, $7, $18 and $15, respectively.

On May 29, 2008, the
Company amended and restated the Companys 2001 Stock Compensation Plan and Policy for Non-Employee Directors of D&E Communications, Inc. (the Plan). Previously, the Plan only permitted a non-employee director to receive shares
of the Companys common stock with a value equal to one-half of the annual retainer paid to such director for his or her service as a director of the Company. The Plan was amended and restated to (i) allow non-employee directors to elect
to receive all or any fraction of any fees received as directors in the form of shares of the Companys common stock, (ii) provide for elections to be made in a manner that complies with Rule 10b5-1 under the Securities Exchange Act of
1934 and (iii) make certain other amendments.



|10. | Employee Benefit Plans
|--- | ----------------------

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



|                                         |  |                             |        |   |                         |   |      |      |  |   |      |   |  |   |     |  
|---------------------------------------- |  | --------------------------- | ------ | - | ----------------------- | - | ---- | ---- |  | - | ---- | - |  | - | --- | -
|                                         |  | Pension Benefits            |        |   | Postretirement Benefits |  
|                                         |  | Three months ended June 30, |       
|                                         |  | 2008                        |        |   | 2007                    |   |      | 2008 |  |   | 2007 |  
|Components of Net Periodic Benefit Cost: |  |                             |        |   |                         |   |      |      |  |   |      |   |  |   |     |  
|Service cost                             |  | $                           | 390    |   |                         | $ | 410  |      |  | $ |     |   |  | $ |    |  
|Interest cost                            |  |                             | 1,062  |   |                         |   | 993  |      |  |   | 37   |   |  |   | 52  |  
|Expected return on plan assets           |  |                             | (1,045 | ) |                         |   | (919 | )    |  |   | (8   | ) |  |   | (9  | )
|Amortization of prior service cost       |  |                             | (33    | ) |                         |   | (32  | )    |  |   | (40  | ) |  |   | (40 | )
|Amortization of net loss                 |  |                             | 312    |   |                         |   | 357  |      |  |   | 14   |   |  |   | 35  |  
|                                         |  |                             |        |   |                         |   |      |      |  |   |      |   |  |   |     |  
|Net periodic benefit cost                |  | $                           | 686    |   |                         | $ | 809  |      |  | $ | 3    |   |  | $ | 38  |  
|                                         |  |                             |        |   |                         |   |      |      |  |   |      |   |  |   |     |  



14



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per-share
amounts)

(Unaudited)



|                                         |  |                           |        |   |                         |   |        |      |  |   |      |   |  |   |     |  
|---------------------------------------- |  | ------------------------- | ------ | - | ----------------------- | - | ------ | ---- |  | - | ---- | - |  | - | --- | -
|                                         |  | Pension Benefits          |        |   | Postretirement Benefits |  
|                                         |  | Six months ended June 30, |       
|                                         |  | 2008                      |        |   | 2007                    |   |        | 2008 |  |   | 2007 |  
|Components of Net Periodic Benefit Cost: |  |                           |        |   |                         |   |        |      |  |   |      |   |  |   |     |  
|Service cost                             |  | $                         | 780    |   |                         | $ | 819    |      |  | $ | 1    |   |  | $ | 1   |  
|Interest cost                            |  |                           | 2,123  |   |                         |   | 1,985  |      |  |   | 73   |   |  |   | 92  |  
|Expected return on plan assets           |  |                           | (2,089 | ) |                         |   | (1,838 | )    |  |   | (15  | ) |  |   | (16 | )
|Amortization of prior service cost       |  |                           | (66    | ) |                         |   | (63    | )    |  |   | (81  | ) |  |   | (81 | )
|Amortization of net loss                 |  |                           | 625    |   |                         |   | 715    |      |  |   | 29   |   |  |   | 59  |  
|                                         |  |                           |        |   |                         |   |        |      |  |   |      |   |  |   |     |  
|Net periodic benefit cost                |  | $                         | 1,373  |   |                         | $ | 1,618  |      |  | $ | 7    |   |  | $ | 55  |  
|                                         |  |                           |        |   |                         |   |        |      |  |   |      |   |  |   |     |  

During the six months ended June 30, 2008, D&E contributed $2,800 to its defined benefit
pension plans and made no contribution to its other postretirement benefit plan. In July 2008, the Company contributed $3,400 to its defined benefit pension plans. The Company presently anticipates making an additional contribution to its defined
benefit plans in the amount of $100 in the fourth quarter of 2008.



|11. | Business Segment Data
|--- | ---------------------

D&Es business
segments are: Wireline, Systems Integration and Corporate and Other. The measure of profitability that management uses to evaluate performance of its business segments is operating income (loss).

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



|                    |  |                            |        |                            |   |        |                            |   |      |   |  |      |    |   |      |   |         |   |  |   |       |  
|------------------- |  | -------------------------- | ------ | -------------------------- | - | ------ | -------------------------- | - | ---- | - |  | ---- | -- | - | ---- | - | ------- | - |  | - | ----- | -
|                    |  | External Revenues          |        | Intersegment Revenues      |   |        | Operating Income (Loss)    |  
|                    |  | Three months endedJune 30, |        | Three months endedJune 30, |   |        | Three months endedJune 30, |  
|Segment             |  | 2008                       |        | 2007                       |   | 2008   |                            |   | 2007 |   |  | 2008 |    |   | 2007 |  
|Wireline            |  | $                          | 36,221 |                            | $ | 35,858 |                            | $ | 10   |   |  | $    | 6  |   |      | $ | (17,722 | ) |  | $ | 7,149 |  
|Systems Integration |  |                            | 904    |                            |   | 967    |                            |   |     |   |  |      |   |   |      |   | 8       |   |  |   | (446  | )
|Corporate and Other |  |                            | 424    |                            |   | 376    |                            |   |     |   |  |      |   |   |      |   | (375    | ) |  |   | (177  | )
|Eliminations        |  |                            |       |                            |   |       |                            |   | (10  | ) |  |      | (6 | ) |      |   |        |   |  |   |      |  
|                    |  |                            |        |                            |   |        |                            |   |      |   |  |      |    |   |      |   |         |   |  |   |       |  
|Total               |  | $                          | 37,549 |                            | $ | 37,201 |                            | $ |     |   |  | $    |   |   |      | $ | (18,089 | ) |  | $ | 6,526 |  
|                    |  |                            |        |                            |   |        |                            |   |      |   |  |      |    |   |      |   |         |   |  |   |       |  



|                    |  |                          |        |                          |   |        |                          |   |      |   |  |      |     |   |      |   |        |   |  |   |        |  
|------------------- |  | ------------------------ | ------ | ------------------------ | - | ------ | ------------------------ | - | ---- | - |  | ---- | --- | - | ---- | - | ------ | - |  | - | ------ | -
|                    |  | External Revenues        |        | Intersegment Revenues    |   |        | Operating Income (Loss)  |  
|                    |  | Six months endedJune 30, |        | Six months endedJune 30, |   |        | Six months endedJune 30, |  
|Segment             |  | 2008                     |        | 2007                     |   | 2008   |                          |   | 2007 |   |  | 2008 |     |   | 2007 |  
|Wireline            |  | $                        | 72,710 |                          | $ | 72,079 |                          | $ | 19   |   |  | $    | 12  |   |      | $ | (9,090 | ) |  | $ | 13,795 |  
|Systems Integration |  |                          | 1,794  |                          |   | 2,751  |                          |   |     |   |  |      |    |   |      |   | (153   | ) |  |   | (1,358 | )
|Corporate and Other |  |                          | 842    |                          |   | 735    |                          |   |     |   |  |      |    |   |      |   | (724   | ) |  |   | (405   | )
|Eliminations        |  |                          |       |                          |   |       |                          |   | (19  | ) |  |      | (12 | ) |      |   |       |   |  |   |       |  
|                    |  |                          |        |                          |   |        |                          |   |      |   |  |      |     |   |      |   |        |   |  |   |        |  
|Total               |  | $                        | 75,346 |                          | $ | 75,565 |                          | $ |     |   |  | $    |    |   |      | $ | (9,967 | ) |  | $ | 12,032 |  
|                    |  |                          |        |                          |   |        |                          |   |      |   |  |      |     |   |      |   |        |   |  |   |        |  



15



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per-share
amounts)

(Unaudited)



|                    |  |                |          |   |                  |   |          |  
|------------------- |  | -------------- | -------- | - | ---------------- | - | -------- | -
|                    |  | Segment Assets |         
|Segment             |  | June 30,2008   |          |   | December 31,2007 |  
|Wireline            |  | $              | 460,195  |   |                  | $ | 489,806  |  
|Systems Integration |  |                | 1,394    |   |                  |   | 1,780    |  
|Corporate and Other |  |                | 451,034  |   |                  |   | 450,386  |  
|Eliminations        |  |                | (445,570 | ) |                  |   | (440,791 | )
|                    |  |                |          |   |                  |   |          |  
|Total               |  | $              | 467,053  |   |                  | $ | 501,181  |  
|                    |  |                |          |   |                  |   |          |  

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 endedJune 30, |         |   | Six months endedJune 30, |  
|                                                                           |  | 2008                       |         |   | 2007                     |   |        | 2008 |  |   | 2007    |  
|Operating income (loss) from reportable segments                           |  | $                          | (17,714 | ) |                          | $ | 6,703  |      |  | $ | (9,243  | ) |  | $ | 12,437 |  
|Corporate and other operating loss                                         |  |                            | (375    | ) |                          |   | (177   | )    |  |   | (724    | ) |  |   | (405   | )
|Equity in net losses of affiliates                                         |  |                            |        |   |                          |   |       |      |  |   |        |   |  |   | (3     | )
|Interest expense                                                           |  |                            | (2,951  | ) |                          |   | (3,718 | )    |  |   | (6,300  | ) |  |   | (7,454 | )
|Other, net                                                                 |  |                            | 115     |   |                          |   | 400    |      |  |   | 3,533   |   |  |   | 2,119  |  
|                                                                           |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  
|Income (loss) before income taxes and dividends on utility preferred stock |  | $                          | (20,925 | ) |                          | $ | 3,208  |      |  | $ | (12,734 | ) |  | $ | 6,694  |  
|                                                                           |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |        |  



16



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)

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, plans, or similar words or expressions. In particular, statements, express or implied, concerning future operating results,
the ability to generate income or cash flows, or our capital resources or financing plans are forward-looking statements. These forward-looking statements involve certain risks and uncertainties. Our actual performance or achievements may differ
materially from those contemplated by these forward-looking statements. These forward-looking statements involve certain risks and uncertainties, including, but not limited to:



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



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



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



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



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



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



| |  |  | reductions in rates or call volume that generate network access revenues.
| | - |  | -------------------------------------------------------------------------

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

Overview

This Overview is intended to provide a context for the following Managements Discussion and Analysis of
Financial Condition and Results of Operations. Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements, including the
notes thereto, included in this quarterly report on Form 10-Q, as well as our audited consolidated financial statements for the year ended December 31, 2007, as filed on



17



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Form 10-K with the Securities and Exchange Commission (SEC). We have attempted to identify the most important matters on which our management
focuses in evaluating our financial condition and operating performance and the short-term and long-term opportunities, challenges and risks (including material trends and uncertainties) which we face. We also discuss the actions we are taking to
address these opportunities, challenges and risks. The Overview is not intended as a summary of, or a substitute for review of, Managements Discussion and Analysis of Financial Condition and Results of Operations.

Business Segments

Our business segments are
Wireline, Systems Integration and Corporate and Other. The measure of profitability that management uses to evaluate performance of its business segments is operating income (loss) because individual segments are not charged an allocation for such
items as interest and income taxes that are reported below operating income on the statement of operations.

Our Wireline segment includes
three rural local exchange carriers (RLEC), providing services in parts of Berks, Lancaster, Union and smaller portions of five other adjacent counties in Pennsylvania, and a competitive local exchange carrier (CLEC),
providing services in the Lancaster, Reading, Harrisburg, State College, Pottstown, Williamsport and Altoona, Pennsylvania metropolitan areas. We offer our Wireline customers a comprehensive package of communications services, including local
telephone service, enhanced telephone services, network access services, long-distance toll services, dedicated data circuits, and communication services, such as broadband and dial-up Internet access services, business continuity services,
co-location facilities, web-hosting services, directory and other revenue sources such as video and VoIP services.

Our Systems Integration
segment provides business customers with professional data and information technology services, network design, monitoring, security assessments and penetration tests. We offer customers our Managed Services products, which are internal monitoring
(within the customers enterprise), external monitoring (devices outside the customers enterprise) and comprehensive security assessments and management. Our complement of Managed Services fills the needs of our customers by allowing them
to improve reliability, provide higher levels of service and save money through efficient device management and planning.

As of
June 30, 2008, we served 122,461 RLEC access lines, 46,462 CLEC access lines, 39,888 digital subscriber lines (DSL)/high-speed Internet subscribers, 2,683 dial-up Internet access subscribers, 7,425 video subscribers and 1,002
web-hosting customers resulting in total customer connections of 219,921. For the quarter ended June 30, 2008, we generated total consolidated revenues of $37,549, a consolidated operating loss of $18,089 and a consolidated net loss of $11,942.
The operating and net losses were primarily a result of a non-cash intangible asset impairment described below.



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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)



Business Strategy

Our primary business objective is to be a leading, regional broadband integrated communications service provider (ICP). To achieve this objective:



| |  |  | We are continuing to pursue the goal of capturing as many broadband connections to customers homes and businesses as possible. While we intend to continue to
serve our dial-up Internet access customer base, our focus will be to migrate these customers to broadband connections. New broadband customers are being aggressively pursued. Targeting customers with a broadband connection to their home and/or
business is vital for the delivery of Internet Protocol (IP) and web-based application services. We have implemented an IP core network, along with a softswitch platform, to more efficiently support and expand our voice and data
delivery. In conjunction with this network implementation, we will continue to build out our fiber-to-the-node (FTTN) infrastructure to support the future deployment of advanced broadband IP communication services. With the establishment
of an IP core network as part of our circuit switch to IP switch network migration, we expect to meet the demands of our residential and business customers for increased bandwidth and new IP-based multimedia applications. Furthermore, our
Haywire computer support services which allow us to handle new computer set-up, installation, troubleshooting and preventive maintenance services for our customers, is another example of our commitment to our broadband business. Through our
Internet service provider, we also offer our customers the convenience of using a web portal (www.dejazzd.net) that showcases content and technologies like news, weather, shopping, music and more.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are continuing to operate under a disciplined strategy, with the goal to increase our market share in our CLEC markets, primarily to business customers, by
offering competitive communication service packages. We will continue to leverage our state-of-the-art network infrastructure, established reputation, extensive local knowledge and significant operating experience to attempt to gain new customers
and increase our market share in our CLEC markets. Our focus will be on acquiring customers that can be served on our own network facilities and moving existing customers from leased facilities to our own network.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We believe that the convergence and complexity of voice communications and data network technologies has increased the need for businesses to seek a single provider
for all of their communications, information technology, business continuity and co-location needs. We have created a more direct link between our Wireline customer base and the Systems Integration business through joint sales proposals, sales
incentive plans and needs-based proposals that combine Wireline and Systems Integration services for a custom and differentiated offering, including professional information technology services, network security services and network monitoring and
response.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will offer a broad array of advanced communication services that will enable new modes of communication to become a part of the daily home or business
experience. Utilizing softswitch technology, we will deliver advanced applications such as unified communications and integrated application services (e.g., email, voicemail, instant messaging and video conferencing), which will provide customers
with more flexible communication alternatives. We have direct experience with video deployments on two technology platforms  hybrid fiber coaxial in the State College market and ADSL2+ over the copper network in Union County, Pennsylvania. The
deployment of video in other markets remains under review and evaluation.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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)



Business Risks

Business risks affecting our Company include increased competition, the complex and uncertain regulatory environment in the telecommunications industry and our debt financing. Our Annual Report on Form 10-K for the
year ended December 31, 2007 contains a more extensive discussion of risk factors affecting our business.



| |  | Increased competition
|- |  | ---------------------

We have faced,
and expect to continue to face, increased competition as a result of a convergence of technologies and a pro-competitive regulatory environment, which has eroded barriers to entry into our Wireline business segment.

Convergence of technologies

One of the critical drivers in the communications industry today is the convergence of voice and data communication technologies into various IP based platforms, all of which have the potential to provide VoIP, broadband services and IP
video over telephone companies copper and fiber networks, cable companies coaxial and fiber networks, wireless telephone companies wireless networks and satellite companies satellite networks. Although each of the networks
has relative strengths and weaknesses, they are all effectively in competition for the customers communications needs. These developments mean that we are competing for our existing customer base in our Wireline markets with cable TV
companies, wireless telephone companies, satellite communications providers and VoIP providers. The decreases in the number of access lines in our RLEC territories reflect such increased competition, in addition to the elimination of lines by our
customers as they shift to DSL for high-speed Internet access.

We have competitive strengths and weaknesses in the
competition for the customers communications dollar. Cable TV companies are now delivering VoIP services with systems fully capable of providing IP telephony services. We are now offering video over a portion of our fiber-copper network in the
area of Lewisburg, Pennsylvania in competition with the video services offered by incumbent cable companies.

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



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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)



In order to remain competitive and provide the broadband services required for
high-speed data and video, we must continue to invest substantial amounts of capital in our infrastructure. We have installed significant amounts of fiber in our system. We have installed gigabit networks, and believe that we have the
expertise to lead the way to providing ubiquitous broadband access in our markets. We have completed 99% of our requirements under Act 183 of the Pennsylvania Public Utility Code to provide broadband availability in 100% of our RLEC system by
December 31, 2008. In keeping with the foregoing, our 2008 capital budget is approximately $25,000. However, our ability to invest in infrastructure may be limited by our indebtedness of $189,665 as of June 30, 2008 and the covenants
contained in the Companys credit facility.

Pro-competitive regulatory environment

It is basic policy of the Federal Communications Commission (FCC) and the Pennsylvania Public Utility Commission (PA
PUC) to encourage competition in the communications industry. Federal and state regulatory trends toward a more competitive marketplace through reduced competitive entry standards are likely to have negative effects on our business and our
ability to compete. The introduction of new competitors could have a negative effect on our RLEC markets, yet at the same time present operating benefits to our CLEC business.

Legislation enacted in Pennsylvania in the fourth quarter of 2004 provides a continuing limited suspension from certain interconnection
requirements of the Telecommunications Act of 1996 to our Buffalo Valley RLEC through December 31, 2008. Competitors currently have the opportunity to seek the removal of our rural exemption applicable to our other two RLECs in order to have
access to our customers by entering our territory and using our facilities through interconnection agreements to provide local services.

The PA PUC granted CORE Communications, Inc. (CORE) a certificate to provide telecommunications services in the entire rural telephone company territory of Pennsylvania and the Commonwealth Court has
affirmed the PA PUCs decision to grant CORE a CLEC certificate. CORE requested interconnection agreements with other RLECs, including our RLECs. The request was contested and referred to arbitration by the PA PUC. A hearing was held before a
PA PUC Administrative Law Judge in March 2008 in order to allow the parties to submit testimony in regard to issues involving interconnection agreements between CORE and other RLECs, including our RLECs. Legal briefs and final offers by both sides
were filed by April 30, 2008. CORE is unable to operate in our RLEC markets until the PA PUC resolves our interconnection agreement arbitration proceeding and we enter into a PA PUC approved interconnection agreement with them.

Comcast Business Communications (Comcast) filed an application with the PA PUC on January 31, 2008 for certification to
be a facilities-based CLEC in our Conestoga RLEC territory in areas where they currently have facilities to provide cable TV services. Comcast also requested to negotiate an interconnection agreement with our Conestoga RLEC. The negotiation process
between Comcast and our Conestoga RLEC is now in progress.



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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)



In our competitive markets, the incumbent carrier, Verizon, enjoys certain business
advantages, including its size, financial resources, brand recognition and network connection to virtually all of our customers and potential customers in those areas. Similarly, in areas where we do or may provide video services, the incumbent
cable operators enjoy certain business advantages, including their size, financial resources, brand recognition and ownership of or superior access to programming.



| |  | Complex and uncertain regulatory environment
|- |  | --------------------------------------------

The United States communications industry is subject to federal, state and local 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.

Prices for our RLECs interstate services, consisting
primarily of subscriber line charges and access charges for interstate and international toll calls, are regulated by the FCC based on the average schedule formulas proposed by the National Exchange Carrier Association, Inc.
(NECA). If the FCC would disallow RLECs from receiving compensation for interstate services based on the NECA average schedule formulas, our RLECs could experience a change in revenues. Changes in the average schedule formula amounts
developed by NECA and implemented annually in July will impact our RLECs future revenues. The average schedule settlement formulas, which were effective July 1, 2006 and July 1, 2007, included a two-year transition period for
implementing the new calculations. We estimate that the total combined effect of the July 2006 and July 2007 changes in NECA average schedule settlement formulas on consolidated network access revenues, based on 2007 access lines and minutes of use,
will be a reduction of approximately $450 during the remaining six months of 2008, and further reductions of approximately $700 during fiscal year 2009 and $100 during fiscal year 2010. NECA implemented new average schedule formulas that became
effective July 1, 2008. We estimate that the July 2008 changes to these formulas, based on current access lines and minutes of use, will reduce annual consolidated network access revenues by approximately $100.

The FCC is reviewing potential modifications to the current systems of interstate network access rates that telecommunication companies charge each other
for network access. The FCC is considering comments from the public on the Missoula Plan, a proposal that was developed by industry representatives. The Missoula Plan, if adopted, would have a significant impact on the intercarrier compensation
revenues and the federal Universal Service Fund (USF) funding that our RLECs receive, as well as the intercarrier compensation expense that they incur. The FCC has also received other proposals to reform intercarrier compensation.

The federal USF program is under legislative and industry scrutiny as a result of the growth in the fund and changes within the
telecommunications industry. The primary change is the increase in the number of eligible telecommunications carriers (ETCs) receiving compensation from the USF. There are several FCC proceedings underway that are likely to change the
way the universal service programs are funded and the way universal service funds are distributed. The Federal/State Joint Board on Universal Service (Joint Board) released a recommended decision to the FCC to impose an interim cap on
the amount of high-cost support that competitive ETCs (CETCs) receive. On May 1, 2008, the FCC adopted an interim cap on payments to CETCs. The FCC capped total annual support for CETCs at the level they were eligible to receive in
each state during March 2008, on an annualized basis. 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)



Joint Board also issued a subsequent recommended decision to the FCC to establish a provider of last resort fund, a mobility fund and a broadband fund. Each
fund would have a separate distribution and allocation mechanism. We cannot estimate at this time what impact the Joint Boards recommended changes would have on our RLECs. Finally, the FCC is considering proposals regarding the USF
contribution methodology, which would change the type of service providers required to contribute to the fund and the basis on which they would contribute. Until the FCC adopts a specific contribution methodology we cannot estimate the impact a
change in carrier contributions would have on our companies.

The PA PUC has a proceeding open to consider changes in intrastate switched
access rates and the Pennsylvania Universal Service Fund (PA USF), along with the potential impact on local service rates, for rural local exchange carriers in Pennsylvania. The PA PUC granted a further stay of this proceeding on
April 9, 2008, but voted to open the proceeding for the limited purpose of re-examining whether the current residential local service rate cap of eighteen dollars for RLECs is appropriate, and whether the PA USF can be utilized by the RLECs for
revenue support if their annual state regulatory price-cap guideline (Chapter 30) rate increases result in rates that exceed the cap. Until the PA PUC adopts specific proposals, it is impossible to predict how much the proposed changes
will affect our business and whether they will be favorable or unfavorable.

Our RLECs filed for changes in local and intrastate access
rates to be effective July 1, 2006, in accordance with our Chapter 30 plan. The PA PUC identified a minor change to our filing, but allowed the new rates to go into effect on July 1, 2006 as modified for the change. Verizon, however, filed
comments against our increase in intrastate access rates and requested that the PA PUC investigate our ability to increase access rates. On July 11, 2007, the PA PUC rescinded its June 2006 order allowing the increase in our access rates. We
filed a request for reconsideration and clarification of the order on a number of issues and proposed an increase in local service rates for one of our RLECs retroactive to November 15, 2006. From November 9, 2006 through July 31,
2007, we continued to bill carriers at the July 1, 2006 rates. However, we recorded a reserve against amounts that were collected from carriers related to the rate increases that were challenged by Verizon.

On November 29, 2007, the PA PUC granted our request to increase local rates retroactive to November 15, 2006 but denied our request to collect
the amounts in excess of the existing caps for residential and business single party services from the PA USF. On December 17, 2007, the Office of Consumer Advocate (OCA) filed a petition for reconsideration, claiming the PA PUC
erred in its ruling that rates could be increased above the existing residential caps established by the PA PUC. We filed in support of the petition while Verizon filed opposition to the petition. The PA PUC granted the petition for review. On
April 9, 2008, the PA PUC issued an Opinion and Order which denied the OCAs petition and ordered our RLECs to issue refunds, as required by the July 11, 2007 Order, within 30 days from the date of entry of the Opinion and Order. We
promptly issued refunds of $1,020 in April 2008. On May 9, 2008, we filed an appeal in Commonwealth Court, seeking to overturn the PA PUCs decisions denying our requests to increase rates or, in the alternative, increase our compensation
from the PA USF instead of increasing residential rates above the cap. On May 23, 2008, the OCA filed a cross appeal in Commonwealth Court, agreeing with our position that we should receive compensation from the PA USF instead of increasing
residential local rates above the residential rate cap. We expect the case will be heard later this year but cannot predict what the outcome of this appeal will be.



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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)



| |  | Debt financing
|- |  | --------------

We had indebtedness
of $189,665, including current maturities and a capital lease obligation of $1,415, at June 30, 2008. Our indebtedness could restrict our operations because:



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



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



| |  |  | The level of indebtedness will make us more vulnerable to economic or industry downturns, and our debt service obligations increase our vulnerability to competitive
pressures.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The non-cash intangible asset impairment incurred in the second quarter of 2008 did not have a material
effect on the results of the financial covenant calculations required by our credit facilities.



| |  | Conclusion
|- |  | ----------

The foregoing
opportunities and risks require management to attempt to balance several aspects of our business. Our Wireline segment is the primary provider of cash flow both to pursue our business plan to be a leading, regional broadband ICP and to provide a
current return on investment to our shareholders in the form of a dividend. However, because our resources are limited, and the manner in which the communications industry will develop is uncertain, both in terms of technology and competition, we
may not be able to pursue every possible avenue of development, and critical decisions will need to be made among various alternatives. These decisions can be made more difficult by our desire to balance our short-term goals of maintaining our
Wireline business and dividend return and our long-term goal of providing voice, data and video services on the next generation, IP-based network. Maintaining our dividend payout may be challenging due to the capital requirements of our business
strategy, payments of principal and interest on our long-term debt and restrictions under our financing facilities, the latter including an annual limitation of $10,000 in dividends and equity redemptions and the requirement to remain in compliance
with financial covenants.



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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 tables are a summary of our operating results by segment for the three and six months ended June 30, 2008 and 2007.



|                              |  |          |         |   |                    |   |       |                    |  |   |              |   |  |              |     |   |  |   |         |  
|----------------------------- |  | -------- | ------- | - | ------------------ | - | ----- | ------------------ |  | - | ------------ | - |  | ------------ | --- | - |  | - | ------- | -
|Three months ended            |  | Wireline |         |   | SystemsIntegration |   |       | Corporateand Other |  |   | Eliminations |   |  | TotalCompany |    
|June 30, 2008                 |  |          |         |   |                    |   |       |                    |  |   |              |   |  |              |     |   |  |   |         |  
|Revenues  External           |  | $        | 36,221  |   |                    | $ | 904   |                    |  | $ | 424          |   |  | $            |    |   |  | $ | 37,549  |  
|Revenues  Intercompany       |  |          | 10      |   |                    |   |      |                    |  |   |             |   |  |              | (10 | ) |  |   |        |  
|                              |  |          |         |   |                    |   |       |                    |  |   |              |   |  |              |     |   |  |   |         |  
|Total Revenues                |  |          | 36,231  |   |                    |   | 904   |                    |  |   | 424          |   |  |              | (10 | ) |  |   | 37,549  |  
|                              |  |          |         |   |                    |   |       |                    |  |   |              |   |  |              |     |   |  |   |         |  
|Depreciation and Amortization |  |          | 7,527   |   |                    |   | 42    |                    |  |   | 199          |   |  |              |    |   |  |   | 7,768   |  
|Intangible Asset Impairment   |  |          | 26,200  |   |                    |   |      |                    |  |   |             |   |  |              |    |   |  |   | 26,200  |  
|Other Operating Expenses      |  |          | 20,226  |   |                    |   | 854   |                    |  |   | 600          |   |  |              | (10 | ) |  |   | 21,670  |  
|                              |  |          |         |   |                    |   |       |                    |  |   |              |   |  |              |     |   |  |   |         |  
|Total Operating Expenses      |  |          | 53,953  |   |                    |   | 896   |                    |  |   | 799          |   |  |              | (10 | ) |  |   | 55,638  |  
|                              |  |          |         |   |                    |   |       |                    |  |   |              |   |  |              |     |   |  |   |         |  
|Operating Income (Loss)       |  | $        | (17,722 | ) |                    | $ | 8     |                    |  | $ | (375         | ) |  | $            |    |   |  | $ | (18,089 | )
|                              |  |          |         |   |                    |   |       |                    |  |   |              |   |  |              |     |   |  |   |         |  
|June 30, 2007                 |  |          |         |   |                    |   |       |                    |  |   |              |   |  |              |     |   |  |   |         |  
|Revenues  External           |  | $        | 35,858  |   |                    | $ | 967   |                    |  | $ | 376          |   |  | $            |    |   |  | $ | 37,201  |  
|Revenues  Intercompany       |  |          | 6       |   |                    |   |      |                    |  |   |             |   |  |              | (6  | ) |  |   |        |  
|                              |  |          |         |   |                    |   |       |                    |  |   |              |   |  |              |     |   |  |   |         |  
|Total Revenues                |  |          | 35,864  |   |                    |   | 967   |                    |  |   | 376          |   |  |              | (6  | ) |  |   | 37,201  |  
|                              |  |          |         |   |                    |   |       |                    |  |   |              |   |  |              |     |   |  |   |         |  
|Depreciation and Amortization |  |          | 8,980   |   |                    |   | 48    |                    |  |   | 182          |   |  |              |    |   |  |   | 9,210   |  
|Other Operating Expenses      |  |          | 19,735  |   |                    |   | 1,365 |                    |  |   | 371          |   |  |              | (6  | ) |  |   | 21,465  |  
|                              |  |          |         |   |                    |   |       |                    |  |   |              |   |  |              |     |   |  |   |         |  
|Total Operating Expenses      |  |          | 28,715  |   |                    |   | 1,413 |                    |  |   | 553          |   |  |              | (6  | ) |  |   | 30,675  |  
|                              |  |          |         |   |                    |   |       |                    |  |   |              |   |  |              |     |   |  |   |         |  
|Operating Income (Loss)       |  | $        | 7,149   |   |                    | $ | (446  | )                  |  | $ | (177         | ) |  | $            |    |   |  | $ | 6,526   |  
|                              |  |          |         |   |                    |   |       |                    |  |   |              |   |  |              |     |   |  |   |         |  



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



|                              |  |          |        |   |                    |   |        |                    |  |   |              |   |  |              |     |   |  |   |        |  
|----------------------------- |  | -------- | ------ | - | ------------------ | - | ------ | ------------------ |  | - | ------------ | - |  | ------------ | --- | - |  | - | ------ | -
|Six months ended              |  | Wireline |        |   | SystemsIntegration |   |        | Corporateand Other |  |   | Eliminations |   |  | TotalCompany |    
|June 30, 2008                 |  |          |        |   |                    |   |        |                    |  |   |              |   |  |              |     |   |  |   |        |  
|Revenues  External           |  | $        | 72,710 |   |                    | $ | 1,794  |                    |  | $ | 842          |   |  | $            |    |   |  | $ | 75,346 |  
|Revenues  Intercompany       |  |          | 19     |   |                    |   |       |                    |  |   |             |   |  |              | (19 | ) |  |   |       |  
|                              |  |          |        |   |                    |   |        |                    |  |   |              |   |  |              |     |   |  |   |        |  
|Total Revenues                |  |          | 72,729 |   |                    |   | 1,794  |                    |  |   | 842          |   |  |              | (19 | ) |  |   | 75,346 |  
|                              |  |          |        |   |                    |   |        |                    |  |   |              |   |  |              |     |   |  |   |        |  
|Depreciation and Amortization |  |          | 15,141 |   |                    |   | 87     |                    |  |   | 388          |   |  |              |    |   |  |   | 15,616 |  
|Intangible Asset Impairment   |  |          | 26,200 |   |                    |   |       |                    |  |   |             |   |  |              |    |   |  |   | 26,200 |  
|Other Operating Expenses      |  |          | 40,478 |   |                    |   | 1,860  |                    |  |   | 1,178        |   |  |              | (19 | ) |  |   | 43,497 |  
|                              |  |          |        |   |                    |   |        |                    |  |   |              |   |  |              |     |   |  |   |        |  
|Total Operating Expenses      |  |          | 81,819 |   |                    |   | 1,947  |                    |  |   | 1,566        |   |  |              | (19 | ) |  |   | 85,313 |  
|                              |  |          |        |   |                    |   |        |                    |  |   |              |   |  |              |     |   |  |   |        |  
|Operating Income (Loss)       |  | $        | (9,090 | ) |                    | $ | (153   | )                  |  | $ | (724         | ) |  | $            |    |   |  | $ | (9,967 | )
|                              |  |          |        |   |                    |   |        |                    |  |   |              |   |  |              |     |   |  |   |        |  
|June 30, 2007                 |  |          |        |   |                    |   |        |                    |  |   |              |   |  |              |     |   |  |   |        |  
|Revenues  External           |  | $        | 72,079 |   |                    | $ | 2,751  |                    |  | $ | 735          |   |  | $            |    |   |  | $ | 75,565 |  
|Revenues  Intercompany       |  |          | 12     |   |                    |   |       |                    |  |   |             |   |  |              | (12 | ) |  |   |       |  
|                              |  |          |        |   |                    |   |        |                    |  |   |              |   |  |              |     |   |  |   |        |  
|Total Revenues                |  |          | 72,091 |   |                    |   | 2,751  |                    |  |   | 735          |   |  |              | (12 | ) |  |   | 75,565 |  
|                              |  |          |        |   |                    |   |        |                    |  |   |              |   |  |              |     |   |  |   |        |  
|Depreciation and Amortization |  |          | 18,172 |   |                    |   | 177    |                    |  |   | 369          |   |  |              |    |   |  |   | 18,718 |  
|Other Operating Expenses      |  |          | 40,124 |   |                    |   | 3,932  |                    |  |   | 771          |   |  |              | (12 | ) |  |   | 44,815 |  
|                              |  |          |        |   |                    |   |        |                    |  |   |              |   |  |              |     |   |  |   |        |  
|Total Operating Expenses      |  |          | 58,296 |   |                    |   | 4,109  |                    |  |   | 1,140        |   |  |              | (12 | ) |  |   | 63,533 |  
|                              |  |          |        |   |                    |   |        |                    |  |   |              |   |  |              |     |   |  |   |        |  
|Operating Income (Loss)       |  | $        | 13,795 |   |                    | $ | (1,358 | )                  |  | $ | (405         | ) |  | $            |    |   |  | $ | 12,032 |  
|                              |  |          |        |   |                    |   |        |                    |  |   |              |   |  |              |     |   |  |   |        |  

Our Wireline revenue is derived primarily from local telephone service, including enhanced
telephone services, network access charges, long distance toll service, dedicated data circuits, and communication services, such as broadband and dial-up Internet access services, business continuity services, co-location facilities, web-hosting
services, directory and other revenue sources such as video and VoIP services. Our Systems Integration revenue is derived from sales of services and equipment that support the design, implementation and maintenance of local and wide area networks.
Our offerings include wireless networking solutions, security services, consultative information technology services and managed services.

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
Wireline segment incurs costs related to network access charges, leased network facilities associated with providing local telephone service to CLEC customers, leased network facilities costs for our broadband and dial-up Internet access services,
and other operations expenses such as network switching expense, engineering and outside plant costs. Our Systems Integration segment incurs expenses primarily related to wages and employee benefit costs, and equipment and materials used in the
provision of our services and sales of computer equipment.

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



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



We completed our annual impairment evaluation of goodwill and intangible assets as of April 30,
2008 in conjunction with the preparation of this Form 10-Q. A decline in the estimated future regulated cash flows of our Conestoga and Buffalo Valley RLECs in the Wireline segment indicated that there was an impairment of the franchise intangible
assets. The reduction in the estimated future regulated cash flows is the result of managements most recent estimates of reductions in access lines, and corresponding reductions in minutes of use, long distance revenues and network access
revenues that are associated with access lines. Therefore, we recognized a non-cash intangible asset impairment charge of $26,200 ($15,329 after tax) in the second quarter of 2008. The key factors that must be estimated to determine the fair value
of intangible assets include the estimation of future cash flows, the estimation of discount rates and long-term growth rates and other assumptions. In evaluating impairment, we consider the effects of competition, the regulatory environment and
current economic factors in our estimates of the expected future cash flows derived from such intangibles. The annual impairment evaluation did not indicate an impairment of goodwill. Note 4 to the Condensed Consolidated Financial Statements in Part
1, Item 1 of this Form 10-Q contains a more extensive discussion on the non-cash intangible asset impairment.

In the first quarter of
2008, we entered into an agreement with Crown Castle International Corp. (Crown) releasing us from our obligations under a guarantee agreement with Crown for lease obligations of wireless tower sites of Keystone Wireless LLC. In
connection with the termination of the lease guarantee, we agreed to additional renewal periods through June 2066 for a ground lease agreement with Crown as lessee and D&E as lessor. In the first quarter of 2008, we recognized a gain of $2,904
based on the difference between the carrying value of the guarantee liability of $3,200 and the fair value of the additional renewal periods of $296. The fair value of the additional renewal periods will be deferred and recognized over the original
lease term and initial renewal periods that expire in June 2026.

We entered into an agreement on May 9, 2008 to restructure the terms
of a note receivable, which we received as partial consideration for the sale of assets in September 2006. Based on the results of managements assessment of the initial negotiations for a restructure of the note terms, we recorded a reserve of
$125 on the note and interest receivable in the fourth quarter of 2007. Although the terms of the restructured note were not finalized at the time, we received a $34 payment on March 11, 2008. As a result of subsequent negotiations of the
restructured note terms, we recognized an additional reserve of $200 on the note receivable in the first quarter of 2008 based on the restructured terms of the note. Additionally, effective January 1, 2008, interest income on the note will only
be recognized after the note principal balance is fully repaid. We will continue to evaluate whether events and circumstances have occurred that indicate that the note receivable may not be recoverable. We have received the scheduled payments due on
this note since the date of the restructured agreement.

Consolidated Operations

Three months ended June 30, 2008 compared to three months ended June 30, 2007

Consolidated revenues increased $348, or 0.9%, to $37,549 for the quarter ended June 30, 2008, from $37,201 for the same period in 2007. Wireline
revenue increased $367 while Systems Integration revenue declined slightly. These revenue changes are more fully described in the Wireline and Systems Integration segment results.



27



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Consolidated operating expenses increased $24,963, or 81.4%, to $55,638 for the quarter ended
June 30, 2008, from $30,675 for the same period in 2007. In the second quarter of 2008, a non-cash intangible asset impairment of $26,200 was recognized in the Wireline segment as described above. Depreciation and amortization in the Wireline
segment decreased $1,453 primarily due to a July 2007 revision in the estimated useful lives of certain fixed assets to update the composite depreciation rates for one of our regulated telephone properties and certain fixed assets becoming fully
depreciated in June 2007. Other Wireline operating expenses increased $491 and Systems Integration operating expenses decreased by $517. These expense changes are more fully described in the Wireline and Systems Integration segment results.
Corporate and Other expenses increased $246 primarily due to new services offered to customers, including our Haywire computer support services and on-demand services provided by our Internet service provider.

Consolidated operating income (loss) decreased $24,615, to an operating loss of $18,089 for the second quarter of 2008, from an operating income of
$6,526 in the same period of 2007. Operating income (loss) as a percentage of revenue was (48.2)% in the second quarter of 2008, compared to 17.5% in the same period of 2007. The primary reason for the decrease in operating income was the non-cash
intangible asset impairment.

Other income (expense) was a net expense of $2,836 in the second quarter of 2008, compared to a net expense
of $3,318 for the same period in 2007. Interest expense decreased to $2,951 in the second quarter of 2008, compared to $3,718 in the same period of 2007, as a result of reductions in debt and decreases in short-term interest rates. Other income
decreased to $115 in 2008 compared to $400 in 2007. Interest income earned on notes receivable declined $195 due to the payoff of one note in November 2007 and the termination of interest income recognition on another note described above. Interest
income on cash and temporary investments decreased approximately $57 due to a decline in interest rates.

Income taxes were a benefit of
$9,000 in the second quarter of 2008, compared to an expense of $905 for the same period in 2007. The effective income tax rate of 43.0% for the second quarter of 2008 is higher than the federal statutory rate by approximately 8.0%. State income
taxes, net of federal tax benefits, resulted in a 8.0% increase in the effective income tax rate for the second quarter of 2008, primarily as result of the deferred state tax benefit recognized on the non-cash intangible asset impairment described
above. The effective income tax rate of 28.2% for the second quarter of 2007 is lower than the federal statutory rate by approximately 6.8% primarily due to the reversal of temporary book to tax differences providing deferred state income tax
benefits and no corresponding current state income tax expense.

Net income (loss) was a loss of $11,942, or $0.82 per share, in the second
quarter of 2008 compared to net income of $2,286, or $0.16 per share, in the second quarter of 2007. The primary reason for the decrease was the operating income decrease of $24,615, partially offset by the decrease in income taxes of $9,905.



28



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Six months ended June 30, 2008 compared to six months ended June 30, 2007

Consolidated revenues decreased $219, or 0.3%, to $75,346 for the six months ended June 30, 2008, from $75,565 for the same period in
2007. The primary reason for the decrease was a reduction in Systems Integration revenue of $957 due mainly to the March 31, 2007 expiration of a contract with a retail services customer. Wireline directory revenue decreased $559 while all
other Wireline revenue increased $1,197. These revenue changes are more fully described in the Wireline and Systems Integration segment results.

Consolidated operating expenses increased $21,780, or 34.3%, to $85,313 for the six months ended June 30, 2008, from $63,533 for the same period in 2007. In the second quarter of 2008, a non-cash intangible asset impairment of $26,200
was recognized in the Wireline segment as described above. Depreciation and amortization in the Wireline segment decreased $3,031 primarily due to a July 2007 revision in the estimated useful lives of certain fixed assets to update the composite
depreciation rates for one of our regulated telephone properties and certain fixed assets becoming fully depreciated in June 2007. Other Wireline operating expenses increased $354 and Systems Integration operating expenses decreased by $2,162. These
expense changes are more fully described in the Wireline and Systems Integration segment results. Corporate and Other expenses increased $426 primarily due to new services offered to customers, including our Haywire computer support services
and on-demand services provided by our Internet service provider.

Consolidated operating income (loss) decreased $21,999, to an operating
loss of $9,967, for the first six months of 2008, from an operating income of $12,032 in the same period of 2007. Operating income (loss) as a percentage of revenue was (13.2)% in the first six months of 2008, compared to 15.9% in the same period of
2007. The primary reason for the decrease in operating income was the non-cash intangible asset impairment, partially offset by the decrease in depreciation and amortization expense.

Other income (expense) was a net expense of $2,767 in the first six months of 2008, compared to a net expense of $5,338 for the same period in 2007.
Interest expense decreased to $6,300 in the first six months of 2008, compared to $7,454 in the same period of 2007, as a result of reductions in debt and decreases in short-term interest rates. Other income increased $1,417, to $3,533, in 2008
compared to $2,116 in 2007. In the first six months of 2008, we recorded $2,904 of income from the termination of a lease guarantee and a $200 reserve on a note receivable as described above. Interest income on cash and temporary investments
decreased approximately $100 due to a decline in interest rates. In the first six months of 2007, we recorded income of $588 from proceeds of a key-person life insurance policy, in excess of the cash surrender value, of which the Company was the
named beneficiary. Other income for the first six months of 2007 included $584 of interest income and principal repayments collected on the note received from the sale of assets of Conestoga Wireless, which was paid in full in the fourth quarter of
2007. We recognized income upon collection of the note principal and interest as this note receivable was from a highly leveraged entity, and the business sold had not generated positive cash flows prior to its sale. Therefore, the note receivable
was fully reserved on our balance sheet. In the first six months of 2007, we recorded interest income of $115 on a note receivable for which we discontinued recognition of interest income in 2008 as described above.



29



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Income taxes were a benefit of $5,957 in the first six months of 2008, compared to an expense of
$1,765 for the same period in 2007. The effective income tax rate of 46.8% for the first six months of 2008 is higher than the federal statutory rate by approximately 11.8%. State income taxes, net of federal tax benefits, resulted in a 11.9%
increase in the effective income tax rate for the first six months of 2008, primarily as result of the deferred state tax benefit recognized on the non-cash intangible asset impairment described above, partially offset by the deferred state tax
expense recognized on the termination of the lease guarantee described above. The effective income tax rate of 26.4% for the first six months of 2007 is lower than the federal statutory rate by approximately 8.6%. In the first six months of 2007, a
permanent book to tax difference of $519 on the key-person life insurance gain resulted in a 2.5% reduction in the effective tax rate. The effective income tax rate for the first six months of 2007 is also lower than the federal statutory rate due
to the reversal of temporary book to tax differences providing deferred state income tax benefits and no corresponding current state income tax expense.

Net income (loss) was a loss of $6,810, or $0.47 per share, in the first six months of 2008 compared to a net income of $4,896, or $0.34 per share, in the first six months of 2007. The primary reasons for the decrease
in net income were the operating income decrease of $21,999, primarily as a result on the non-cash asset intangible asset impairment, partially offset by a decrease in interest expense of $1,154, an increase in other income of $1,417 and a reduction
in income taxes of $7,722.

Wireline Segment Results



|                                |  |                             |         |   |      |   |         |  |   |          |   |  |        |  
|------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- |  | - | -------- | - |  | ------ | -
|                                |  | Three months ended June 30, |        
|                                |  | 2008                        |         |   | 2007 |   | Change  |  |   | % Change |  
|Revenues:                       |  |                             |         |   |      |   |         |  |   |          |   |  |        |  
|Local Telephone Service         |  | $                           | 12,470  |   |      | $ | 12,108  |  | $ | 362      |   |  | 3.0    |  
|Network Access                  |  |                             | 10,527  |   |      |   | 11,060  |  |   | (533     | ) |  | (4.8   | )
|Long Distance                   |  |                             | 4,938   |   |      |   | 5,257   |  |   | (319     | ) |  | (6.1   | )
|Communication Services          |  |                             | 6,398   |   |      |   | 5,699   |  |   | 699      |   |  | 12.3   |  
|Directory                       |  |                             | 1,103   |   |      |   | 1,233   |  |   | (130     | ) |  | (10.5  | )
|Other                           |  |                             | 795     |   |      |   | 507     |  |   | 288      |   |  | 56.8   |  
|                                |  |                             |         |   |      |   |         |  |   |          |   |  |        |  
|Total Revenues                  |  |                             | 36,231  |   |      |   | 35,864  |  |   | 367      |   |  | 1.0    |  
|                                |  |                             |         |   |      |   |         |  |   |          |   |  |        |  
|Depreciation and Amortization   |  |                             | 7,527   |   |      |   | 8,980   |  |   | (1,453   | ) |  | (16.2  | )
|Intangible Asset Impairment     |  |                             | 26,200  |   |      |   |        |  |   | 26,200   |   |  | 100.0  |  
|Other Operating Expenses        |  |                             | 20,226  |   |      |   | 19,735  |  |   | 491      |   |  | 2.5    |  
|                                |  |                             |         |   |      |   |         |  |   |          |   |  |        |  
|Total Operating Expenses        |  |                             | 53,953  |   |      |   | 28,715  |  |   | 25,238   |   |  | 87.9   |  
|                                |  |                             |         |   |      |   |         |  |   |          |   |  |        |  
|Operating Income (Loss)         |  | $                           | (17,722 | ) |      | $ | 7,149   |  | $ | (24,871  | ) |  | (347.9 | )
|                                |  |                             |         |   |      |   |         |  |   |          |   |  |        |  
|Customer Connections at June 30 |  |                             |         |   |      |   |         |  |   |          |   |  |        |  
|RLEC Access Lines               |  |                             | 122,461 |   |      |   | 127,278 |  |   | (4,817   | ) |  | (3.8   | )
|CLEC Access Lines               |  |                             | 46,462  |   |      |   | 44,891  |  |   | 1,571    |   |  | 3.5    |  
|DSL/High-Speed Internet         |  |                             | 39,888  |   |      |   | 34,078  |  |   | 5,810    |   |  | 17.0   |  
|Dial-up Access                  |  |                             | 2,683   |   |      |   | 4,425   |  |   | (1,742   | ) |  | (39.4  | )
|Video                           |  |                             | 7,425   |   |      |   | 6,765   |  |   | 660      |   |  | 9.8    |  
|Web-hosting                     |  |                             | 1,002   |   |      |   | 989     |  |   | 13       |   |  | 1.3    |  
|                                |  |                             |         |   |      |   |         |  |   |          |   |  |        |  
|Total                           |  |                             | 219,921 |   |      |   | 218,426 |  |   | 1,495    |   |  | 0.7    |  
|                                |  |                             |         |   |      |   |         |  |   |          |   |  |        |  



30



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Local telephone service revenue increased primarily due to additional custom calling feature revenue
mainly as a result of a July 1, 2007 price increase and increased local private network circuits. Network access revenue declined primarily due to lower NECA settlements of $470, lower subscriber line charges of $142 as a result of the decline
in RLEC access lines and a revenue decrease of $450, primarily due to lower minutes of use, partially offset by a revenue increase of approximately $389 due to a change in the routing of long distance calls and a special network access revenue
increase of $140 due to a higher average rate per circuit. Long distance revenues decreased primarily due to a reduction in the average rate per minute of use. Communication services revenue increased primarily from additional DSL/high-speed
Internet revenue of $592 attributable to subscriber growth, co-location and web-hosting revenue of $104 and video revenue of $64, partially offset by a reduction in dial-up Internet revenue of $89. Directory revenue decreased primarily as the result
of three of our four directories being published under the contract described below. Other revenue increased due to data cabling projects completed for customers.

Depreciation and amortization expense decreased due to a July 2007 revision in the estimated useful lives of certain fixed assets to update the composite depreciation rates for one of our regulated telephone companies
and certain fixed assets becoming fully depreciated in the second quarter of 2007, partially offset by the depreciation expense on fixed assets placed in service in the current year. A non-cash intangible asset impairment of $26,200 was recognized
in the second quarter of 2008 as described above. Subcontractor expense increased $122 due to the data cabling projects completed in the second quarter of 2008. Network access expense increased $245 primarily due to a change in the routing of long
distance calls, which increased the average rate per minute of use and minutes of use. Operating taxes increased $97 as a result of a sales tax refund received in April 2007. Employee benefits decreased $122 due to lower health insurance premiums
and pension expense.



31



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



|                                |  |                           |         |   |      |   |         |  |   |          |   |  |        |  
|------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- |  | - | -------- | - |  | ------ | -
|                                |  | Six months ended June 30, |        
|                                |  | 2008                      |         |   | 2007 |   | Change  |  |   | % Change |  
|Revenues:                       |  |                           |         |   |      |   |         |  |   |          |   |  |        |  
|Local Telephone Service         |  | $                         | 24,908  |   |      | $ | 24,174  |  | $ | 734      |   |  | 3.0    |  
|Network Access                  |  |                           | 21,519  |   |      |   | 22,259  |  |   | (740     | ) |  | (3.3   | )
|Long Distance                   |  |                           | 9,999   |   |      |   | 10,580  |  |   | (581     | ) |  | (5.5   | )
|Communication Services          |  |                           | 12,738  |   |      |   | 11,193  |  |   | 1,545    |   |  | 13.8   |  
|Directory                       |  |                           | 2,231   |   |      |   | 2,790   |  |   | (559     | ) |  | (20.0  | )
|Other                           |  |                           | 1,334   |   |      |   | 1,095   |  |   | 239      |   |  | 21.8   |  
|                                |  |                           |         |   |      |   |         |  |   |          |   |  |        |  
|Total Revenues                  |  |                           | 72,729  |   |      |   | 72,091  |  |   | 638      |   |  | 0.9    |  
|                                |  |                           |         |   |      |   |         |  |   |          |   |  |        |  
|Depreciation and Amortization   |  |                           | 15,141  |   |      |   | 18,172  |  |   | (3,031   | ) |  | (16.7  | )
|Intangible Asset Impairment     |  |                           | 26,200  |   |      |   |        |  |   | 26,200   |   |  | 100.0  |  
|Other Operating Expenses        |  |                           | 40,478  |   |      |   | 40,124  |  |   | 354      |   |  | 0.9    |  
|                                |  |                           |         |   |      |   |         |  |   |          |   |  |        |  
|Total Operating Expenses        |  |                           | 81,819  |   |      |   | 58,296  |  |   | 23,523   |   |  | 40.4   |  
|                                |  |                           |         |   |      |   |         |  |   |          |   |  |        |  
|Operating Income (Loss)         |  | $                         | (9,090  | ) |      | $ | 13,795  |  | $ | (22,885  | ) |  | (165.9 | )
|                                |  |                           |         |   |      |   |         |  |   |          |   |  |        |  
|Customer Connections at June 30 |  |                           |         |   |      |   |         |  |   |          |   |  |        |  
|RLEC Access Lines               |  |                           | 122,461 |   |      |   | 127,278 |  |   | (4,817   | ) |  | (3.8   | )
|CLEC Access Lines               |  |                           | 46,462  |   |      |   | 44,891  |  |   | 1,571    |   |  | 3.5    |  
|DSL/High-Speed Internet         |  |                           | 39,888  |   |      |   | 34,078  |  |   | 5,810    |   |  | 17.0   |  
|Dial-up Access                  |  |                           | 2,683   |   |      |   | 4,425   |  |   | (1,742   | ) |  | (39.4  | )
|Video                           |  |                           | 7,425   |   |      |   | 6,765   |  |   | 660      |   |  | 9.8    |  
|Web-hosting                     |  |                           | 1,002   |   |      |   | 989     |  |   | 13       |   |  | 1.3    |  
|                                |  |                           |         |   |      |   |         |  |   |          |   |  |        |  
|Total                           |  |                           | 219,921 |   |      |   | 218,426 |  |   | 1,495    |   |  | 0.7    |  
|                                |  |                           |         |   |      |   |         |  |   |          |   |  |        |  

Local telephone service revenue increased primarily due to additional custom calling feature
revenue mainly as a result of a July 1, 2007 price increase and increased local private network circuits. Network access revenue declined primarily due to lower NECA settlements of $791, lower subscriber line charges of $278 as a result of the
decline in RLEC access lines and a revenue decrease of $835 primarily due to lower minutes of use, partially offset by a revenue increase of approximately $880 due to a change in the routing of long distance calls and a special network access
revenue increase of $284 due to a higher average rate per circuit. Long distance revenues decreased primarily due to a reduction in the average rate per minute of use. Communication services revenue increased primarily from additional DSL/high-speed
Internet revenue of $1,315 attributable to subscriber growth, co-location and web-hosting revenue of $204 and video revenue of $135, partially offset by a reduction in dial-up Internet revenue of $184. Directory revenue decreased primarily as the
result of three of our four directories being published under the contract described below. Other revenue increased due to data cabling projects completed for customers.

Depreciation and amortization expense decreased due to a July 2007 revision in the estimated useful lives of certain fixed assets to update the composite depreciation rates for one of our regulated telephone companies
and certain fixed assets becoming fully depreciated in the first six months of 2007, partially offset by the depreciation expense on fixed assets placed in service in the current year. A non-cash intangible asset impairment of $26,200 was recognized
in the second quarter of 2008 as described above. Subcontractor expense increased $83 due mainly to large cabling projects, partially offset by a reduction in sales agent commissions. Network access expense increased $668 primarily due to a change
in the routing of long distance calls, which increased the average



32



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



rate per minute of use and minutes of use. Marketing and advertising expense increased $195 primarily due to additional customer incentive and sponsorship
expenses. Operating taxes increased $104 as a result of a sales tax refund received in April 2007. Electric expense increased $102 primarily due to co-location services provided to customers. Wages increased $109 primarily as a result of increased
sales commissions. Employee benefits expenses decreased $188 due to lower health insurance and pension expense. Directory expense decreased $313, primarily as the result of three of our four directories being published under the contract described
below. Cost of services decreased $276 primarily due to a settlement reached with a vendor on estimated amounts owed to it. Short-term incentive expenses decreased $320 due to lower performance compared to the incentive targets.

The effect of the July 2006 and 2007 changes in NECA average schedule settlement formulas on the Wireline segment are more fully described in the section
entitled Business Risks in Part 1, Item 2 of this Form 10-Q. Revenues earned through the NECA settlement process are initially recognized based on estimates and are subject to adjustments that may either increase or decrease the amount of
interstate access revenues. If the actual amounts that we receive from the settlement pools differ from the amounts that we have recorded as accounts receivable or accrued liabilities on our balance sheets, we record the amount of such a reduction
or increase as an adjustment to our earnings. During the first six months of 2008 and 2007, we have increased revenue by $133 and $225, respectively, due to a revision of the estimated revenue we expect to receive from the settlement pools in the
future.

The Wireline segment receives funding from the federal and state universal service funding support programs of the FCC and PA PUC.
For the six months ended June 30, 2008 and 2007, we recognized network access revenue of $3,412 and $3,946, respectively, for universal service support. We also pay into the federal USF and the PA USF. For the six months ended June 30,
2008 and 2007, the Company incurred communication service expense of $1,338 and $1,295, respectively. We bill our customers a federal universal service charge to cover most of our universal service costs. Universal service costs not recovered
through billings to customers are recovered through the NECA settlement process.

On July 11, 2007, the PA PUC rescinded its
June 2006 order allowing the increase in our access rates as a result of our 2006 Chapter 30 filings. The effect of this order on our Wireline segment is more fully described in the section entitled Business Risks in Part 1, Item 2 of this Form
10-Q.

The PA PUC approved our request to increase certain local service rates effective July 1, 2008, in accordance with our 2008
Chapter 30 filing. The new monthly rates are designed to generate an increase in annual consolidated revenue of approximately $163. The actual annual revenue increase will be different from this amount to the extent that actual access lines differ
from the historical data that we used in developing the new rates.

In July 2008, we implemented changes in routing of our long distance
toll usage in response to increases in rates from our long distance provider. Due to these routing changes, we estimate network access revenues could decrease approximately $1,200 and network access expenses could decrease approximately $800 in the
last six months of 2008 as compared to the first six months of 2008. We are looking at various alternatives that could reduce this revenue loss and/or increase this expense reduction.



33



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



We entered into a three-year agreement for the publication of three of our four directories under
which the responsibility for publication and distribution of the directory and the related financial risks became the responsibility of the publisher beginning in the fourth quarter of 2006 for two of the directories and in the first quarter of 2007
for the third directory. Our directory revenue, based upon 2007 levels, is estimated to decrease by approximately $170 in the last six months of 2008 due to a decline in annual revenue for 2008 compared to 2007 in accordance with the terms of the
contract. Our directory expense, based on 2007 levels, is not expected to decrease any further in the last six months of 2008. We estimate the net effect of the decrease in directory revenue and expense will be a reduction in operating income of
approximately $170 in the last six months of 2008.

In July 2007, we revised the estimated useful lives of certain fixed assets to update
the composite depreciation rates for one of our regulated telephone properties. Depreciation expense is expected to decline approximately $4,600 in 2008, compared to 2007 annual depreciation expense, due to several reasons, including the July 2007
revisions in the estimated useful lives of certain fixed assets, certain fixed assets becoming fully depreciated in the first six months of 2007 and certain fixed assets becoming fully depreciated in 2008. A further reduction of approximately $1,000
is expected in 2009 due to certain fixed assets becoming fully depreciated in 2008.

Systems Integration Segment Results



|                              |  |                             |     |      |   |       |        |  |   |          |   |  |       |  
|----------------------------- |  | --------------------------- | --- | ---- | - | ----- | ------ |  | - | -------- | - |  | ----- | -
|                              |  | Three months ended June 30, |    
|                              |  | 2008                        |     | 2007 |   |       | Change |  |   | % Change |  
|Revenues                      |  | $                           | 904 |      | $ | 967   |        |  | $ | (63      | ) |  | (6.5  | )
|                              |  |                             |     |     
|Depreciation and Amortization |  |                             | 42  |      |   | 48    |        |  |   | (6       | ) |  | (12.5 | )
|Other Operating Expenses      |  |                             | 854 |      |   | 1,365 |        |  |   | (511     | ) |  | (37.4 | )
|                              |  |                             |     |      |   |       |        |  |   |          |   |  |       |  
|Total Operating Expenses      |  |                             | 896 |      |   | 1,413 |        |  |   | (517     | ) |  | (36.6 | )
|                              |  |                             |     |      |   |       |        |  |   |          |   |  |       |  
|Operating Income (Loss)       |  | $                           | 8   |      | $ | (446  | )      |  | $ | 454      |   |  | 101.8 |  
|                              |  |                             |     |      |   |       |        |  |   |          |   |  |       |  

Communications services revenue increased $31 and communication products sold decreased $94
primarily due to a decline in computer equipment sales. Labor and benefits decreased $266 and $107, respectively, due to a reduction in the number of employees. Costs of products sold decreased $130 in conjunction with the decline in computer
equipment sold.



|                              |  |                           |       |   |      |   |        |        |  |   |          |   |  |       |  
|----------------------------- |  | ------------------------- | ----- | - | ---- | - | ------ | ------ |  | - | -------- | - |  | ----- | -
|                              |  | Six months ended June 30, |      
|                              |  | 2008                      |       |   | 2007 |   |        | Change |  |   | % Change |  
|Revenues                      |  | $                         | 1,794 |   |      | $ | 2,751  |        |  | $ | (957     | ) |  | (34.8 | )
|                              |  |                           |       |  
|Depreciation and Amortization |  |                           | 87    |   |      |   | 177    |        |  |   | (90      | ) |  | (50.8 | )
|Other Operating Expenses      |  |                           | 1,860 |   |      |   | 3,932  |        |  |   | (2,072   | ) |  | (52.7 | )
|                              |  |                           |       |   |      |   |        |        |  |   |          |   |  |       |  
|Total Operating Expenses      |  |                           | 1,947 |   |      |   | 4,109  |        |  |   | (2,162   | ) |  | (52.6 | )
|                              |  |                           |       |   |      |   |        |        |  |   |          |   |  |       |  
|Operating Loss                |  | $                         | (153  | ) |      | $ | (1,358 | )      |  | $ | 1,205    |   |  | 88.7  |  
|                              |  |                           |       |   |      |   |        |        |  |   |          |   |  |       |  



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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)



Communications services revenue decreased $678 primarily due to the March 31, 2007 expiration of
a contract with a retail services customer resulting in lower revenue of $797. Communication products sold decreased $279 primarily due to a decline in computer equipment sales.

Operating expenses for the Systems Integration segment decreased primarily due to the expiration of the contract referenced above. Depreciation and
amortization decreased $90 due to equipment disposals as a result of the contract expiration. Labor, benefits, subcontractors and vehicle expenses decreased $788, $327, $241 and $114, respectively, due to the contract expiration and a reduction in
number of employees. Costs of products sold decreased $291 in conjunction with the decline in computer equipment sold. Corporate overhead expenses decreased $125 as a result of the reduction in allocation of corporate overhead expenses to this
segment. Bad debt expense decreased $75 due to the recovery of an account receivable reserved in 2007.

Financial Condition

Liquidity and Capital Resources

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



|                                                 |  |                           |         |   |      |   |        |  
|------------------------------------------------ |  | ------------------------- | ------- | - | ---- | - | ------ | -
|                                                 |  | Six months ended June 30, |        
|                                                 |  | 2008                      |         |   | 2007 |  
|Net cash provided by (used in):                  |  |                           |         |   |      |   |        |  
|Operating activities                             |  | $                         | 13,743  |   |      | $ | 16,903 |  
|Investing activities                             |  |                           | (13,118 | ) |      |   | (4,124 | )
|Financing activities                             |  |                           | (7,663  | ) |      |   | (9,333 | )
|                                                 |  |                           |         |   |      |   |        |  
|Increase (decrease) in cash and cash equivalents |  | $                         | (7,038  | ) |      | $ | 3,446  |  
|                                                 |  |                           |         |   |      |   |        |  

The change in cash and cash equivalents decreased $10,484 to a decrease in cash and cash
equivalents of $7,038 for the six months ended June 30, 2008 compared to an increase in cash and cash equivalents of $3,446 in the six months ended June 30, 2007. The primary reasons for the $10,484 decrease were an increase in income tax
payments of $2,469, an increase in payments for property, plant and equipment of $1,263 primarily due to cash payments made in 2008 for assets acquired in late 2007, and the net reinvestment of short-term investments of $6,759 in cash equivalents in
the first six months of 2007.

The primary reason for the decrease in cash flow from operating activities during the six months ended
June 30, 2008 was a $2,469 increase in income tax payments made during the period compared to the same period of 2007 primarily as a result of a $1,800 tax payment in the first quarter of 2008 for the 2007 tax year.

Net cash used in investing activities was $13,118 for the six months ended June 30, 2008 compared to $4,124 in the six months ended June 30,
2007. Payments for capital additions in the first six months of 2008 were $13,576 primarily for information technology upgrades of approximately $2,300, communications network enhancements of approximately $6,900 and outside plant



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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)



additions totaling approximately $3,100. In the first six months of 2007, capital additions were $12,313 and we acquired a customer list intangible asset for
$606. In the six months ended June 30, 2007, we purchased short-term investments of $3,187 and sold short-term investments of $9,946 and reinvested the proceeds in cash equivalents. We used life insurance proceeds of $1,000 received in March
2007 to make a voluntary principal payment on our long-term debt.

Net cash used in financing activities decreased due to lower voluntary
payments on long-term debt of approximately $1,750. Long-term debt payments were $4,285 in the six months ended June 30, 2008, including voluntary prepayments of $750. Long-term debt payments were $6,033 for the first six months of 2007,
including voluntary prepayments of $2,500.

External Sources of Capital at June 30, 2008

As of June 30, 2008, our credit facility consisted of Term Loan A with an outstanding balance of $28,604, Term Loan B with an outstanding balance of
$136,896, secured term loans with an outstanding balance of $22,750 and a revolving credit facility, with a total availability of $25,000 ($25,000 remaining available) to fund capital expenditures, acquisitions, general corporate purposes and
working capital needs.

Term Loan A requires interest payments and $500 quarterly principal payments, which continue through the first
quarter of 2011, and one final principal payment in the second quarter of 2011. Term Loan B requires interest payments and $375 quarterly principal payments, which continue through 2010, and four large quarterly principal payments in 2011. The
revolving credit facility requires interest only payments until the final required payment on June 30, 2011. Interest on Term Loan A and the revolving credit facility is payable at either, at our option, the U.S. prime rate plus 0.50% to 1.00%
or at LIBOR rates plus 1.50% to 2.00%, with the applicable percentage based on our leverage ratio. Effective May 15, 2008, Term Loan A interest is payable at the U.S. prime rate plus 0.50% or a LIBOR rate plus 1.50%. Term Loan B bears interest
at either, at our option, the U.S. prime rate plus 0.75% or a LIBOR rate plus 1.75%, regardless of the Companys leverage ratio. The Secured Term Loans bear interest at a fixed rate of 9.00% and require equal quarterly principal payments
through the fourth quarter of 2014. A commitment fee of 0.25% must be paid on the unused portion of the revolving credit facility.

The
credit facility includes a number of significant covenants that impose restrictions on our business. These covenants include, among others, restrictions on additional indebtedness, mergers, acquisitions and the disposition of assets, sale and
leaseback transactions and capital lease payments. In addition, we are required to comply with financial covenants with respect to the maximum leverage ratio, maximum indebtedness to total capitalization ratio, debt service coverage and fixed charge
coverage. The non-cash intangible asset impairment incurred in the second quarter of 2008 did not have a material effect on the results of the financial covenant calculations required by our credit facility. As of June 30, 2008, we had no other
unsecured lines of credit. As of June 30, 2008, $25,000 of the revolving credit facility was available for borrowing and the full amount can be borrowed without violating any of the financial covenants. Our ratio of total debt to total debt
plus capital increased to 51.4% at June 30, 2008 from 50.6% at December 31, 2007 due to a decrease in shareholders equity as a result of the net loss for the six months ended June 30, 2008, partially offset by our long-term debt
principal repayments.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



On August 7, 2008, the annual limitation of $10,000 in dividends contained in our credit
facility was amended to also include equity redemptions.

Commitments, Contingencies and Projected Uses of Capital

We believe that our most significant commitments, contingencies and projected uses of funds in 2008, other than for operations, include capital
expenditures, scheduled principal and interest payments on our long-term debt, income taxes, the payment of quarterly common stock dividends, when and if declared by the board of directors, and other contractual obligations. On July 24, 2008,
we declared a quarterly common stock dividend of $0.125 per share payable on September 15, 2008, to holders of record on September 1, 2008. We expect that this dividend will result in an aggregate payment of approximately $1,812. In July
2008, we made accelerated scheduled contributions of $2,200 to our pension plans in addition to the scheduled contribution of $1,200 for July 2008. These accelerated contributions were originally scheduled as follows: $1,100 to be paid in October
2008 and $1,100 to be paid in January 2009. We presently anticipate making a contribution of $100 to our pension plans in October 2008. As a result of these accelerated contributions, we estimate our pension expense will be reduced approximately $70
in the last six months of 2008. We believe that we have adequate internal and external resources available to meet ongoing operating requirements.

D&E had a guarantee agreement with Crown Castle International, Inc. (Crown) for lease obligations on wireless tower sites until its termination in the first quarter of 2008. The guarantee agreement and termination is
described in more detail in the Note 7 to the Condensed Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q.

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 ongoing basis, we evaluate our estimates, including those related to revenue recognition, asset depreciation, long-lived and indefinite-lived assets, goodwill, retirement benefits, network access costs, income taxes and contingencies.
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.

In Managements Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the
year ended December 31, 2007, we have identified our critical accounting policies, as those that are the most significant to our financial statement presentation and that require difficult, subjective and complex judgments. Other than the items
mentioned in the following paragraphs, there were no material changes to our critical accounting policies or estimates during the six months ended June 30, 2008.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



We completed our annual impairment evaluation of goodwill and intangible assets as of April 30,
2008 in conjunction with the preparation of this Form 10-Q. A decline in the estimated future regulated cash flows of our Conestoga and Buffalo Valley RLECs in the Wireline segment indicated that there was an impairment of the franchise intangible
assets. The reduction in the estimated future regulated cash flows is the result of managements most recent estimates of reductions in access lines, and corresponding reductions in minutes of use, long distance revenues and network access
revenues that are associated with access lines. Therefore, we recognized a non-cash intangible asset impairment charge of $26,200 ($15,329 after tax) in the second quarter of 2008. The key factors that must be estimated to determine the fair value
of intangible assets include the estimation of future cash flows, the estimation of discount rates and long-term growth rates and other assumptions. In evaluating impairment, we consider the effects of competition, the regulatory environment and
current economic factors in our estimates of the expected future cash flows derived from such intangibles. The annual impairment evaluation did not indicate an impairment of goodwill. Note 4 to the Condensed Consolidated Financial Statements in Part
1, Item 1 of this Form 10-Q contains a more extensive discussion on the non-cash intangible asset impairment.

Recently Issued Accounting
Pronouncements

The effects of recently issued accounting pronouncements on the Company are discussed in Note 2 to the Condensed
Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)



Item 3. Quantitative and Qualitative Disclosures

About Market Risks

(Dollar amounts are in thousands)

Our cash flows and earnings are exposed to fluctuations in interest rates due to our
variable rate debt. 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 on Term Loan A as provided in our loan agreement. As of June 30, 2008, our debt, excluding capital lease obligations, can be categorized as follows:



|                                                                                |  |           |         |             |      |   |            |   |        
|------------------------------------------------------------------------------- |  | --------- | ------- | ----------- | ---- | - | ---------- | - | -------
|                                                                                |  | Principal |         | AverageRate |      |   | Fair Value
|Fixed interest rates:                                                           |  |           |         |             |      |   |            |   |        
|Secured Term Loans (fixed to October 2014)                                      |  | $         | 22,750  |             | 9.00 | % |            | $ | 24,982 
|Senior Secured Term Loans (fixed to September 2009 through interest rate swaps) |  |           | 75,000  |             | 7.04 | % |            |   | 75,000 
|                                                                                |  |           |         |             |      |   |            |   |        
|                                                                                |  |           | 97,750  |             | 7.50 | % |            |   | 99,982 
|Subject to interest rate fluctuations:                                          |  |           |         |             |      |   |            |   |        
|Senior Secured Term Loans                                                       |  |           | 90,500  |             | 4.58 | % |            |   | 90,500 
|                                                                                |  |           |         |             |      |   |            |   |        
|Total                                                                           |  | $         | 188,250 |             | 6.10 | % |            | $ | 190,482
|                                                                                |  |           |         |             |      |   |            |   |        

If interest rates rise above the rates of the variable debt, we could incur extra annual interest
expense of $453 for each 50 basis points above the variable rates. If rates were to decline, we would realize reductions in annual interest expense of approximately $453 for each 50 basis point decrease in rates.

We have interest rate swap agreements with a bank that participates in our senior indebtedness to hedge against the effect of interest rate fluctuations.
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. As of June 30, 2008, our interest rate swap agreements were as follows:



|                     |  |                |        |          |      |   |                     |      |   |                        |   |      
|-------------------- |  | -------------- | ------ | -------- | ---- | - | ------------------- | ---- | - | ---------------------- | - | -----
|Terms of Swaps       |  | NotionalAmount |        | Pay Rate |      |   | AverageReceivedRate |      |   | Fair Value ofLiability
|09/21/07 to 09/21/09 |  | $              | 50,000 |          | 7.16 | % |                     | 4.55 | % |                        | $ | 1,272
|08/01/07 to 09/21/09 |  |                | 25,000 |          | 6.81 | % |                     | 4.55 | % |                        |   | 529  
|                     |  |                |        |          |      |   |                     |      |   |                        |   |      
|                     |  | $              | 75,000 |          |      |   |                     |      |   |                        | $ | 1,801
|                     |  |                |        |          |      |   |                     |      |   |                        |   |      

On July 29, 2008, we entered into an interest rate swap agreement with a notional amount of
$15,000, a pay rate of 5.32% and an average received rate of 4.55%. The agreement matures in July 2010.

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.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)



Item 4. Controls and Procedures

As of June 30, 2008, the Company carried out an evaluation, under the supervision and with the participation of the Companys management,
including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 (Exchange Act),
Rule 13a-15(e). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and forms. These controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files under the Exchange Act is accumulated and communicated to the issuers management, including its principal executive and principal financial officers, or persons performing similar functions,
as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were
effective as of the end of the period covered by this Quarterly Report.

It should be noted that any system of controls, however well
designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitation of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions, regardless of how remote. There were no changes in the
Companys internal controls over financial reporting during the second quarter of 2008 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

Attached as Exhibits 31 and 32 to this quarterly report are certifications of the Chief Executive Officer and the Chief Financial Officer required in
accordance with Rule 13a-14(a) of the Exchange Act. This portion of the Companys quarterly report includes the information concerning the controls evaluation referred to in the certifications and should be read in conjunction with the
certifications for a more complete understanding of the topics presented.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part II - Other Information

Item 1. Legal Proceedings

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 1A. Risk Factors

There have been no
material changes to the factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2007.

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

Our credit
facility includes a number of significant covenants that impose restrictions on our business. These covenants include, among others, restrictions on additional indebtedness, mergers, acquisitions and the disposition of assets, sale and leaseback
transactions and capital lease payments. In addition, we are required to comply with financial covenants with respect to the maximum leverage ratio, maximum indebtedness to total capitalization ratio, debt service coverage and fixed charge coverage.
There is also an annual limitation of $10,000 on the payment of dividends and the redemption of equity.

Item 3. Defaults Upon Senior Securities

None

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

(a) Date of meeting. The Annual Meeting of Shareholders was held on April 24, 2008.

(b) Matters Voted Upon at Annual Meeting. The vote tabulations in respect to the four matters voted upon at the 2008 Annual Meeting were as follows:

(1) Election of four directors to hold office for a three-year term to expire in 2011.



|                  |  |            |  |         
|----------------- |  | ---------- |  | --------
|Director          |  | For        |  | Withheld
|John Amos         |  | 11,115,304 |  | 743,584 
|John C. Long      |  | 11,464,667 |  | 394,221 
|G. William Ruhl   |  | 11,362,145 |  | 496,743 
|W. Garth Sprecher |  | 11,346,207 |  | 512,681 

(2) Election of one director to hold office for a two-year term to expire in 2010.



|                   |  |            |  |         
|------------------ |  | ---------- |  | --------
|Director           |  | For        |  | Withheld
|Richard G. Weidner |  | 11,467,866 |  | 391,022 



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part II - Other Information



(3) Approval of the 2008 Long-Term Incentive Plan of D&E Communications, Inc.



|          |  |           |  |        
|--------- |  | --------- |  | -------
|For       |  | Against   |  | Abstain
|8,417,296 |  | 1,375,108 |  | 30,831 

(4) Ratification of the Board of Directors selection of PricewaterhouseCoopers LLP as
independent auditors in 2008.



|           |  |         |  |        
|---------- |  | ------- |  | -------
|For        |  | Against |  | Abstain
|11,541,167 |  | 306,513 |  | 11,208 

Item 5. Other Information

None



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part II - Other Information



Item 6. Exhibits



|            |  |                                                                                                                                                                                                   |  |                                                                                                                                                      
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Identification of Exhibit                                                                                                                                                                         |  | Reference                                                                                                                                            
|3.          |  | Articles of Incorporation and By-laws:                                                                                                                                                            |  |                                                                                                                                                      
|            |  |                                                                                                                                                                                                  
|3.1         |  | Amended and Restated Articles of Incorporation                                                                                                                                                    |  | Incorporated herein by reference from Exhibit 1 to D&Es definitive proxy statement for its 2005 Annual Meeting of Shareholders filed March 17, 2005.
|            |  |                                                                                                                                                                                                  
|3.2         |  | By-laws                                                                                                                                                                                           |  | Incorporated herein by reference from Exhibit 3.2 to D&Es Annual Report on Form 10-K for the year ended December 31, 2006.                          
|            |  |                                                                                                                                                                                                  
|10.         |  | Material Contracts                                                                                                                                                                                |  |                                                                                                                                                      
|            |  |                                                                                                                                                                                                  
|10.1        |  | 2008 Long-Term Incentive Plan of D&E Communications, Inc.                                                                                                                                         |  | Incorporated herein by reference to Exhibit A to D&Es Definitive Proxy Statement filed on March 27, 2008                                            
|            |  |                                                                                                                                                                                                  
|10.2        |  | Amended and Restated Stock Compensation Plan and Policy For Non-Employee Directors of D&E Communications, Inc.                                                                                    |  | Incorporated herein by reference from Exhibit 10.1 to the Current Report on Form 8-K filed by D&E on June 4, 2008                                    
|            |  |                                                                                                                                                                                                  
|10.3        |  | Amendment No. 2 to the Telecommunications Services and Facilities Agreement between Verizon Pennsylvania, Inc, and Denver and Ephrata Telephone and Telegraph Company, effective June 22, 2008    |  | Filed herewith.                                                                                                                                      
|            |  |                                                                                                                                                                                                  
|10.4        |  | Second Amendment to the Intralata Compensation Agreement between the Pennsylvania Independent Telephone Companies and Denver and Ephrata Telephone and Telegraph Company, effective July 24, 2006 |  | Filed herewith.                                                                                                                                      
|            |  |                                                                                                                                                                                                  
|10.5        |  | Amendment to Section 3.5 of the Third Amended and Restated Credit Agreement dated as of September 19, 2006, amended as of August 7, 2008                                                          |  | Filed herewith.                                                                                                                                      
|            |  |                                                                                                                                                                                                  
|31          |  | Certification of the Chief Executive Officer and the Chief Financial Officer Required by Section 13a-14(a) of the Exchange Act                                                                    |  | Filed herewith.                                                                                                                                      
|            |  |                                                                                                                                                                                                  
|32          |  | Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                           |  | Filed herewith.                                                                                                                                      



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D&E Communications, Inc. and Subsidiaries

Signatures

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



|                      |  |                          |  |                                                                        
|--------------------- |  | ------------------------ |  | -----------------------------------------------------------------------
|                      |  | D&E Communications, Inc.
|                      |  |                         
|Date: August 11, 2008 |  | By:                      |  | /s/ James W. Morozzi                                                   
|                      |  |                          |  | James W. Morozzi                                                       
|                      |  |                          |  | President & Chief Executive Officer                                    
|                      |  |                         
|Date: August 11, 2008 |  | By:                      |  | /s/ Thomas E. Morell                                                   
|                      |  |                          |  | Thomas E. Morell                                                       
|                      |  |                          |  | Senior Vice President, Chief Financial Officer, Secretary and Treasurer



44