##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended September 30, 2007

or



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

For the transition period from  to

Commission File Number: 000-20709



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D&E Communications, Inc.

(Exact name of registrant as specified in its charter)



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PENNSYLVANIA

(State or other jurisdiction of

incorporation or organization)

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

Brossman Business Complex

124 East
Main Street

P. O. Box 458

Ephrata, Pennsylvania 17522

(Address of principal executive offices)

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



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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer
and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer  x    Non-accelerated
filer ̈

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 October 26, 2007
|Common Stock, par value $0.16 per share |  | 14,441,047 Shares              



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Form 10-Q

TABLE OF CONTENTS



|                              |  |                                                                                       |  |                                                                                                                                                   |  |  
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------- |  | -
|Item No.                      |  | Page                                                                                 
|PART I. FINANCIAL INFORMATION
|1.                            |  | Unaudited Financial Statements                                                        |  |                                                                                                                                                  
|                              |  |                                                                                       | 
|                              |  |                                                                                       |  | Condensed Consolidated Statements of Operations  For the three months and nine months ended September 30, 2007 and 2006                          |  | 1
|                              |  |                                                                                       | 
|                              |  |                                                                                       |  | Condensed Consolidated Balance Sheets  September 30, 2007 and December 31, 2006                                                                  |  | 2
|                              |  |                                                                                       | 
|                              |  |                                                                                       |  | Condensed Consolidated Statements of Cash Flows  For the nine months ended September 30, 2007 and 2006                                           |  | 3
|                              |  |                                                                                       | 
|                              |  |                                                                                       |  | Condensed Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss)  For the nine months ended September 30, 2007 and 2006 |  | 4
|                              |  |                                                                                       | 
|                              |  |                                                                                       |  | Notes to Condensed Consolidated Financial Statements                                                                                              |  | 5
|                              |  |                                                                                      
|2.                            |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 19                                                                                                                                               
|                              |  |                                                                                      
|3.                            |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 41                                                                                                                                               
|                              |  |                                                                                      
|4.                            |  | Controls and Procedures                                                               |  | 41                                                                                                                                               
|                             
|PART II. OTHER INFORMATION   
|                              |  |                                                                                      
|1.                            |  | Legal Proceedings                                                                     |  | 43                                                                                                                                               
|                              |  |                                                                                      
|1A.                           |  | Risk Factors                                                                          |  | 43                                                                                                                                               
|                              |  |                                                                                      
|2.                            |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 43                                                                                                                                               
|                              |  |                                                                                      
|3.                            |  | Defaults Upon Senior Securities                                                       |  | 43                                                                                                                                               
|                              |  |                                                                                      
|4.                            |  | Submissions of Matters to a Vote of Security Holders                                  |  | 43                                                                                                                                               
|                              |  |                                                                                      
|5.                            |  | Other Information                                                                     |  | 43                                                                                                                                               
|                              |  |                                                                                      
|6.                            |  | Exhibits                                                                              |  | 44                                                                                                                                               
|                              |  |                                                                                      
|                              |  | SIGNATURES                                                                            |  | 45                                                                                                                                               



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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 EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                                               |  | 2007                            |        |   | 2006                           |   |        | 2007 |  |   | 2006    |  
|OPERATING REVENUES                                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Communication services                                                                         |  | $                               | 36,503 |   |                                | $ | 39,221 |      |  | $ | 109,370 |   |  | $ | 118,457 |  
|Communication products                                                                         |  |                                 | 1,085  |   |                                |   | 711    |      |  |   | 2,245   |   |  |   | 1,672   |  
|Other                                                                                          |  |                                 | 622    |   |                                |   | 692    |      |  |   | 2,160   |   |  |   | 2,142   |  
|                                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating revenues                                                                       |  |                                 | 38,210 |   |                                |   | 40,624 |      |  |   | 113,775 |   |  |   | 122,271 |  
|                                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|OPERATING EXPENSES                                                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Communication services (exclusive of depreciation and amortization below)                      |  |                                 | 12,037 |   |                                |   | 15,671 |      |  |   | 37,175  |   |  |   | 46,801  |  
|Cost of communication products                                                                 |  |                                 | 866    |   |                                |   | 625    |      |  |   | 1,806   |   |  |   | 1,428   |  
|Depreciation and amortization                                                                  |  |                                 | 7,678  |   |                                |   | 9,536  |      |  |   | 26,396  |   |  |   | 28,489  |  
|Marketing and customer services                                                                |  |                                 | 3,614  |   |                                |   | 3,528  |      |  |   | 10,498  |   |  |   | 10,177  |  
|General and administrative services                                                            |  |                                 | 5,469  |   |                                |   | 5,093  |      |  |   | 17,322  |   |  |   | 18,141  |  
|Intangible asset impairment                                                                    |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   | 1,892   |  
|                                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                                       |  |                                 | 29,664 |   |                                |   | 34,453 |      |  |   | 93,197  |   |  |   | 106,928 |  
|                                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Operating income                                                                               |  |                                 | 8,546  |   |                                |   | 6,171  |      |  |   | 20,578  |   |  |   | 15,343  |  
|                                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|OTHER INCOME (EXPENSE)                                                                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Equity in net losses of affiliates                                                             |  |                                 |       |   |                                |   | (21    | )    |  |   | (3      | ) |  |   | (238    | )
|Interest expense, net of interest capitalized                                                  |  |                                 | (3,745 | ) |                                |   | (3,832 | )    |  |   | (11,199 | ) |  |   | (11,537 | )
|Loss on early extinguishment of debt                                                           |  |                                 |       |   |                                |   | (1,094 | )    |  |   |        |   |  |   | (1,094  | )
|Other, net                                                                                     |  |                                 | 962    |   |                                |   | 1,038  |      |  |   | 3,081   |   |  |   | 3,555   |  
|                                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total other income (expense)                                                                   |  |                                 | (2,783 | ) |                                |   | (3,909 | )    |  |   | (8,121  | ) |  |   | (9,314  | )
|                                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income from continuing operations before income taxes and dividends on utility preferred stock |  |                                 | 5,763  |   |                                |   | 2,262  |      |  |   | 12,457  |   |  |   | 6,029   |  
|INCOME TAXES AND DIVIDENDS ON UTILITY PREFERRED STOCK                                          |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income taxes                                                                                   |  |                                 | 1,992  |   |                                |   | 594    |      |  |   | 3,757   |   |  |   | 1,496   |  
|Dividends on utility preferred stock                                                           |  |                                 | 16     |   |                                |   | 16     |      |  |   | 49      |   |  |   | 49      |  
|                                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Total income taxes and dividends on utility preferred stock                                    |  |                                 | 2,008  |   |                                |   | 610    |      |  |   | 3,806   |   |  |   | 1,545   |  
|                                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income from continuing operations                                                              |  |                                 | 3,755  |   |                                |   | 1,652  |      |  |   | 8,651   |   |  |   | 4,484   |  
|DISCONTINUED OPERATIONS:                                                                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Loss from operations of Voice Systems Business, net of income tax benefit of ($32) and ($271)  |  |                                 |       |   |                                |   | (51    | )    |  |   |        |   |  |   | (355    | )
|Loss on sale of Voice Systems Business, net of income taxes of $85 and $85                     |  |                                 |       |   |                                |   | (870   | )    |  |   |        |   |  |   | (870    | )
|                                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Loss from discontinued operations                                                              |  |                                 |       |   |                                |   | (921   | )    |  |   |        |   |  |   | (1,225  | )
|                                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|NET INCOME                                                                                     |  | $                               | 3,755  |   |                                | $ | 731    |      |  | $ | 8,651   |   |  | $ | 3,259   |  
|                                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Weighted average common shares outstanding (basic)                                             |  |                                 | 14,434 |   |                                |   | 14,377 |      |  |   | 14,416  |   |  |   | 14,362  |  
|Weighted average common shares outstanding (diluted)                                           |  |                                 | 14,509 |   |                                |   | 14,444 |      |  |   | 14,486  |   |  |   | 14,425  |  
|                                                                                               |  |                                 |        |  
|BASIC AND DILUTED EARNINGS PER COMMON SHARE                                                    |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Earnings per common share-continuing operations                                                |  | $                               | 0.26   |   |                                | $ | 0.11   |      |  | $ | 0.60    |   |  | $ | 0.31    |  
|Earnings per common share-discontinued operations                                              |  |                                 |       |   |                                |   | (0.06  | )    |  |   |        |   |  |   | (0.08   | )
|                                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                                                                               |  | $                               | 0.26   |   |                                | $ | 0.05   |      |  | $ | 0.60    |   |  | $ | 0.23    |  
|                                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Dividends per common share                                                                     |  | $                               | 0.13   |   |                                | $ | 0.13   |      |  | $ | 0.38    |   |  | $ | 0.38    |  
|                                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  

See notes to condensed consolidated financial statements.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)



|                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                              |  | September 30,2007 |         |   | December 31,2006 |  
|ASSETS                                                                                                                                                                        |  |                   |         |   |                  |   |         |  
|CURRENT ASSETS                                                                                                                                                                |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                     |  | $                 | 10,866  |   |                  | $ | 3,101   |  
|Short-term investments                                                                                                                                                        |  |                   |        |   |                  |   | 7,746   |  
|Accounts and notes receivable, net of reserves of $615 and $609                                                                                                               |  |                   | 15,996  |   |                  |   | 16,037  |  
|Inventories, lower of cost or market, at average cost                                                                                                                         |  |                   | 2,470   |   |                  |   | 2,704   |  
|Prepaid expenses                                                                                                                                                              |  |                   | 4,662   |   |                  |   | 3,310   |  
|Other                                                                                                                                                                         |  |                   | 2,372   |   |                  |   | 1,150   |  
|                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|TOTAL CURRENT ASSETS                                                                                                                                                          |  |                   | 36,366  |   |                  |   | 34,048  |  
|                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                              |  |                  
|PROPERTY, PLANT AND EQUIPMENT                                                                                                                                                 |  |                   |         |   |                  |   |         |  
|In service                                                                                                                                                                    |  |                   | 392,530 |   |                  |   | 380,630 |  
|Under construction                                                                                                                                                            |  |                   | 6,340   |   |                  |   | 5,504   |  
|                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                              |  |                   | 398,870 |   |                  |   | 386,134 |  
|Less accumulated depreciation                                                                                                                                                 |  |                   | 232,855 |   |                  |   | 214,722 |  
|                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                              |  |                   | 166,015 |   |                  |   | 171,412 |  
|                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|OTHER ASSETS                                                                                                                                                                  |  |                   |         |   |                  |   |         |  
|Goodwill                                                                                                                                                                      |  |                   | 142,802 |   |                  |   | 143,667 |  
|Intangible assets, net of accumulated amortization                                                                                                                            |  |                   | 149,702 |   |                  |   | 153,072 |  
|Other                                                                                                                                                                         |  |                   | 7,743   |   |                  |   | 8,375   |  
|                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                              |  |                   | 300,247 |   |                  |   | 305,114 |  
|                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|TOTAL ASSETS                                                                                                                                                                  |  | $                 | 502,628 |   |                  | $ | 510,574 |  
|                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                              |  |                  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                          |  |                   |         |   |                  |   |         |  
|CURRENT LIABILITIES                                                                                                                                                           |  |                   |         |   |                  |   |         |  
|Long-term debt maturing within one year                                                                                                                                       |  | $                 | 7,069   |   |                  | $ | 7,066   |  
|Accounts payable and accrued liabilities                                                                                                                                      |  |                   | 14,684  |   |                  |   | 13,654  |  
|Accrued taxes                                                                                                                                                                 |  |                   | 179     |   |                  |   | 195     |  
|Accrued interest and dividends                                                                                                                                                |  |                   | 826     |   |                  |   | 1,149   |  
|Advance billings, customer deposits and other                                                                                                                                 |  |                   | 5,159   |   |                  |   | 4,880   |  
|                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|TOTAL CURRENT LIABILITIES                                                                                                                                                     |  |                   | 27,917  |   |                  |   | 26,944  |  
|                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|LONG-TERM DEBT                                                                                                                                                                |  |                   | 191,398 |   |                  |   | 199,950 |  
|                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|OTHER LIABILITIES                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|Deferred income taxes                                                                                                                                                         |  |                   | 71,698  |   |                  |   | 74,849  |  
|Other                                                                                                                                                                         |  |                   | 21,725  |   |                  |   | 21,806  |  
|                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                              |  |                   | 93,423  |   |                  |   | 96,655  |  
|                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|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 shares, outstanding 14 shares |  |                   | 1,446   |   |                  |   | 1,446   |  
|                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                 |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                              |  |                  
|SHAREHOLDERS EQUITY                                                                                                                                                          |  |                   |         |   |                  |   |         |  
|Common stock, par value $0.16, authorized shares 100,000                                                                                                                      |  |                   |         |   |                  |   |         |  
|Outstanding shares: 14,441 at September 30, 2007 and 14,399 at December 31, 2006                                                                                              |  |                   | 2,570   |   |                  |   | 2,563   |  
|Additional paid-in capital                                                                                                                                                    |  |                   | 162,838 |   |                  |   | 162,010 |  
|Accumulated other comprehensive income (loss)                                                                                                                                 |  |                   | (6,351  | ) |                  |   | (5,028  | )
|Retained earnings                                                                                                                                                             |  |                   | 48,052  |   |                  |   | 44,651  |  
|Treasury stock at cost, 1,644 shares at September 30, 2007 and 1,640 shares at December 31, 2006                                                                              |  |                   | (18,665 | ) |                  |   | (18,617 | )
|                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                              |  |                   | 188,444 |   |                  |   | 185,579 |  
|                                                                                                                                                                              |  |                   |         |   |                  |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                    |  | $                 | 502,628 |   |                  | $ | 510,574 |  
|                                                                                                                                                                              |  |                   |         |   |                  |   |         |  

See notes to condensed consolidated financial statements.



2



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                                                         |  |                                 |         |   |      |   |          |  
|-------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | -------- | -
|                                                                                                         |  | Nine Months Ended September 30, |        
|                                                                                                         |  | 2007                            |         |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                     |  |                                 |         |   |      |   |          |  
|Net income                                                                                               |  | $                               | 8,651   |   |      | $ | 3,259    |  
|Loss from discontinued operations                                                                        |  |                                 |        |   |      |   | 1,225    |  
|                                                                                                         |  |                                 |         |   |      |   |          |  
|Income from continuing operations                                                                        |  |                                 | 8,651   |   |      |   | 4,484    |  
|Adjustments to reconcile income from continuing operations to net cash provided by operating activities: |  |                                 |         |   |      |   |          |  
|Depreciation and amortization                                                                            |  |                                 | 26,396  |   |      |   | 28,489   |  
|Bad debt expense                                                                                         |  |                                 | 640     |   |      |   | 434      |  
|Deferred income taxes                                                                                    |  |                                 | (3,322  | ) |      |   | (4,886   | )
|Equity in net losses of affiliates                                                                       |  |                                 | 3       |   |      |   | 238      |  
|Gain from cash recovery of note receivable                                                               |  |                                 | (900    | ) |      |   | (2,125   | )
|Gain from life insurance proceeds                                                                        |  |                                 | (588    | ) |      |   |         |  
|Intangible asset impairment                                                                              |  |                                 |        |   |      |   | 1,892    |  
|Stock-based compensation expense                                                                         |  |                                 | 259     |   |      |   | 230      |  
|(Gain) loss on retirement of property, plant and equipment                                               |  |                                 | (115    | ) |      |   | 166      |  
|Loss on early extinguishment of debt                                                                     |  |                                 |        |   |      |   | 1,094    |  
|Changes in operating assets and liabilities:                                                             |  |                                 |         |   |      |   |          |  
|Accounts receivable                                                                                      |  |                                 | (599    | ) |      |   | 1,002    |  
|Inventories                                                                                              |  |                                 | 234     |   |      |   | (32      | )
|Prepaid expenses                                                                                         |  |                                 | (1,283  | ) |      |   | 1,465    |  
|Accounts payable and accrued liabilities                                                                 |  |                                 | 950     |   |      |   | (741     | )
|Accrued taxes and accrued interest                                                                       |  |                                 | (333    | ) |      |   | (1,383   | )
|Advance billings, customer deposits and other                                                            |  |                                 | 280     |   |      |   | (4,369   | )
|Other, net                                                                                               |  |                                 | (1,587  | ) |      |   | (1,399   | )
|                                                                                                         |  |                                 |         |   |      |   |          |  
|Net Cash Provided by Operating Activities from Continuing Operations                                     |  |                                 | 28,686  |   |      |   | 24,559   |  
|                                                                                                         |  |                                 |         |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                     |  |                                 |         |   |      |   |          |  
|Capital expenditures, net of proceeds from sales                                                         |  |                                 | (16,822 | ) |      |   | (19,783  | )
|Collection of note receivable                                                                            |  |                                 | 1,279   |   |      |   | 2,125    |  
|Proceeds from sale of investment                                                                         |  |                                 | 10,933  |   |      |   |         |  
|Purchase of short-term investments                                                                       |  |                                 | (3,187  | ) |      |   |         |  
|Life insurance proceeds                                                                                  |  |                                 | 1,000   |   |      |   |         |  
|Increase in investments and advances to affiliates                                                       |  |                                 |        |   |      |   | (390     | )
|Acquisition of customer list intangible asset                                                            |  |                                 | (606    | ) |      |   |         |  
|                                                                                                         |  |                                 |         |   |      |   |          |  
|Net Cash Used In Investing Activities of Continuing Operations                                           |  |                                 | (7,403  | ) |      |   | (18,048  | )
|                                                                                                         |  |                                 |         |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                     |  |                                 |         |   |      |   |          |  
|Dividends on common stock                                                                                |  |                                 | (5,155  | ) |      |   | (5,129   | )
|Payments on long-term debt                                                                               |  |                                 | (8,549  | ) |      |   | (188,291 | )
|Proceeds from long-term debt financing                                                                   |  |                                 |        |   |      |   | 180,750  |  
|Payment of debt issuance costs                                                                           |  |                                 |        |   |      |   | (384     | )
|Proceeds from interest rate swap terminations                                                            |  |                                 |        |   |      |   | 1,064    |  
|Proceeds from issuance of common stock and stock options exercised                                       |  |                                 | 183     |   |      |   | 135      |  
|Excess tax benefits from stock compensation plans                                                        |  |                                 | 51      |   |      |   |         |  
|Purchase of treasury stock                                                                               |  |                                 | (48     | ) |      |   |         |  
|                                                                                                         |  |                                 |         |   |      |   |          |  
|Net Cash Used In Financing Activities of Continuing Operations                                           |  |                                 | (13,518 | ) |      |   | (11,855  | )
|                                                                                                         |  |                                 |         |   |      |   |          |  
|CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS                                                         |  |                                 | 7,765   |   |      |   | (5,344   | )
|                                                                                                         |  |                                
|CASH USED IN DISCONTINUED OPERATIONS                                                                     |  |                                 |         |   |      |   |          |  
|Cash provided by operating activities of discontinued operations                                         |  |                                 |        |   |      |   | 195      |  
|Cash used in investing activities of discontinued operations                                             |  |                                 |        |   |      |   | (212     | )
|                                                                                                         |  |                                 |         |   |      |   |          |  
|Net Cash Used In Discontinued Operations                                                                 |  |                                 |        |   |      |   | (17      | )
|                                                                                                         |  |                                 |         |   |      |   |          |  
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                         |  |                                 | 7,765   |   |      |   | (5,361   | )
|                                                                                                         |  |                                
|CASH AND CASH EQUIVALENTS                                                                                |  |                                 |         |   |      |   |          |  
|BEGINNING OF PERIOD                                                                                      |  |                                 | 3,101   |   |      |   | 10,325   |  
|                                                                                                         |  |                                 |         |   |      |   |          |  
|END OF PERIOD                                                                                            |  | $                               | 10,866  |   |      | $ | 4,964    |  
|                                                                                                         |  |                                 |         |   |      |   |          |  

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 nine months ended September 30, 2007 and 2006

(In thousands)

(Unaudited)



|                                                                                                                                                           |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------- | ------ |  | - | ------ | - |  | - | ------- | -
|                                                                                                                                                           |  | 2007                            |        |   | 2006                           |  
|                                                                                                                                                           |  | Shares                          |        |   | Amount                         |   |         | Shares |  |   | Amount |  
|COMMON STOCK                                                                                                                                               |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|Balance at beginning of year                                                                                                                               |  |                                 | 16,039 |   |                                | $ | 2,563   |        |  |   | 15,985 |   |  | $ | 2,554   |  
|Common stock issued for Employee Stock Purchase, Long-Term                                                                                                 |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|Incentive, Dividend Reinvestment, Stock Compensation                                                                                                       |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|Plan and Policy for Non-Employee Directors                                                                                                                 |  |                                 | 38     |   |                                |   | 6       |        |  |   | 40     |   |  |   | 6       |  
|Common stock issued for stock options exercised                                                                                                            |  |                                 | 8      |   |                                |   | 1       |        |  |   |       |   |  |   |        |  
|                                                                                                                                                           |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|Balance at September 30                                                                                                                                    |  |                                 | 16,085 |   |                                |   | 2,570   |        |  |   | 16,025 |   |  |   | 2,560   |  
|                                                                                                                                                           |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|ADDITIONAL PAID-IN CAPITAL                                                                                                                                 |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|Balance at beginning of year                                                                                                                               |  |                                 |        |   |                                |   | 162,010 |        |  |   |        |   |  |   | 160,924 |  
|Common stock issued for Employee Stock Purchase, Long-Term Incentive, Dividend Reinvestment, Stock Compensation Plan and Policy for
Non-Employee Directors |  |                                 |        |   |                                |   | 742     |        |  |   |        |   |  |   | 824     |  
|Common stock issued for stock options exercised                                                                                                            |  |                                 |        |   |                                |   | 86      |        |  |   |        |   |  |   |        |  
|                                                                                                                                                           |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|Balance at September 30                                                                                                                                    |  |                                 |        |   |                                |   | 162,838 |        |  |   |        |   |  |   | 161,748 |  
|                                                                                                                                                           |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)                                                                                                              |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|Balance at beginning of year                                                                                                                               |  |                                 |        |   |                                |   | (5,028  | )      |  |   |        |   |  |   | (5,598  | )
|Reclassification adjustment for realized gain on derivative financial instruments, net of tax                                                              |  |                                 |        |   |                                |   | (236    | )      |  |   |        |   |  |   | (9      | )
|Defined benefit plans, net of tax                                                                                                                          |  |                                 |        |   |                                |   | (480    | )      |  |   |        |   |  |   | 1,802   |  
|Unrealized gain (loss) on derivative financial instruments, net of tax                                                                                     |  |                                 |        |   |                                |   | (607    | )      |  |   |        |   |  |   | 95      |  
|                                                                                                                                                           |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|Balance at September 30                                                                                                                                    |  |                                 |        |   |                                |   | (6,351  | )      |  |   |        |   |  |   | (3,710  | )
|                                                                                                                                                           |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|RETAINED EARNINGS                                                                                                                                          |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|Balance at beginning of year                                                                                                                               |  |                                 |        |   |                                |   | 44,651  |        |  |   |        |   |  |   | 45,083  |  
|Adjustment to adopt FIN 48                                                                                                                                 |  |                                 |        |   |                                |   | 173     |        |  |   |        |   |  |   |        |  
|Net income                                                                                                                                                 |  |                                 |        |   |                                |   | 8,651   |        |  |   |        |   |  |   | 3,259   |  
|Dividends on common stock: $0.38 per share for each period                                                                                                 |  |                                 |        |   |                                |   | (5,423  | )      |  |   |        |   |  |   | (5,377  | )
|                                                                                                                                                           |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|Balance at September 30                                                                                                                                    |  |                                 |        |   |                                |   | 48,052  |        |  |   |        |   |  |   | 42,965  |  
|                                                                                                                                                           |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|TREASURY STOCK                                                                                                                                             |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|Balance at beginning of year                                                                                                                               |  |                                 | (1,640 | ) |                                |   | (18,617 | )      |  |   | (1,640 | ) |  |   | (18,617 | )
|Treasury stock acquired                                                                                                                                    |  |                                 | (4     | ) |                                |   | (48     | )      |  |   |       |   |  |   |        |  
|                                                                                                                                                           |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|Balance at September 30                                                                                                                                    |  |                                 | (1,644 | ) |                                |   | (18,665 | )      |  |   | (1,640 | ) |  |   | (18,617 | )
|                                                                                                                                                           |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                 |  |                                 | 14,441 |   |                                | $ | 188,444 |        |  |   | 14,385 |   |  | $ | 184,946 |  
|                                                                                                                                                           |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|                                                                                                                                                           |  |                                
|                                                                                                                                                           |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|                                                                                                                                                           |  | 2007                            |        |   | 2006                           |   |         | 2007   |  |   | 2006   |  
|COMPREHENSIVE INCOME (LOSS)                                                                                                                                |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|Net income                                                                                                                                                 |  | $                               | 3,755  |   |                                | $ | 731     |        |  | $ | 8,651  |   |  | $ | 3,259   |  
|Reclassification adjustment for realized gain on derivative financial instruments, net of income taxes of ($46), ($8), ($168) and
($8)                     |  |                                 | (65    | ) |                                |   | (9      | )      |  |   | (236   | ) |  |   | (9      | )
|Defined benefit plans, net of income taxes of ($603), $1,279, ($341) and $1,279                                                                            |  |                                 | (849   | ) |                                |   | 1,802   |        |  |   | (480   | ) |  |   | 1,802   |  
|Unrealized gain (loss) on derivative financial instruments, net of income taxes of ($360), ($536), ($430) and $67                                          |  |                                 | (507   | ) |                                |   | (754    | )      |  |   | (607   | ) |  |   | 95      |  
|                                                                                                                                                           |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                                                                 |  | $                               | 2,334  |   |                                | $ | 1,770   |        |  | $ | 7,328  |   |  | $ | 5,147   |  
|                                                                                                                                                           |  |                                 |        |   |                                |   |         |        |  |   |        |   |  |   |         |  

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.

Effective January 1, 2007, the Company reorganized its internal management reporting in order to better align it with the current management
structure. Based on the similar nature of services and products, operating processes and service delivery methods, the rural local exchange carrier (RLEC), competitive local exchange carrier (CLEC), Internet services and
video operations are managed as one reportable segment, Wireline. The Systems Integration and Corporate and Other units continue as distinct, reportable business segments. Segment information reported for the prior year has been recast
to conform to the current year presentation, including the recasting of certain inter-company transactions.

On September 29, 2006,
D&E completed the sale of assets of the commercial voice equipment and service operations of the Systems Integration segment (Voice Systems Business) to eCommunications Systems Corporation (see Note 6). The Voice Systems Business
represented a component of our Systems Integration segment and, accordingly, the results of operations have been classified as a discontinued operation for all periods presented in the condensed consolidated statements of operations.

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, 2006. Operating results for the three and nine months ended September 30, 2007 are
not necessarily indicative of the results for the year ended December 31, 2007.



5



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

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

(Unaudited)



Property, Plant and Equipment

Property, plant and equipment is stated at cost and depreciated using a composite group remaining life method and straight-line composite rates for the regulated telephone property of the Wireline segment and the
straight-line method of depreciation for other depreciable property. Use of the composite group remaining life method requires the periodic revision of estimated useful lives. Such revisions are based on fixed asset retirement activity, and often
require related estimates and assumptions. In July 2007, D&E revised the estimated useful lives of certain fixed assets to update its composite rates for certain regulated telephone property. A majority of the revisions were to increase the
estimated lives of the assets. This change resulted in lower depreciation expense of approximately $944 ($614, or $0.04 per share after tax) in the quarter ended September 30, 2007. The estimated useful lives on the majority of property, plant
and equipment after the revisions are 5 to 39 years for buildings, 5 to 18 years for digital switching equipment, 6 to 62 years for outside plant facilities and 3 to 33 years for other equipment. Prior to the revisions, the estimated useful lives on
the majority of property, plant and equipment were 5 to 34 years for buildings, 5 to 18 years for digital switching equipment, 7 to 61 years for outside plant facilities and 3 to 39 years for other equipment.

Pension Adjustment

Management has concluded that an
error in the actuarial valuation used to estimate the Companys pension expense resulted in an understatement of pension expense, understatement of pension liability and overstatement of accumulated other comprehensive income (loss) in fiscal
years 2006 and 2005. In 2006 and 2005, pension expense was understated by $374 and $189, respectively. In the six months ended June 30, 2007, pension expense was overstated by $26. The cumulative effect of the misstatement increased operating
expense (decreased operating income) by $537 and reduced net income by $315, or $0.02 per share, in the quarter ended September 30, 2007, increased other liabilities by $2,347 as of September 30, 2007 and decreased accumulated other
comprehensive income (loss) by $1,025, net of tax, as of September 30, 2007. The Company has concluded that the amount of the misstatement is not material to the financial statements of any previous period. Accordingly, the cumulative effect of
the misstatement has been recognized as an increase in operating expense (reduction in operating income) in the statement of operations for the three and nine months ended September 30, 2007, and an increase in other liabilities and decrease in
other comprehensive income (loss) in the statement of financial position as of September 30, 2007. The effect of the misstatement on specific operating expense line items was to increase communication service expenses $272, marketing and
customer services $142 and general and administrative services $123 for the three and nine months ended September 30, 2007. The cumulative effect of the misstatement is not material with respect to the estimated net income for the year ended
December 31, 2007 or to the trend of earnings.



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

Effective
January 1, 2007, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN
48). FIN 48 prescribes a two-step process for recognizing and measuring a tax position taken or expected to be taken in a tax return. The first step involves evaluating if a tax position is more likely than not to be sustained upon examination
based on the technical merits of the position. In



6



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

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

(Unaudited)



applying this threshold, it should be presumed that the appropriate taxing authority will examine the tax position and that the authority is fully
knowledgeable of all relevant information. The second step requires a tax position that meets the more likely than not recognition threshold to be measured at the largest amount of benefit that is greater than 50 percent likely of being realized
upon ultimate settlement. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. As a result of the adoption of FIN 48, the Company recognized a
$1,013 tax benefit, consisting of an $840 decrease in goodwill and a $173 increase in retained earnings. The increase in retained earnings consisted of the recognition of an interest receivable of $266 net of taxes of $93. See Note 10 for additional
information on the adoption of FIN 48.

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, creates a framework within GAAP 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. SFAS 157 is effective for the Company in January 2008. The Company is currently evaluating the impact, if any, SFAS 157 will have on its financial position, results
of operations and cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 offers companies an irrevocable option to measure most financial assets and liabilities at fair value, with changes in fair value recorded in earnings. SFAS 159 is effective for the
Company in January 2008. The Company is currently evaluating the impact, if any, SFAS 159 will have on its financial position, results of operations and cash flows.



|3. | Cash Flow Information
|-- | ---------------------

Cash paid for income taxes
and interest expense for the nine months ended September 30, 2007 and 2006 was as follows:



|                 |  |      |        |      |   |       
|---------------- |  | ---- | ------ | ---- | - | ------
|                 |  | 2007 |        | 2006
|Income taxes     |  | $    | 6,150  |      | $ | 8,730 
|Interest expense |  |      | 11,560 |      |   | 11,861

In January 2006, D&E entered into a capital lease obligation for equipment in the amount of
$1,573. In September 2006, D&E sold assets of the commercial voice equipment and service operations of the Systems Integration segment in exchange for a note receivable of $2,500, with a fair value of $2,400, and a 10% equity investment valued
at $350 (see Note 6.)



7



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

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

(Unaudited)



|4. | Investments in and Advances to Affiliated Companies
|-- | ---------------------------------------------------

D&E owned a one-third investment in EuroTel, a domestic corporate joint venture, until its dissolution effective May 4, 2007. EuroTel held a 100% investment in PenneCom, B.V. (PenneCom), an international telecommunications holding
company, until its dissolution effective January 26, 2007. D&E accounted for its investment in EuroTel using the equity method of accounting. As of May 4, 2007, D&E had no investments in or advances to affiliated companies and will
no longer recognize equity in net losses of affiliates in its statement of operations.

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



|                    |  |                                 |   |      |                                |     |      |  |   |      |   |  |   |      |  
|------------------- |  | ------------------------------- | - | ---- | ------------------------------ | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                    |  | Three months endedSeptember 30, |   |      | Nine months endedSeptember 30, |    
|                    |  | 2007                            |   | 2006 |                                |     | 2007 |  |   | 2006 |  
|Net sales           |  | $                               |  |      | $                              |    |      |  | $ |     |   |  | $ |     |  
|Net loss            |  |                                 |  |      |                                | (62 | )    |  |   | (10  | ) |  |   | (714 | )
|D&Es share of loss |  |                                 |  |      |                                | (21 | )    |  |   | (3   | ) |  |   | (238 | )



|5. | Intangible Assets
|-- | -----------------

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



|                              |  |                    |         |   |                   |   |         |  
|----------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                              |  | September 30, 2007 |         |   | December 31, 2006 |  
|Indefinite-lived intangibles: |  |                    |         |   |                   |   |         |  
|Franchises                    |  | $                  | 104,800 |   |                   | $ | 104,800 |  
|FCC licenses                  |  |                    | 828     |   |                   |   | 828     |  
|Finite-lived intangibles:     |  |                    |         |   |                   |   |         |  
|Customer relationships:       |  |                    |         |   |                   |   |         |  
|Gross carrying amount         |  |                    | 74,606  |   |                   |   | 74,000  |  
|Accumulated amortization      |  |                    | (30,532 | ) |                   |   | (26,556 | )
|                              |  |                    |         |   |                   |   |         |  
|Net intangible assets         |  | $                  | 149,702 |   |                   | $ | 153,072 |  
|                              |  |                    |         |   |                   |   |         |  

The Company has concluded that there are no legal, regulatory, contractual, competitive, economic,
or other factors that currently limit the useful life of our franchise intangible assets. These intangible assets continue to generate adequate cash flow for the Wireline segment, and the cash flows are expected to continue. Aggregate amortization
expense related to the finite-lived intangible assets recorded for the three and nine months ended September 30, 2007 and 2006 was $1,325, $1,321, $3,976 and $4,078, respectively.



8



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

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

(Unaudited)



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



|     |  |        |      
|---- |  | ------ | -----
|Year |  | Amount
|2007 |  | $      | 5,302
|2008 |  |        | 5,302
|2009 |  |        | 5,302
|2010 |  |        | 5,302
|2011 |  |        | 5,302

In the second quarter of 2006, management revised its forecast to lower the expected value of its
customer relationships in the Systems Integration segment. Based on the results of managements assessment, the Company recorded an intangible asset impairment charge of $2,375 for the customer relationships of the Systems Integration segment
in the three months ended June 30, 2006 in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, of which $1,892 and $483 is reported in continuing and discontinued operations, respectively.



|6. | Discontinued Operations
|-- | -----------------------

On September 29,
2006, D&E completed the sale of assets of the commercial voice equipment and service operations of its Systems Integration segment (Voice Systems Business) to eCommunications Systems Corporation (eComm) under an Asset
Purchase Agreement dated September 13, 2006. The Voice Systems Business generally consisted of D&Es voice telephone equipment business, but did not include the professional data and information technology services, security, design
and network monitoring operations of D&Es Systems Integration segment.

The fair value of the sale consideration was $3,000,
consisting of cash of $250, a promissory note for $2,500, with a fair value of $2,400, issued by eComm and a 10% equity interest in eComm valued at $350, with a related put right. The promissory note is collateralized by a second priority security
interest in the assets of eComm and the joint and several personal guarantees of the other individual shareholders of eComm. The note receivable requires interest-only payments through December 31, 2006 and equal monthly principal payments plus
interest beginning February 1, 2007 and continuing through October 2009. The note bears interest at the U.S. prime rate plus 1.75%, with a minimum interest rate of 7.5%. The 10% equity ownership interest in eComm is accounted for under the cost
method in accordance with Accounting Principles Board Opinion No 18, The Equity Method of Accounting for Investments in Common Stock.

The Company has not received the scheduled principal or interest payments from eComm on the note receivable since July 1, 2007. The eComm note receivable as of September 30, 2007 was $2,121, of which $227 was past due. Based on
the results of managements assessment, there was no reserve recognized on the note receivable during the quarter or nine months ended September 30, 2007. The Company continually evaluates whether events and circumstances have occurred
that indicate that the note receivable may not be recoverable.



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)



The results of operations of the Voice Systems Business are reported as discontinued operations in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Summarized income statement information for the discontinued operations of the Voice Systems Business are as follows:



|                                                             |  |                                     |       |   |                                    |   |       |  
|------------------------------------------------------------ |  | ----------------------------------- | ----- | - | ---------------------------------- | - | ----- | -
|                                                             |  | Three monthsended September 30,2006 |       |   | Nine monthsended September 30,2006 |  
|Revenue                                                      |  | $                                   | 2,491 |   |                                    | $ | 7,005 |  
|                                                             |  |                                    
|Depreciation and amortization                                |  |                                     | 112   |   |                                    |   | 397   |  
|Other operating expenses                                     |  |                                     | 2,462 |   |                                    |   | 6,751 |  
|Intangible asset impairment                                  |  |                                     |      |   |                                    |   | 483   |  
|                                                             |  |                                     |       |   |                                    |   |       |  
|Total operating expenses                                     |  |                                     | 2,574 |   |                                    |   | 7,631 |  
|                                                             |  |                                     |       |   |                                    |   |       |  
|Operating loss                                               |  |                                     | (83   | ) |                                    |   | (626  | )
|Income tax (benefit)                                         |  |                                     | (32   | ) |                                    |   | (271  | )
|                                                             |  |                                     |       |   |                                    |   |       |  
|Loss from discontinued operations, net of income tax benefit |  | $                                   | (51   | ) |                                    | $ | (355  | )
|                                                             |  |                                     |       |   |                                    |   |       |  



|7. | Long-Term Debt
|-- | --------------

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



|                           |  |                                          |   |  |          |  |                    |         |                  |   |        
|-------------------------- |  | ---------------------------------------- | - |  | -------- |  | ------------------ | ------- | ---------------- | - | -------
|                           |  | September 30, 2007 Average Interest Rate |   |  | Maturity |  | September 30, 2007 |         | December 31,2006
|Senior Secured Term Loan A |  | 6.96                                     | % |  | 2011     |  | $                  | 30,730  |                  | $ | 33,980 
|Senior Secured Term Loan B |  | 6.99                                     | % |  | 2011     |  |                    | 140,895 |                  |   | 143,520
|Secured Term Loan          |  | 9.00                                     | % |  | 2014     |  |                    | 14,500  |                  |   | 16,000 
|Secured Term Loan          |  | 9.00                                     | % |  | 2014     |  |                    | 10,875  |                  |   | 12,000 
|Capital lease obligation   |  |                                          |   |  |          |  |                    | 1,467   |                  |   | 1,516  
|                           |  |                                          |   |  |          |  |                    |         |                  |   |        
|                           |  |                                          |   |  |          |  |                    | 198,467 |                  |   | 207,016
|Less current maturities    |  |                                          |   |  |          |  |                    | 7,069   |                  |   | 7,066  
|                           |  |                                          |   |  |          |  |                    |         |                  |   |        
|Total long-term debt       |  |                                          |   |  |          |  | $                  | 191,398 |                  | $ | 199,950
|                           |  |                                          |   |  |          |  |                    |         |                  |   |        

In the nine months ended September 30, 2007, D&E made voluntary principal prepayments of
$3,250, of which $1,750 and $1,500 was applied to Term Loan A and Term Loan B, respectively, according to the terms of the credit facility.

On September 19, 2006, D&E completed an amendment to its syndicated senior secured debt financing, consisting of a $25,000 revolving line of credit, Term Loan A in the amount of $36,061, Term Loan B in the amount of $144,689, and
$28,875 of term indebtedness. The amendment reduced the interest rates on the indebtedness, provided greater flexibility in the financial covenants, extended the scheduled amortization of principal, eliminated the $10,000 permanent reduction on the
revolving line of credit



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)



previously scheduled for December 31, 2006 and eliminated the requirement to maintain interest rate protection with a weighted average life at least two
years on 50% of total variable rate indebtedness. D&E also paid off the $7,000 balance on the revolving line of credit by drawing $7,000 from Term Loan A.

The effect of the amendment on interest rates was to reduce the revolving line of credit and Term Loan A U.S. prime and LIBOR margins by 0.75%, the Term Loan B U.S. prime and LIBOR margins by 0.25% and the average
interest rate on the term indebtedness by 0.35%. In connection with the amendment, interest rate swap agreements were terminated and the Company received a cash termination payment of $1,064 in the third quarter of 2006, which is being amortized as
a reduction of interest expense and accumulated other comprehensive income (loss) over the remainder of the original respective terms of the interest rate swap agreements.



|8. | 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 September 30, 2007, the Company had interest rate swap agreements with a total notional amount of
$75,000 and maturity dates in September 2009. The Company did not have any interest rate swap agreements at December 31, 2006. The Company recognizes all derivatives on the balance sheet at fair value. Changes in the fair value for the
effective portion of the gain or loss on a derivative that is designated as, and meets all the required criteria for, a cash flow hedge are recorded in Accumulated Other Comprehensive Income (Loss) and reclassified into earnings as the underlying
hedged items affect earnings. Amounts reclassified into earnings related to interest rate swap agreements are included in interest expense. The ineffective portion of the gain or loss on a derivative is recognized in earnings within other income or
expense. As of September 30, 2007, the fair value of the derivative was recorded as a long-term liability of $1,037. An unrealized net loss of $1,037 ($607 net of tax) at September 30, 2007 related to the interest rate swap was 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.



|9. | Commitments and Contingencies
|-- | -----------------------------

D&E has a
guarantee agreement with Crown Castle International, Inc. (Crown) for lease obligations on wireless tower sites. When D&E entered into an asset purchase agreement with Keystone Wireless LLC (Keystone Wireless), under
which Keystone Wireless purchased assets from D&E and assumed the responsibility for leases, Crown declined to release D&E from its guarantee. In the event of a default by Keystone Wireless, D&E continues to guarantee the wireless tower
site lease payments, which cover a 10-year period beginning on the commencement date of the lease of each tower. As such, the guarantee is a continuing guarantee



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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)



provided on an individual tower site basis. The lease payments start at $1.5 per site per month, with provision for an increase of 4% per year. The
maximum potential amount of undiscounted future payments that D&E could be required to make under the guarantee as of September 30, 2007 is $8,171. The majority of these tower site leases and our guarantee will expire between 2011 and 2013.
As of September 30, 2007, D&E has recorded a liability for the lease guarantees of $3,200. D&E will adjust the lease guarantee liability upon a change in managements estimate of the fair value of the guarantee or the expiration or
settlement of the guarantee.

In the event that D&E is required to pay in excess of $100 to Crown under D&Es guarantee of the
wireless tower site lease payments, a default would occur on Keystone Wireless note payable to D&E received in connection with the sale of assets to Keystone Wireless. Upon such default, the entire remaining balance of the note, which was
$4,600 as of September 30, 2007 and fully reserved on the balance sheet, would be immediately due and payable, and D&E could exercise its rights and remedies as the holder of a second lien security interest in all of the assets of Keystone
Wireless. The Company recognizes income upon collection of the principal and interest from Keystone Wireless as the note receivable is from a highly leveraged entity, and the business sold had not generated positive cash flow prior to its sale.
Therefore, the note receivable has been fully reserved on the Companys balance sheet. During the three and nine months ended September 30, 2007 and 2006, the Company recognized other income of $735, $931, $1,318 and $2,692, respectively,
from principal and interest payments collected on the note receivable.



|10. | Income Taxes
|--- | ------------

Uncertain Tax Positions

The Company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states. With few exceptions, the
Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2001.

As discussed in
Note 2, the Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the adoption, the Company recognized a $1,013 tax benefit, consisting of an $840 decrease in goodwill (related to an item in an acquired entitys tax
return in a year prior to the merger) and a $173 increase in retained earnings. The increase in retained earnings consisted of the recognition of an interest receivable of $266 net of taxes of $93. The amount of unrecognized tax benefits as of
January 1, 2007 was $3,039, which included interest income of $519. The entire amount of unrecognized tax benefits pertains to a refund claim relating to an acquired entitys tax return in a year prior to the merger; therefore, if the tax
position is sustained the tax effect would be applied to goodwill. The Company anticipates it is reasonably possible the refund claim will be settled within twelve months.

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. During the nine months ending
September 30, 2007, the Company recognized $68 of interest income in income tax expense resulting in accrued interest income of $334 at September 30, 2007.



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)



|11. | 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. There were no options to purchase shares excluded from
the computation of earnings per share assuming dilution in the three and nine months ended September 30, 2007. Options to purchase 55,104 shares for the three and nine months ended September 30, 2006, respectively, were not included in the
computation of earnings per share assuming dilution because their effect on earnings per share would have been antidilutive.

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



|                                                                                                    |  |                                 |        |      |                                |        |      |  |      |        |  |   |        |  
|--------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | ---- | ------------------------------ | ------ | ---- |  | ---- | ------ |  | - | ------ | -
|                                                                                                    |  | Three months endedSeptember 30, |        |      | Nine months endedSeptember 30, |       
|                                                                                                    |  | 2007                            |        | 2006 |                                |        | 2007 |  | 2006 |       
|Income from continuing operations                                                                   |  | $                               | 3,755  |      | $                              | 1,652  |      |  | $    | 8,651  |  | $ | 4,484  |  
|Loss from discontinued operations                                                                   |  |                                 |       |      |                                | (921   | )    |  |      |       |  |   | (1,225 | )
|                                                                                                    |  |                                 |        |      |                                |        |      |  |      |        |  |   |        |  
|Net income                                                                                          |  | $                               | 3,755  |      | $                              | 731    |      |  | $    | 8,651  |  | $ | 3,259  |  
|                                                                                                    |  |                                 |        |      |                                |        |      |  |      |        |  |   |        |  
|Basic earnings per share:                                                                           |  |                                 |        |      |                                |        |      |  |      |        |  |   |        |  
|Weighted average shares outstanding (thousands)                                                     |  |                                 | 14,434 |      |                                | 14,377 |      |  |      | 14,416 |  |   | 14,362 |  
|                                                                                                    |  |                                 |        |      |                                |        |      |  |      |        |  |   |        |  
|Income from continuing operations                                                                   |  | $                               | 0.26   |      | $                              | 0.11   |      |  | $    | 0.60   |  | $ | 0.31   |  
|Loss from discontinued operations                                                                   |  |                                 |       |      |                                | (0.06  | )    |  |      |       |  |   | (0.08  | )
|                                                                                                    |  |                                 |        |      |                                |        |      |  |      |        |  |   |        |  
|Net income per common share                                                                         |  | $                               | 0.26   |      | $                              | 0.05   |      |  | $    | 0.60   |  | $ | 0.23   |  
|                                                                                                    |  |                                 |        |      |                                |        |      |  |      |        |  |   |        |  
|Diluted earnings per share:                                                                         |  |                                 |        |      |                                |        |      |  |      |        |  |   |        |  
|Weighted average shares outstanding (thousands)                                                     |  |                                 | 14,434 |      |                                | 14,377 |      |  |      | 14,416 |  |   | 14,362 |  
|Incremental shares from assumed stock option exercises and contingently issuable shares (thousands) |  |                                 | 75     |      |                                | 67     |      |  |      | 70     |  |   | 63     |  
|                                                                                                    |  |                                 |        |      |                                |        |      |  |      |        |  |   |        |  
|Adjusted weighted average shares outstanding (thousands)                                            |  |                                 | 14,509 |      |                                | 14,444 |      |  |      | 14,486 |  |   | 14,425 |  
|                                                                                                    |  |                                 |        |      |                                |        |      |  |      |        |  |   |        |  
|Income from continuing operations                                                                   |  | $                               | 0.26   |      | $                              | 0.11   |      |  | $    | 0.60   |  | $ | 0.31   |  
|Loss from discontinued operations                                                                   |  |                                 |       |      |                                | (0.06  | )    |  |      |       |  |   | (0.08  | )
|                                                                                                    |  |                                 |        |      |                                |        |      |  |      |        |  |   |        |  
|Net income per common share                                                                         |  | $                               | 0.26   |      | $                              | 0.05   |      |  | $    | 0.60   |  | $ | 0.23   |  
|                                                                                                    |  |                                 |        |      |                                |        |      |  |      |        |  |   |        |  



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)



|12. | Stock-Based Compensation
|--- | ------------------------

Stock Options

The grant-date fair value of 62,900 stock options awarded in the nine months ended September 30, 2007 was $4.28, which was estimated using the
Black-Scholes option-pricing model with the following assumptions:



|                        |  |        
|----------------------- |  | -------
|Dividend yield          |  | 3.86%  
|Expected life           |  | 6 Years
|Expected volatility     |  | 45.00% 
|Risk-free interest rate |  | 4.61%  

There were no stock option grants in the nine months ended September 30, 2006. There were
forfeitures of 6,000 stock option grants in the nine months ended September 30, 2007. There were a total of 213,452 stock options exercisable with a weighted-average exercise price of $10.10 at September 30, 2007. The weighted average
remaining contractual term was approximately 4.6 years for stock options outstanding as of September 30, 2007. The total intrinsic value was approximately $978 for stock options outstanding as of September 30, 2007.

Compensation expense related to stock options in the three and nine months ended September 30, 2007 was $20 and $61, respectively. The related tax
benefits were $8 and $25 for the three and nine months ended September 30, 2007, respectively. There was no compensation expense related to stock option grants in the nine months ended September 30, 2006.

Performance Restricted Shares

During the nine months
ended September 30, 2007 and 2006, 20,000 and 36,700 common shares, respectively, were granted as performance restricted shares with performance conditions. There were forfeitures of 9,266 performance restricted shares in the nine months ended
September 30, 2007. 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 nine months ended
September 30, 2007 and 2006 was $73, $69, $189 and $202, respectively. The related tax benefits for the three and nine months ended September 30, 2007 and 2006 were $30, $29, $79 and $84, respectively.

In the second and third quarter of 2007, the performance goals for 7,500 performance restricted shares were met. The remaining expense recognized in the
three and nine months ended September 30, 2007 was $2 and $6, respectively. The related tax benefits for three and nine months ended September 30, 2007 were $1 and $2, respectively. The performance restricted shares plus dividend
equivalents were converted to shares of common stock in July 2007.



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)



Fully Vested Shares

During the nine months ended September 30, 2007 and 2006, there were 219 and 3,100 fully vested shares of common stock, respectively, issued to employees and a non-employee director of the Company. The total fair
value of fully vested shares issued during the nine months ended September 30, 2007 and 2006 was $3 and $28, respectively, and the related tax benefits were $1 and $11, respectively.



|13. | 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 September 30, |       
|                                         |  | 2007                             |        |   | 2006                    |   |        | 2007 |  |   | 2006 |  
|Components of Net Periodic Benefit Cost: |  |                                  |        |   |                         |   |        |      |  |   |      |   |  |   |      |  
|Service cost                             |  | $                                | 429    |   |                         | $ | 551    |      |  | $ |     |   |  | $ | 2    |  
|Interest cost                            |  |                                  | 1,228  |   |                         |   | 921    |      |  |   | 46   |   |  |   | 40   |  
|Expected return on plan assets           |  |                                  | (920   | ) |                         |   | (799   | )    |  |   | (8   | ) |  |   | (7   | )
|Amortization of prior service cost       |  |                                  | (48    | ) |                         |   | (29    | )    |  |   | (41  | ) |  |   | (41  | )
|Amortization of net loss                 |  |                                  | 702    |   |                         |   | 307    |      |  |   | 29   |   |  |   | 21   |  
|Curtailment gain                         |  |                                  |       |   |                         |   | (116   | )    |  |   |     |   |  |   |     |  
|                                         |  |                                  |        |   |                         |   |        |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost                |  | $                                | 1,391  |   |                         | $ | 835    |      |  | $ | 26   |   |  | $ | 15   |  
|                                         |  |                                  |        |   |                         |   |        |      |  |   |      |   |  |   |      |  
|                                         |  |                                 
|                                         |  | Pension Benefits                 |        |   | Postretirement Benefits |  
|                                         |  | Nine months ended September 30,  |       
|                                         |  | 2007                             |        |   | 2006                    |   |        | 2007 |  |   | 2006 |  
|Components of Net Periodic Benefit Cost: |  |                                  |        |   |                         |   |        |      |  |   |      |   |  |   |      |  
|Service cost                             |  | $                                | 1,248  |   |                         | $ | 1,719  |      |  | $ | 1    |   |  | $ | 6    |  
|Interest cost                            |  |                                  | 3,213  |   |                         |   | 2,779  |      |  |   | 138  |   |  |   | 120  |  
|Expected return on plan assets           |  |                                  | (2,758 | ) |                         |   | (2,503 | )    |  |   | (24  | ) |  |   | (21  | )
|Amortization of prior service cost       |  |                                  | (111   | ) |                         |   | (63    | )    |  |   | (122 | ) |  |   | (123 | )
|Amortization of net loss                 |  |                                  | 1,417  |   |                         |   | 1,023  |      |  |   | 88   |   |  |   | 61   |  
|Curtailment gain                         |  |                                  |       |   |                         |   | (116   | )    |  |   |     |   |  |   |     |  
|Special termination benefits             |  |                                  |       |   |                         |   |       |      |  |   |     |   |  |   | 112  |  
|                                         |  |                                  |        |   |                         |   |        |      |  |   |      |   |  |   |      |  
|Net periodic benefit cost                |  | $                                | 3,009  |   |                         | $ | 2,839  |      |  | $ | 81   |   |  | $ | 155  |  
|                                         |  |                                  |        |   |                         |   |        |      |  |   |      |   |  |   |      |  



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)



The net periodic benefit cost is reported in the condensed consolidated statements of operations as
follows:



|                          |  |                                  |       |      |                         |       |      |  |      |    |  |   |    
|------------------------- |  | -------------------------------- | ----- | ---- | ----------------------- | ----- | ---- |  | ---- | -- |  | - | ---
|                          |  | Pension Benefits                 |       |      | Postretirement Benefits
|                          |  | Three months ended September 30,
|                          |  | 2007                             |       | 2006 |                         |       | 2007 |  | 2006
|Continuing operations     |  | $                                | 1,391 |      | $                       | 877   |      |  | $    | 26 |  | $ | 13 
|Discontinued operations   |  |                                  |      |      |                         | (42   | )    |  |      |   |  |   | 2  
|                          |  |                                  |       |      |                         |       |      |  |      |    |  |   |    
|Net periodic benefit cost |  | $                                | 1,391 |      | $                       | 835   |      |  | $    | 26 |  | $ | 15 
|                          |  |                                  |       |      |                         |       |      |  |      |    |  |   |    
|                          |  |                                 
|                          |  | Pension Benefits                 |       |      | Postretirement Benefits
|                          |  | Nine months ended September 30, 
|                          |  | 2007                             |       | 2006 |                         |       | 2007 |  | 2006
|Continuing operations     |  | $                                | 3,009 |      | $                       | 2,658 |      |  | $    | 81 |  | $ | 138
|Discontinued operations   |  |                                  |      |      |                         | 181   |      |  |      |   |  |   | 17 
|                          |  |                                  |       |      |                         |       |      |  |      |    |  |   |    
|Net periodic benefit cost |  | $                                | 3,009 |      | $                       | 2,839 |      |  | $    | 81 |  | $ | 155
|                          |  |                                  |       |      |                         |       |      |  |      |    |  |   |    

During the nine months ended September 30, 2007, D&E contributed $4,800 to its defined
benefit pension plans and made no contribution to its other postretirement benefit plan. The Company presently anticipates that no additional contributions to its defined benefit plans will be made during the remainder of 2007.

During the second quarter of 2007, the Company amended the D&E Communications, Inc. Employees Retirement Plan to exclude from membership any
non-union employees hired on or after July 1, 2007. This change will have no effect on pension expense for the current fiscal year, as the plan requires one year of service before new employees become eligible to participate. Beginning in 2009,
the Company expects to realize a modest reduction in pension expense as a result of the plan being closed to non-union employees hired on or after July 1, 2007, assuming other factors used to determine pension expense remain constant in future
years.

During the second quarter of 2007, the Company amended the D&E Communications, Inc. Employees 401(k) Savings Plan in
connection with the amendment to the retirement plan described above. Under the amendment, non-union employees hired on or after July 1, 2007 have the opportunity to receive, based on the amount of contributions that they make to the plan,
Company matching contributions in an amount that is up to two percent greater than the Company matching contributions that non-union employees who were hired before July 1, 2007 have the opportunity to receive.

During the third quarter of 2007, management concluded that an error in the actuarial valuation used to estimate the Companys pension expense
resulted in an understatement of pension expense, understatement of pension liability and overstatement of accumulated other comprehensive income (loss) in fiscal years 2006 and 2005. The cumulative effect of the misstatement is described in more
detail in Note 1 of the Notes to Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q.



16



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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)



|14. | 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 our 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 endedSeptember 30, |          |   | Three months endedSeptember 30, |   |          | Three months endedSeptember 30, | 
|                    |  | 2007                            |          |   | 2006                            |   |          | 2007                            |  |   | 2006 |   |  | 2007 |    |   | 2006 |  
|Segment             |  |                                 |          |   |                                 |   |          |                                 |  |   |      |   |  |      |    |   |      |   |        |   |  |   |        |  
|Wireline            |  | $                               | 36,398   |   |                                 | $ | 38,472   |                                 |  | $ | 4    |   |  | $    | 1  |   |      | $ | 9,190  |   |  | $ | 7,282  |  
|Systems Integration |  |                                 | 1,427    |   |                                 |   | 1,773    |                                 |  |   |     |   |  |      |   |   |      |   | (459   | ) |  |   | (989   | )
|Corporate and Other |  |                                 | 385      |   |                                 |   | 379      |                                 |  |   |     |   |  |      |   |   |      |   | (185   | ) |  |   | (122   | )
|Eliminations        |  |                                 |         |   |                                 |   |         |                                 |  |   | (4   | ) |  |      | (1 | ) |      |   |       |   |  |   |       |  
|                    |  |                                 |          |   |                                 |   |          |                                 |  |   |      |   |  |      |    |   |      |   |        |   |  |   |        |  
|Total               |  | $                               | 38,210   |   |                                 | $ | 40,624   |                                 |  | $ |     |   |  | $    |   |   |      | $ | 8,546  |   |  | $ | 6,171  |  
|                    |  |                                 |          |   |                                 |   |          |                                 |  |   |      |   |  |      |    |   |      |   |        |   |  |   |        |  
|                    |  |                                 |         
|                    |  | External Revenues               |          |   | Intersegment Revenues           |   |          | Operating Income (Loss)         | 
|                    |  | Nine months endedSeptember 30,  |          |   | Nine months endedSeptember 30,  |   |          | Nine months endedSeptember 30,  | 
|                    |  | 2007                            |          |   | 2006                            |   |          | 2007                            |  |   | 2006 |   |  | 2007 |    |   | 2006 |  
|Segment             |  |                                 |          |   |                                 |   |          |                                 |  |   |      |   |  |      |    |   |      |   |        |   |  |   |        |  
|Wireline            |  | $                               | 108,477  |   |                                 | $ | 116,306  |                                 |  | $ | 16   |   |  | $    | 3  |   |      | $ | 22,985 |   |  | $ | 21,284 |  
|Systems Integration |  |                                 | 4,178    |   |                                 |   | 4,793    |                                 |  |   |     |   |  |      | 4  |   |      |   | (1,817 | ) |  |   | (5,424 | )
|Corporate and Other |  |                                 | 1,120    |   |                                 |   | 1,172    |                                 |  |   |     |   |  |      |   |   |      |   | (590   | ) |  |   | (517   | )
|Eliminations        |  |                                 |         |   |                                 |   |         |                                 |  |   | (16  | ) |  |      | (7 | ) |      |   |       |   |  |   |       |  
|                    |  |                                 |          |   |                                 |   |          |                                 |  |   |      |   |  |      |    |   |      |   |        |   |  |   |        |  
|Total               |  | $                               | 113,775  |   |                                 | $ | 122,271  |                                 |  | $ |     |   |  | $    |   |   |      | $ | 20,578 |   |  | $ | 15,343 |  
|                    |  |                                 |          |   |                                 |   |          |                                 |  |   |      |   |  |      |    |   |      |   |        |   |  |   |        |  
|                    |  |                                 |          |   |                                
|                    |  | Segment Assets                  |          |   |                                 |   |          |                                 |  |   |      |   |  |      |   
|                    |  | September 30,2007               |          |   | December 31,2006                |   |          |                                 |  |   |      |   |  |      |    |   |      |  
|Segment             |  |                                 |          |   |                                 |   |          |                                 |  |   |      |   |  |      |    |   |      |   |        |   |  |   |        |  
|Wireline            |  | $                               | 492,072  |   |                                 | $ | 495,721  |                                 |  |   |      |   |  |      |    |   |      |   |        |   |  |   |        |  
|Systems Integration |  |                                 | 7,645    |   |                                 |   | 10,628   |                                 |  |   |      |   |  |      |    |   |      |   |        |   |  |   |        |  
|Corporate and Other |  |                                 | 447,113  |   |                                 |   | 440,430  |                                 |  |   |      |   |  |      |    |   |      |   |        |   |  |   |        |  
|Eliminations        |  |                                 | (444,202 | ) |                                 |   | (436,205 | )                               |  |   |      |   |  |      |    |   |      |   |        |   |  |   |        |  
|                    |  |                                 |          |   |                                 |   |          |                                 |  |   |      |   |  |      |    |   |      |   |        |   |  |   |        |  
|Total               |  | $                               | 502,628  |   |                                 | $ | 510,574  |                                 |  |   |      |   |  |      |    |   |      |   |        |   |  |   |        |  
|                    |  |                                 |          |   |                                 |   |          |                                 |  |   |      |   |  |      |    |   |      |   |        |   |  |   |        |  



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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 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 endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|                                                                                               |  | 2007                            |        |   | 2006                           |   |        | 2007 |  |   | 2006    |  
|Operating income from reportable segments                                                      |  | $                               | 8,731  |   |                                | $ | 6,293  |      |  | $ | 21,168  |   |  | $ | 15,860  |  
|Corporate and other operating loss                                                             |  |                                 | (185   | ) |                                |   | (122   | )    |  |   | (590    | ) |  |   | (517    | )
|Equity in net losses of affiliates                                                             |  |                                 |       |   |                                |   | (21    | )    |  |   | (3      | ) |  |   | (238    | )
|Interest expense                                                                               |  |                                 | (3,745 | ) |                                |   | (3,832 | )    |  |   | (11,199 | ) |  |   | (11,537 | )
|Loss on early extinguishment of debt                                                           |  |                                 |       |   |                                |   | (1,094 | )    |  |   |        |   |  |   | (1,094  | )
|Other, net                                                                                     |  |                                 | 962    |   |                                |   | 1,038  |      |  |   | 3,081   |   |  |   | 3,555   |  
|                                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Income from continuing operations before income taxes and dividends on utility preferred stock |  | $                               | 5,763  |   |                                | $ | 2,262  |      |  | $ | 12,457  |   |  | $ | 6,029   |  
|                                                                                               |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)

Forward-Looking Statements

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



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



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



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



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



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



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



| |  |  | reductions in rates or call volume that 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, 2006, as filed on Form



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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)



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

Effective January 1, 2007, we
reorganized our internal management reporting in order to better align it with our current management structure. Based on the similar nature of services and products, operating processes and service delivery methods, the rural local exchange carrier
(RLEC), competitive local exchange carrier (CLEC), Internet Services, cable television and video operations are managed as one reportable segment, Wireline. The Systems Integration and Corporate and Other units
continue as distinct, reportable business segments. Segment information reported for the prior year has been recast to conform to the current year presentation. The measure of profitability that management uses to evaluate performance of our
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 provides broadband integrated communications services to residential and business customers in markets throughout the eastern half
of Pennsylvania. This segment includes three RLECs, providing services in parts of Berks, Lancaster, Union and smaller portions of five other adjacent counties in Pennsylvania. This segment also includes a CLEC, providing services in the Lancaster,
Reading, Harrisburg, State College, Pottstown, Williamsport and Altoona, Pennsylvania metropolitan areas, which we refer to as our edge-out markets. We offer our Wireline customers a comprehensive package of communications services,
including local and long distance telephone services, broadband services, Internet access, collocation facilities and, in certain of our markets, video services.

Our Systems Integration segment provides business customers with professional data and information technology services, security assessments and penetration tests, network design and monitoring. 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 September 30, 2007, we served 126,126 RLEC access lines, 45,775 CLEC access lines, 36,782 digital subscriber lines
(DSL)/high-speed Internet subscribers, 3,790 dial-up Internet access subscribers, 7,668 video subscribers and 1,004 web-hosting customers. For the quarter ended September 30, 2007, we generated total revenues of $38,210, operating
income of $8,546 and net income of $3,755. For the nine months ended September 30, 2007, we generated total revenues of $113,775, operating income of $20,578 and net income of $8,651.



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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 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 will also be aggressively pursued. Targeting customers with a broadband connection to their home and/or
business is vital for the future delivery of Internet Protocol (IP) 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 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 applications.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | We are continuing to pursue the goal of Delivering Excellence for our customers by providing reliable, responsive, state-of-the-art broadband
communications services, including voice, high-speed data and, in certain of our markets, video. We assess and tailor the bundling of services to best serve our customers and endeavor to achieve a competitive advantage in our local markets. 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are endeavoring to be a single source provider of voice and data communications services to our business customers. We believe that the convergence and
complexity of voice communications and data network technologies has increased the need for businesses to seek a single provider for all of their communications, information technology and collocation 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 Systems Integration and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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)



| | Wireline services for a customized and differentiated offering, including professional information technology services, network security services and network
monitoring and response.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We continue to make our commitment to customer service a top priority. Our Network Operations Center (NOC) provides monitoring, repair and emergency
services 24 hours a day, 7 days a week and 365 days a year, which strengthens our relationships with our customers and enhances our competitive position. In an effort to enhance the customers experience when they call in service issues, we
utilize a case management system in the NOC. The system gives us the ability to better manage and prioritize service calls through the use of several automated tests that allow us to analyze every issue that is called in, determine the location of
the issue and identify the appropriate technical group to resolve the issue.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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. Using softswitch technology currently being implemented, a unified communications portfolio of integrated application services (e.g., email, voicemail, instant messaging and video conferencing) will provide customers with more flexible
communication alternatives.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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, 2006 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 business segments.

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 Voice over Internet Protocol
(VoIP), broadband services, and IP video over telephone companies copper and fiber networks, cable companies coaxial and fiber networks, wireless telephone companies wireless networks, satellite companies
satellite networks and electric companies electric lines. Although 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 recent decreases in the number of access lines in our RLEC
markets reflect such increased competition, in addition to the elimination of second lines by our customers as they shift to DSL for high-speed Internet access.



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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 have competitive strengths and weaknesses in the competition for the
customers communications dollar. On a national basis, cable TV companies have the major market share of paid video services and have a larger market share of broadband Internet access services than telephone companies. Some cable TV companies
are now delivering VoIP services with systems fully capable of providing IP telephony services. We offer video over a portion of our fiber-copper network in the area of Union County, 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 small enough to be able to provide an individual response to customer
services needs. We feel that this responsiveness will be critical to our ability to successfully convince both our business and residential customers to see us as their trusted advisor for integrated communications services, particularly in light of
the substantially greater resources of many of our competitors.

In order to remain competitive and provide the broadband
services required for high-speed data and video, we must continue to invest substantial amounts in 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 markets
by December 31, 2008. In keeping with the foregoing, our 2007 capital budget is approximately $25,000. However, our ability to invest in infrastructure to remain competitive may be limited by our indebtedness of $198,467 as of
September 30, 2007.

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. In this
regard, the regulatory environment governing ILEC operations has been and will likely continue to be very liberal in its approach to promoting competition and network access, which may increase the likelihood of new competitors offering similar
services in our service areas. The introduction of new competitors could have a negative effect on our RLEC markets, yet at the same time provide opportunities in our CLEC markets.

Service Electric Telephone Company, LLC (Service Electric) is a facilities-based CLEC competitor primarily in our Conestoga
RLEC market. Service Electric has received authority to operate in our three RLEC markets and has signed an interconnection agreement with us allowing them to begin operations in our RLEC markets. In addition, CORE Communications, Inc
(CORE) filed an amended application on August 19, 2005 with the PA PUC to be a facilities-based



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



CLEC providing service in our RLEC markets. On January 25, 2006, CORE served our three RLECs with their Petition for Arbitration. Included in their
filing is a request seeking a termination of the rural exemption for the limited purpose of permitting the interconnection standards to apply to any direct interconnection between our three RLECs and CORE. On January 3, 2007, rural carriers in
Pennsylvania, including our three RLECS, filed a joint Petition for Review in the Commonwealth Court of Pennsylvania objecting to the PA PUCs order granting CORE a certificate to provide telecommunications service in the rural carriers
territories. On January 8, 2007, CORE filed an Amended Petition for Arbitration of Interconnection Rates, Terms and Conditions with the PA PUC, seeking immediate PA PUC arbitration of issues on a collective basis with our three RLECs and a
number of other small ILECs in Pennsylvania. On April 4, 2007, the PA PUCs Administrative Law Judge granted a request for stay of COREs Amended Petition for Arbitration, pending the outcome of the Joint Petition for Review filed
with the Commonwealth Court. On May 31, 2007, the PA PUC overturned the stay of the judge, permitting the arbitration of items in disagreement relating to rates, terms and conditions of the interconnection agreement to proceed before the
Administrative Law Judge. On August 20, 2007, the Administrative Law Judge held a pre-hearing conference and established a hearing date of March 11, 2008 through March 13, 2008, with legal briefs and final offers by both sides to be
filed by April 30, 2008 in regards to issues involving the interconnection agreement. It is possible that the Commonwealth Court will schedule oral arguments in this petition regarding COREs certification as a telecommunications company
in rural markets by the end of 2007. CORE is unable to operate in our RLEC markets until the Commonwealth Court proceeding is resolved and we enter into an interconnection agreement with them.

Legislation enacted in Pennsylvania in the fourth quarter of 2004 provides a continued 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 to have access to
our customers by entering our markets and using our facilities through interconnection agreements to provide local services.

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 markets. Similarly, in markets 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 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 (NECA). If the
FCC would disallow RLECs to receive compensation for interstate services based on the NECA



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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)



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 the RLECs future revenues. The average schedule settlement formulas, which were effective July 1, 2006, included a two-year transition period for implementing the new calculations. The FCC has also approved
NECAs changes in average schedule settlement formulas to be effective July 1, 2007, which include a two-year transition period for implementing the new calculations. We estimate that the total combined effect of the July 2006 and 2007
changes in NECA average schedule settlement formulas on consolidated network access revenues, based on 2006 access lines and minutes of use, will be a reduction of $800 for the last three months of 2007, $4,100 in 2008, $4,700 in 2009 and $4,800
thereafter.

On February 10, 2005, the FCC initiated a proceeding at CC Docket No. 01-92 to develop a unified intercarrier
compensation methodology. As a part of this proceeding, the FCC is now considering and soliciting 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 rule changes that result from
this proceeding could have a material effect on our revenues, expenses and earnings. The FCC has not yet acted on this notice, and there is no guarantee that a final order addressing potential modifications to the current access charge system will
be issued in 2007. Until the FCC adopts a specific proposal, we are unable to predict how much the proposed changes will affect our company and whether they will be favorable or unfavorable.

The PA PUC has a proceeding pending to consider changes in intrastate switched access rates and PA USF, along with potential impacts on local service
rates, for rural local exchange carriers in Pennsylvania. On August 30, 2006, a filing was made by numerous parties, including a rural coalition group that included our RLECs, to stay this proceeding. On November 9, 2006, the PA PUC
granted in its entirety a stay of this proceeding pending the outcome of the FCCs Unified Intercarrier Compensation proceeding at CC Docket No. 01-92 or for one year, whichever is earlier. On October 16, 2007, a status report of
changes since November 9, 2006 on issues affecting intrastate access and PA USF was filed with the PA PUC by attorneys on behalf of the rural coalition group. In addition, a motion was filed with the PA PUC requesting a further stay of the
intrastate access and PA USF proceeding by attorneys on behalf of the rural coalition group, the Office of Consumer Advocate, the Office of Trial Staff and Embarq. There has been no new activity at the FCC regarding intercarrier access reform. At
this time, we cannot predict the outcome of the FCCs proceeding or what the PA PUC may do.

Our RLECs filed for changes in local and
intrastate access rates to be effective July 1, 2006, in accordance with our state regulatory price-cap guidelines (Chapter 30 Plan). When we made our filings to increase certain local and intrastate access rates, no customer filed
any complaint or request for intervention. 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 the PA PUC to investigate our ability to increase access rates. On November 9, 2006, the PA PUC elected to have its Office of Administrative Law Judge hold a hearing to determine whether the increases in
access rates violated any previous PA PUC order or decision. This hearing was held on January 17, 2007. Our RLECs provided a witness in support of the access rate increases and the Office of Consumer Advocate and the Office of Small Business
Advocate also filed comments in



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



support of our RLECs rate increases. Verizon provided a witness contending that local end-user rates should be increased, not intrastate access rates.
On February 20, 2007, the Administrative Law Judge issued a recommendation to the PA PUC that no rescission or amendment is warranted to our increase in certain local and intrastate access rates. On July 11, 2007, the PA PUC reversed the
recommendation of the Administrative Law Judge and rescinded its June 2006 order allowing the increase in our access rates. The PA PUC decision to refund the access rate increases to carriers will have no impact on the results of our operations
since we have been recording a reserve against amounts that have been collected from carriers related to the rate increases that were challenged by Verizon. The total amount of the reserve at September 30, 2007 was $1,147, of which $959 and
$188 were recorded in the nine months ending September 30, 2007 and the fourth quarter of 2006, respectively. We are prepared to refund the amounts that have been collected from the carriers related to this rate increase when our petition for
reconsideration/clarification identified in the following paragraph is addressed by the PA PUC. We are reviewing all other options as well and cannot predict what course of action we will take regarding the refund until we receive the PA PUCs
order on our petition.

We have filed a request for reconsideration/clarification of the order on a number of issues and have proposed an
increase in local service rates for one of our RLECs retroactive to November 15, 2006. Since the proposed increase in local service rates in one of our RLECs will cause those rates to exceed a maximum cap established per PA PUC order in 2003,
increases in billed rates for residential and business single party service above the caps would be received from the Pennsylvania Universal Service Fund (PaUSF) and not the customer. If we are successful with our
reconsideration/clarification request for increased revenue from the PaUSF, we estimate that we will recognize, in the period approval is received, additional local service revenue of $428 related to the period from November 15, 2006 to
June 30, 2007 and $96 per month beginning July 1, 2007.

The PA PUC approved our request to increase local service rates
effective July 1, 2007, in accordance with our Chapter 30 Plan. The new monthly rates are designed to generate an increase in annual consolidated revenue of approximately $1,600. 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.



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

We had indebtedness
of $198,467, including current maturities and a capital lease obligation of $1,467 at September 30, 2007. 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



26



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



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
may 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 the requirement to remain in compliance with financial covenants.

Results of Operations

The following table is a summary of our operating results by segment for the three and nine months
ended September 30, 2007 and 2006.



|                              |  |          |        |                     |   |       |                    |  |   |              |   |  |              |    |   |  |   |       
|----------------------------- |  | -------- | ------ | ------------------- | - | ----- | ------------------ |  | - | ------------ | - |  | ------------ | -- | - |  | - | ------
|Three months ended            |  | Wireline |        | Systems Integration |   |       | Corporateand Other |  |   | Eliminations |   |  | TotalCompany
|September 30, 2007            |  |          |        |                     |   |       |                    |  |   |              |   |  |              |    |   |  |   |       
|Revenues  External           |  | $        | 36,398 |                     | $ | 1,427 |                    |  | $ | 385          |   |  | $            |   |   |  | $ | 38,210
|Revenues  Intercompany       |  |          | 4      |                     |   |      |                    |  |   |             |   |  |              | (4 | ) |  |   |      
|                              |  |          |        |                     |   |       |                    |  |   |              |   |  |              |    |   |  |   |       
|Total Revenues                |  |          | 36,402 |                     |   | 1,427 |                    |  |   | 385          |   |  |              | (4 | ) |  |   | 38,210
|                              |  |          |        |                     |   |       |                    |  |   |              |   |  |              |    |   |  |   |       
|                              |  |          |        |                     |  
|Depreciation and Amortization |  |          | 7,452  |                     |   | 47    |                    |  |   | 179          |   |  |              |   |   |  |   | 7,678 
|Other Operating Expenses      |  |          | 19,760 |                     |   | 1,839 |                    |  |   | 391          |   |  |              | (4 | ) |  |   | 21,986
|                              |  |          |        |                     |   |       |                    |  |   |              |   |  |              |    |   |  |   |       
|Total Operating Expenses      |  |          | 27,212 |                     |   | 1,886 |                    |  |   | 570          |   |  |              | (4 | ) |  |   | 29,664
|                              |  |          |        |                     |   |       |                    |  |   |              |   |  |              |    |   |  |   |       
|Operating Income (Loss)       |  | $        | 9,190  |                     | $ | (459  | )                  |  | $ | (185         | ) |  | $            |   |   |  | $ | 8,546 
|                              |  |          |        |                     |   |       |                    |  |   |              |   |  |              |    |   |  |   |       
|September 30, 2006            |  |          |        |                     |   |       |                    |  |   |              |   |  |              |    |   |  |   |       
|Revenues  External           |  | $        | 38,472 |                     | $ | 1,773 |                    |  | $ | 379          |   |  | $            |   |   |  | $ | 40,624
|Revenues  Intercompany       |  |          | 1      |                     |   |      |                    |  |   |             |   |  |              | (1 | ) |  |   |      
|                              |  |          |        |                     |   |       |                    |  |   |              |   |  |              |    |   |  |   |       
|Total Revenues                |  |          | 38,473 |                     |   | 1,773 |                    |  |   | 379          |   |  |              | (1 | ) |  |   | 40,624
|                              |  |          |        |                     |   |       |                    |  |   |              |   |  |              |    |   |  |   |       
|                              |  |          |        |                     |  
|Depreciation and Amortization |  |          | 9,212  |                     |   | 137   |                    |  |   | 187          |   |  |              |   |   |  |   | 9,536 
|Other Operating Expenses      |  |          | 21,979 |                     |   | 2,625 |                    |  |   | 314          |   |  |              | (1 | ) |  |   | 24,917
|                              |  |          |        |                     |   |       |                    |  |   |              |   |  |              |    |   |  |   |       
|Total Operating Expenses      |  |          | 31,191 |                     |   | 2,762 |                    |  |   | 501          |   |  |              | (1 | ) |  |   | 34,453
|                              |  |          |        |                     |   |       |                    |  |   |              |   |  |              |    |   |  |   |       
|Operating Income (Loss)       |  | $        | 7,282  |                     | $ | (989  | )                  |  | $ | (122         | ) |  | $            |   |   |  | $ | 6,171 
|                              |  |          |        |                     |   |       |                    |  |   |              |   |  |              |    |   |  |   |       



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)



|                              |  |          |         |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |        
|----------------------------- |  | -------- | ------- | ------------------- | - | ------ | ------------------ |  | - | ------------ | - |  | ------------ | --- | - |  | - | -------
|Nine months ended             |  | Wireline |         | Systems Integration |   |        | Corporateand Other |  |   | Eliminations |   |  | TotalCompany
|September 30, 2007            |  |          |         |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |        
|Revenues  External           |  | $        | 108,477 |                     | $ | 4,178  |                    |  | $ | 1,120        |   |  | $            |    |   |  | $ | 113,775
|Revenues  Intercompany       |  |          | 16      |                     |   |       |                    |  |   |             |   |  |              | (16 | ) |  |   |       
|                              |  |          |         |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |        
|Total Revenues                |  |          | 108,493 |                     |   | 4,178  |                    |  |   | 1,120        |   |  |              | (16 | ) |  |   | 113,775
|                              |  |          |         |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |        
|                              |  |          |         |                     |  
|Depreciation and Amortization |  |          | 25,624  |                     |   | 224    |                    |  |   | 548          |   |  |              |    |   |  |   | 26,396 
|Other Operating Expenses      |  |          | 59,884  |                     |   | 5,771  |                    |  |   | 1,162        |   |  |              | (16 | ) |  |   | 66,801 
|                              |  |          |         |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |        
|Total Operating Expenses      |  |          | 85,508  |                     |   | 5,995  |                    |  |   | 1,710        |   |  |              | (16 | ) |  |   | 93,197 
|                              |  |          |         |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |        
|Operating Income (Loss)       |  | $        | 22,985  |                     | $ | (1,817 | )                  |  | $ | (590         | ) |  | $            |    |   |  | $ | 20,578 
|                              |  |          |         |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |        
|September 30, 2006            |  |          |         |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |        
|Revenues  External           |  | $        | 116,306 |                     | $ | 4,793  |                    |  | $ | 1,172        |   |  | $            |    |   |  | $ | 122,271
|Revenues  Intercompany       |  |          | 3       |                     |   | 4      |                    |  |   |             |   |  |              | (7  | ) |  |   |       
|                              |  |          |         |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |        
|Total Revenues                |  |          | 116,309 |                     |   | 4,797  |                    |  |   | 1,172        |   |  |              | (7  | ) |  |   | 122,271
|                              |  |          |         |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |        
|                              |  |          |         |                     |  
|Depreciation and Amortization |  |          | 27,383  |                     |   | 539    |                    |  |   | 567          |   |  |              |    |   |  |   | 28,489 
|Intangible Asset Impairment   |  |          |        |                     |   | 1,892  |                    |  |   |             |   |  |              |    |   |  |   | 1,892  
|Other Operating Expenses      |  |          | 67,642  |                     |   | 7,790  |                    |  |   | 1,122        |   |  |              | (7  | ) |  |   | 76,547 
|                              |  |          |         |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |        
|Total Operating Expenses      |  |          | 95,025  |                     |   | 10,221 |                    |  |   | 1,689        |   |  |              | (7  | ) |  |   | 106,928
|                              |  |          |         |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |        
|Operating Income (Loss)       |  | $        | 21,284  |                     | $ | (5,424 | )                  |  | $ | (517         | ) |  | $            |    |   |  | $ | 15,343 
|                              |  |          |         |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |        

Our Wireline revenue is derived primarily from local telephone service, including enhanced
telephone services, network access charges, long distance toll service, communication services such as broadband and dial-up Internet access services, web-hosting services, directory publication and other revenues from VoIP services and video
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, managed services,
managed security services and consultative information technology 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, directory expense, and other operations expenses such as digital
electronic switch 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, expenditures for upgrading
existing facilities to provide broadband services 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 corresponding reductions in operating expenses.



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)



On September 29, 2006, D&E completed the sale of assets of the commercial voice equipment
and service operations of the Systems Integration segment (Voice Systems Business) to eCommunications Systems Corporation (eComm). The fair value of the sale consideration was $3,000 and included $250 in cash paid on the
closing date, the receipt of a $2,500 promissory note, with a fair value of $2,400, issued by eComm and a 10% equity interest in eComm valued at $350 with a related put right. The promissory note is collateralized by a second priority security
interest in the assets of eComm and the joint and several personal guarantees of the other individual shareholders of eComm. The Voice Systems Business represented a component of our Systems Integration segment and, accordingly, the results of
operations have been classified as a discontinued operation for all periods presented in the condensed consolidated statements of operations.

We have not received the scheduled principal or interest payments from eComm on the note receivable since July 1, 2007. The eComm note receivable as of September 30, 2007 was $2,121, of which $227 was past due. Based on the
results of managements assessment, there was no reserve recognized on the note receivable during the quarter or nine months ended September 30, 2007. We continually evaluate whether events and circumstances have occurred that indicate
that the note receivable may not be recoverable.

Consolidated Operations

Three months ended September 30, 2007 compared to three months ended September 30, 2006

Consolidated revenues decreased $2,414, or 5.9%, to $38,210 for the quarter ended September 30, 2007, from $40,624 for the same period in 2006. The
primary reason for the decrease was a reduction in Wireline directory revenue of $3,213, primarily reflecting the impact of a new contract relating to three of our four directories which became effective in the fourth quarter of 2006, partially
offset by other Wireline revenue increases of $1,142. Systems Integration segment revenue decreased $346. These revenue changes are more fully described in the Wireline and Systems Integration segment results.

We have entered into a new 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 the first quarter of 2007 for the third directory. As a result, our
directory revenue, as the three new directories are published, will only be the annual fee paid to the Company for access to our customers. This arrangement will decrease directory revenues, based upon 2006 levels, by approximately $1,200 in the
last three months of 2007, $11,000 in 2008 and $11,200 in 2009. Our directory expense, based on 2006 levels, will also decrease approximately $1,100 in the last three months of 2007 and $9,800 in 2008 and 2009. The net effect of the decrease in
directory revenue and expense will result in a reduction in operating income of approximately $100 in the last three months of 2007, $1,200 in 2008 and $1,400 in 2009.



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)



Consolidated operating expenses decreased $4,789, or 13.9%, to $29,664 for the quarter ended
September 30, 2007, from $34,453 for the same period in 2006. Wireline directory expense decreased $3,000, primarily as the result of the new contract for three of our four directories described previously. Depreciation and amortization in the
Wireline segment decreased $1,760 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 $781 while Systems Integration operating expenses decreased by $876. These expense changes are more fully described in the Wireline and Systems Integration segment results.

Consolidated operating income increased $2,375, to $8,546, for the third quarter of 2007, from $6,171 in the same period of 2006.
Operating income as a percentage of revenue increased to 22.4% in the third quarter of 2007, compared to 15.2% in the same period of 2006.

Other income and expense was a net expense of $2,783 in the third quarter of 2007, compared to a net expense of $3,909 for the same period in 2006. Interest expense decreased to $3,745 in the third quarter of 2007, compared to $3,832 in the
same period of 2006, as a result of reductions in debt and the lower interest rate margins as a result of a credit facility amendment in September 2006, partially offset by increases in short-term interest rates. In the third quarter of 2006, we
incurred a loss on early extinguishment of debt of $1,094 as a result of amendments to our long-term debt on September 19, 2006. The loss consisted of a non-cash write-off of $1,047 of unamortized debt issuance costs of the previous credit
facility and the expensing of $47 of debt issuance costs related to the amended credit facility. Other income was $962 in 2007 compared to $1,038 in 2006. Other income included $735 of principal and interest collected in the third quarter of 2007 on
the note received from the sale of assets of Conestoga Wireless compared to $931 of principal and interest received in the third quarter of 2006 due to the receipt of only two of three scheduled principal payments on the note during the third
quarter of 2007. The Company negotiated a six-month grace period, which ended July 31, 2007, on the monthly principal payments of the note receivable in exchange for a two-year extension of a telecommunication services contract with the note
issuer. The Company is scheduled to receive principal payments of $900 on this note during the remainder of 2007. We recognize income upon collection of the note principal and interest as this note receivable is from a highly leveraged entity, and
the business sold had not generated positive cash flows prior to its sale. Therefore, the note receivable has been fully reserved on our balance sheet.

Income taxes from continuing operations were $1,992 in the third quarter of 2007, compared to $594 for the same period in 2006. The effective income tax rate was 34.6% for the third quarter of 2007. The effective
income tax rate of 26.3% for the third quarter of 2006 is lower than the federal statutory rate by approximately 8.7% primarily due to deferred state income tax benefits with no corresponding current state income tax expense on the temporary book to
tax differences from the loss on early extinguishment of debt and depreciation expense.

Net income was $3,755, or $0.26 per share, in the
third quarter of 2007 compared to a net income of $731, or $0.05 per share, in the third quarter of 2006. The primary reasons for the increase in net income were the operating income increase of $2,375 and the reductions in losses from early
extinguishment of debt of $1,094 and discontinued operations of $921, partially offset by the increase in income taxes of $1,398.



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)



Nine months ended September 30, 2007 compared to nine months ended September 30, 2006

Consolidated revenues decreased $8,496, or 6.9%, to $113,775 for the nine months ended September 30, 2007, from $122,271 for the
same period in 2007. The primary reason for the decrease was a reduction in Wireline directory revenue of $9,073, primarily as the result of three of our four directories being published under the new contract described previously, partially offset
by other Wireline revenue increases of $1,257. Systems Integration segment revenue decreased $619 due to the expiration of a customer contract on March 31, 2007 partially offset by increased computer equipment sales. These revenue changes are
more fully described in the Wireline and Systems Integration segment results.

Consolidated operating expenses decreased $13,731, or 12.8%,
to $93,197 for the nine months ended September 30, 2007, from $106,928 for the same period in 2006. The primary reasons for the decrease were a reduction in Wireline directory expense of $8,436, primarily as the result of three of our four
directories being published under the new contract described previously, the Systems Integration intangible asset impairment of $1,892 recognized in the second quarter of last year and the depreciation and amortization expense decrease in the
Wireline segment of $1,759 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 $678 while other Systems Integration operating expenses decreased by $2,334. These expense changes are more fully described in the Wireline and Systems Integration segment
results.

Consolidated operating income increased $5,235, to $20,578, for the first nine months of 2007, from $15,343 in the same period of
2006. Operating income as a percentage of revenue increased to 18.1% in the first nine months of 2007, compared to 12.5% in the same period of 2006.

Other income and expense was a net expense of $8,121 in the first nine months of 2007, compared to a net expense of $9,314 for the same period in 2006. Interest expense decreased to $11,199 in the first nine months of
2007, compared to $11,537 in the same period of 2006, as a result of reductions in debt and the lower interest rate margins as a result of a credit facility amendment in September 2006, partially offset by increases in short-term interest rates. In
the third quarter of 2006, we incurred a loss on early extinguishment of debt of $1,094 as a result of amendments to our long-term debt on September 19, 2006 which is described in more detail previously. Other income was $3,081 in 2007 compared
to $3,555 in 2006. We recorded income of $588 in the first nine months of 2007 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 included $1,318
of interest income and principal repayments collected in the first nine months of 2007 on the note received from the sale of assets of Conestoga Wireless compared to $2,692 of principal and interest received in the first nine months of 2006 due to
the receipt of only three of nine scheduled principal payments on the note during the first nine months of 2007. The Company negotiated a six-month grace period which ended July 31, 2007 on the monthly principal payments of the note receivable
as described in more detail previously.

Income taxes from continuing operations were $3,757 in the first nine months of 2007, compared to
$1,496 for the same period in 2006. The effective income tax rate of 30.2% for the first nine months of 2007 was lower than the federal statutory rate by 4.8%.



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)



Of this percentage difference, approximately 2.9% was primarily due to temporary book to tax differences which provided deferred state income tax benefits
with no corresponding current state income tax expense and approximately 1.5% was due to a permanent book to tax difference of $588 on the key-person life insurance gain. The effective income tax rate of 24.8% for the first nine months of 2006 was
lower than the federal statutory rate by 10.2%. Of this percentage difference, approximately 9.5% was primarily due to deferred state income tax benefits with no corresponding current state income tax expense on the temporary book to tax differences
from the loss on early extinguishment of debt, the intangible asset impairment loss and depreciation expense.

Net income was $8,651, or
$0.60 per share, in the first nine months of 2007 compared to net income of $3,259, or $0.23 per share, in the first nine months of 2006. The primary reasons for the increase in net income were the operating income increase of $5,235 and the
reductions in losses from early extinguishment of debt of $1,094 and discontinued operations of $1,225, partially offset by the increase in income taxes of $2,261.

Wireline Segment Results



|                                     |  |                                  |         |      |   |         |  |   |          |   |  |       |  
|------------------------------------ |  | -------------------------------- | ------- | ---- | - | ------- |  | - | -------- | - |  | ----- | -
|                                     |  | Three months ended September 30, |        
|                                     |  | 2007                             |         | 2006 |   | Change  |  |   | % Change |  
|Revenues:                            |  |                                  |         |      |   |         |  |   |          |   |  |       |  
|Local Telephone Service              |  | $                                | 12,388  |      | $ | 11,928  |  | $ | 460      |   |  | 3.9   |  
|Network Access                       |  |                                  | 11,340  |      |   | 11,389  |  |   | (49      | ) |  | (0.4  | )
|Long Distance                        |  |                                  | 5,114   |      |   | 5,316   |  |   | (202     | ) |  | (3.8  | )
|Communication Services               |  |                                  | 5,864   |      |   | 4,896   |  |   | 968      |   |  | 19.8  |  
|Directory                            |  |                                  | 1,241   |      |   | 4,455   |  |   | (3,214   | ) |  | (72.1 | )
|Other                                |  |                                  | 455     |      |   | 489     |  |   | (34      | ) |  | (7.0  | )
|                                     |  |                                  |         |      |   |         |  |   |          |   |  |       |  
|Total Revenues                       |  |                                  | 36,402  |      |   | 38,473  |  |   | (2,071   | ) |  | (5.4  | )
|                                     |  |                                  |         |      |   |         |  |   |          |   |  |       |  
|Depreciation and Amortization        |  |                                  | 7,452   |      |   | 9,212   |  |   | (1,760   | ) |  | (19.1 | )
|Other Operating Expenses             |  |                                  | 19,760  |      |   | 21,979  |  |   | (2,219   | ) |  | (10.1 | )
|                                     |  |                                  |         |      |   |         |  |   |          |   |  |       |  
|Total Operating Expenses             |  |                                  | 27,212  |      |   | 31,191  |  |   | (3,979   | ) |  | (12.8 | )
|                                     |  |                                  |         |      |   |         |  |   |          |   |  |       |  
|Operating Income                     |  | $                                | 9,190   |      | $ | 7,282   |  | $ | 1,908    |   |  | 26.2  |  
|                                     |  |                                  |         |      |   |         |  |   |          |   |  |       |  
|Customer Connections at September 30 |  |                                  |         |      |   |         |  |   |          |   |  |       |  
|RLEC Access Lines                    |  |                                  | 126,126 |      |   | 130,727 |  |   | (4,601   | ) |  | (3.5  | )
|CLEC Access Lines                    |  |                                  | 45,775  |      |   | 42,012  |  |   | 3,763    |   |  | 9.0   |  
|DSL/High-Speed Internet              |  |                                  | 36,782  |      |   | 29,990  |  |   | 6,792    |   |  | 22.6  |  
|Dial-up Access                       |  |                                  | 3,790   |      |   | 5,905   |  |   | (2,115   | ) |  | (35.8 | )
|Video                                |  |                                  | 7,668   |      |   | 7,307   |  |   | 361      |   |  | 4.9   |  
|Web-hosting                          |  |                                  | 1,004   |      |   | 944     |  |   | 60       |   |  | 6.4   |  
|                                     |  |                                  |         |      |   |         |  |   |          |   |  |       |  
|Total                                |  |                                  | 221,145 |      |   | 216,885 |  |   | 4,260    |   |  | 2.0   |  
|                                     |  |                                  |         |      |   |         |  |   |          |   |  |       |  

Local private network revenue increased $177 due to additional circuits in service. Other local
exchange revenue increased $251 due primarily to additional custom calling feature revenue mainly as a result of a July 1, 2007 price increase. Basic local telephone revenue increased $45 as a result of increases in CLEC access lines and the
July 1, 2007 RLEC rate increases partially offset by the decline in RLEC access lines. Intrastate network access revenue decreased $196 primarily due to lower rates in the third quarter of



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



2007 compared to the same period of 2006 as a result of the PA PUCs decision on July 11, 2007 disallowing the July 1, 2006 rate increase for
billing periods subsequent to November 15, 2006, partially offset by increased intrastate minutes of use. A reduction in NECA settlements of $136 almost entirely offset the increased revenue from higher interstate network access minutes of use.
Network access revenues also decreased approximately $87 due to lower subscriber line charges as a result of the decline in RLEC access lines. Special network access revenue increased $229 as a result of an increase in the average rate per circuit.
Long distance toll revenues decreased $265 due to a reduction in the average rate per minute of use while long distance circuit revenue increased $63. Communication services revenue increased primarily from additional DSL/high-speed Internet revenue
of $880 attributable to subscriber growth and increased video revenue of $69 due to additional subscribers and increased rates, partially offset by a reduction in dial-up Internet revenue of $114. Directory revenue decreased primarily as the result
of three of our four directories being published under the new contract described previously.

Depreciation and amortization expense
decreased approximately $944 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 approximately $704 due to certain fixed
assets becoming fully depreciated in June 2007. Directory expense decreased $3,000, primarily as the result of three of our four directories being published under the new contract described previously. Network access expense decreased $61 due to a
$298 reduction in an estimated liability for network access costs partially offset by increased minutes of use and the rate per minute of use. Customer billing expenses decreased $192 as a result of vendor rate reductions that became effective
January 1, 2007. Wages decreased $123 primarily from lower overtime hours in the third quarter of 2007 compared to the same period of last year. Employee benefits increased $366 primarily due to increased pension expense of $424 as a result of
recognizing the cumulative effect of an error in the actuarial valuation of our defined benefit plan. Short-term incentive plan expenses increased $127 due to the increase in consolidated operating income. Uncollectible expense increased $290
primarily as a result of a reduction in the accounts receivable reserve for our CLEC markets in the three months ended September 30, 2006 and increased network access accounts receivable write-offs. Operating taxes increased $164 as a result of
additional public utility realty tax assessments for prior years. Corporate overhead expenses increased $202 as a result of the increase in allocation of corporate overhead expenses to this segment.



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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)



|                                     |  |                                 |         |      |   |         |  |   |          |   |  |       |  
|------------------------------------ |  | ------------------------------- | ------- | ---- | - | ------- |  | - | -------- | - |  | ----- | -
|                                     |  | Nine months ended September 30, |        
|                                     |  | 2007                            |         | 2006 |   | Change  |  |   | % Change |  
|Revenues:                            |  |                                 |         |      |   |         |  |   |          |   |  |       |  
|Local Telephone Service              |  | $                               | 36,562  |      | $ | 35,791  |  | $ | 771      |   |  | 2.2   |  
|Network Access                       |  |                                 | 33,599  |      |   | 35,446  |  |   | (1,847   | ) |  | (5.2  | )
|Long Distance                        |  |                                 | 15,694  |      |   | 16,204  |  |   | (510     | ) |  | (3.1  | )
|Communication Services               |  |                                 | 17,057  |      |   | 14,273  |  |   | 2,784    |   |  | 19.5  |  
|Directory                            |  |                                 | 4,031   |      |   | 13,104  |  |   | (9,073   | ) |  | (69.2 | )
|Other                                |  |                                 | 1,550   |      |   | 1,491   |  |   | 59       |   |  | 4.0   |  
|                                     |  |                                 |         |      |   |         |  |   |          |   |  |       |  
|Total Revenues                       |  |                                 | 108,493 |      |   | 116,309 |  |   | (7,816   | ) |  | (6.7  | )
|                                     |  |                                 |         |      |   |         |  |   |          |   |  |       |  
|Depreciation and Amortization        |  |                                 | 25,624  |      |   | 27,383  |  |   | (1,759   | ) |  | (6.4  | )
|Other Operating Expenses             |  |                                 | 59,884  |      |   | 67,642  |  |   | (7,758   | ) |  | (11.5 | )
|                                     |  |                                 |         |      |   |         |  |   |          |   |  |       |  
|Total Operating Expenses             |  |                                 | 85,508  |      |   | 95,025  |  |   | (9,517   | ) |  | (10.0 | )
|                                     |  |                                 |         |      |   |         |  |   |          |   |  |       |  
|Operating Income                     |  | $                               | 22,985  |      | $ | 21,284  |  | $ | 1,701    |   |  | 8.0   |  
|                                     |  |                                 |         |      |   |         |  |   |          |   |  |       |  
|Customer Connections at September 30 |  |                                 |         |      |   |         |  |   |          |   |  |       |  
|RLEC Access Lines                    |  |                                 | 126,126 |      |   | 130,727 |  |   | (4,601   | ) |  | (3.5  | )
|CLEC Access Lines                    |  |                                 | 45,775  |      |   | 42,012  |  |   | 3,763    |   |  | 9.0   |  
|DSL/High-Speed Internet              |  |                                 | 36,782  |      |   | 29,990  |  |   | 6,792    |   |  | 22.6  |  
|Dial-up Access                       |  |                                 | 3,790   |      |   | 5,905   |  |   | (2,115   | ) |  | (35.8 | )
|Video                                |  |                                 | 7,668   |      |   | 7,307   |  |   | 361      |   |  | 4.9   |  
|Web-hosting                          |  |                                 | 1,004   |      |   | 944     |  |   | 60       |   |  | 6.4   |  
|                                     |  |                                 |         |      |   |         |  |   |          |   |  |       |  
|Total                                |  |                                 | 221,145 |      |   | 216,885 |  |   | 4,260    |   |  | 2.0   |  
|                                     |  |                                 |         |      |   |         |  |   |          |   |  |       |  

Local private network revenue increased $564 due to additional circuits in service. Other local
exchange revenue increased $412 due primarily to additional custom calling feature revenue mainly as a result of a July 1, 2007 price increase. Basic local telephone revenue decreased $175 primarily from a decline in RLEC access lines partially
offset by the July 1, 2007 RLEC rate increases and the growth in CLEC access lines. Network access revenue decreased primarily due to lower NECA settlements of $2,595, partially offset by increased special network access revenue of $470 as a
result of an increase in the average rate per circuit. Intrastate network access revenue increased $227 due to increased minutes of use and a $294 revenue reduction due to a billing adjustment correction recognized in the second quarter of 2006,
partially offset by the effect of the July 11, 2007 PA PUC decision disallowing the July 1, 2006 intrastate access rate increase for billing periods subsequent to November 15, 2006. Long distance toll revenues decreased $729 due to a
reduction in the average rate per minute of use while long distance circuit revenue increased $219. Communication services revenue increased primarily from additional DSL/high-speed Internet revenue of $2,599 attributable to subscriber growth and
increased video revenue of $234 due to additional subscribers and increased rates, partially offset by a reduction in dial-up Internet revenue of $358. Directory revenue decreased primarily as the result of three of our four directories being
published under the new contract described previously.

Depreciation expense decreased approximately $944 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 approximately $704 due to certain fixed assets becoming fully depreciated in June 2007. Directory expense
decreased $8,436 primarily as the result of three of our four directories being published under the new contract described previously. Consulting fees decreased $363 primarily due to expenses



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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)



incurred in the prior year for data conversion required in implementing new software to provide enhanced customer service and communication facility
maintenance support. Advertising expense decreased $206 primarily related to Internet services. Leased communications facilities expense decreased $385 primarily due to a one-time vendor billing charge of $248 for fiber circuits in May 2006 and a
reduction in pole attachment fees. Customer billing expenses decreased $482 as a result of vendor rate reductions that became effective January 1, 2007. Cost of services decreased $232 primarily due to a decline in costs realized from
longer-term purchase agreements and one-time billing credits from vendors, a decline in the number of CLEC customers served with facilities of other providers partially offset by an increase in video expenses due to increased programming costs and
additional subscribers. Wages increased $398 primarily due to merit pay increases that became effective in March 2007 and 2006 and a minimal increase in personnel, partially offset by a reduction in overtime hours in the current year. Employee
benefits increased $807 due to increased pension expense of $424 as a result of recognizing the cumulative effect of an error in the actuarial valuation our defined benefit pension plan in the third quarter of 2007, an increase in wages and an
increase in health insurance costs due to a reduction of our estimate of health insurance expenses recognized in the second quarter of 2006 related to the transition from a self-funded medical plan to one that is fully insured. Short-term incentive
plan expenses increased $280 due to the increase in consolidated operating income. Uncollectible expense increased $300 primarily as a result of a reduction in the accounts receivable reserve for our CLEC markets in the nine months ended
September 30, 2006 and increased network access accounts receivable write-offs. Corporate overhead expenses increased $320 as a result of the increase in allocation of corporate overhead expenses to this segment. Network access expenses
increased $27 due to increased minutes of use and the rate per minute of use partially offset by a $298 reduction in an estimated liability for network access costs.

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.

On July 11, 2007, the PA PUC rescinded its June 2006 order allowing the increase in our access rates. 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.

In
addition, the PA PUC approved our request to increase local service rates effective July 1, 2007, in accordance with our Chapter 30 Plan. The effect of these changes on the Wireline segment is more fully described in the section entitled
Business Risks in Part 1, Item 2 of this Form 10-Q.

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. We estimate that, as a result of the implementation of the new depreciation rates and based on the assets in service at June 30, 2007, annual
depreciation expense in the Wireline segment will decline by approximately $4,250. In addition, certain regulated telephone assets became fully depreciated in June 2007. We estimate that, as a result of these assets becoming fully depreciated,
annual depreciation expense in the Wireline segment will decline by approximately $2,800.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Systems Integration Segment Results



|                              |  |                                  |       |   |      |   |       |        |  |   |          |   |  |       |  
|----------------------------- |  | -------------------------------- | ----- | - | ---- | - | ----- | ------ |  | - | -------- | - |  | ----- | -
|                              |  | Three months ended September 30, |      
|                              |  | 2007                             |       |   | 2006 |   |       | Change |  |   | % Change |  
|Revenues                      |  | $                                | 1,427 |   |      | $ | 1,773 |        |  | $ | (346     | ) |  | (19.5 | )
|                              |  |                                  |       |  
|Depreciation and Amortization |  |                                  | 47    |   |      |   | 137   |        |  |   | (90      | ) |  | (65.7 | )
|Other Operating Expenses      |  |                                  | 1,839 |   |      |   | 2,625 |        |  |   | (786     | ) |  | (29.9 | )
|                              |  |                                  |       |   |      |   |       |        |  |   |          |   |  |       |  
|Total Operating Expenses      |  |                                  | 1,886 |   |      |   | 2,762 |        |  |   | (876     | ) |  | (31.7 | )
|                              |  |                                  |       |   |      |   |       |        |  |   |          |   |  |       |  
|Operating Loss                |  | $                                | (459  | ) |      | $ | (989  | )      |  | $ | 530      |   |  | (53.6 | )
|                              |  |                                  |       |   |      |   |       |        |  |   |          |   |  |       |  

On March 31, 2007, a contract with a retail services customer expired. As a result of the
expiration of this contract, Systems Integration revenue is expected to decline, based on 2006 levels, approximately $700 in the last three months of 2007 and $2,800 in 2008. We estimate that the loss of this contract will not have a negative impact
on operating income (loss).

Communications services revenue decreased $665 primarily due to the expiration of this contract. Communication
products sold increased $319 due to increased computer equipment sales.

Operating expenses for the Systems Integration segment decreased
primarily due to the expiration of the contract referenced above. Labor, benefits and vehicle expenses decreased $512, $101 and $77, respectively, due to the contract expiration and a reduction in number of employees. Depreciation and amortization
decreased $90 due to equipment disposals as a result of the contract expiration and certain intangible assets becoming fully amortized in the prior year. Corporate overhead expenses decreased $96 as a result of the reduction in allocation of
corporate overhead expenses to this segment. Costs of products sold increased $147 in conjunction with the increased communication products sold.



|                              |  |                                 |        |   |      |   |        |        |  |   |          |   |  |        |  
|----------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | ------ |  | - | -------- | - |  | ------ | -
|                              |  | Nine months ended September 30, |       
|                              |  | 2007                            |        |   | 2006 |   |        | Change |  |   | % Change |  
|Revenues                      |  | $                               | 4,178  |   |      | $ | 4,797  |        |  | $ | (619     | ) |  | (12.9  | )
|                              |  |                                 |        |  
|Depreciation and Amortization |  |                                 | 224    |   |      |   | 539    |        |  |   | (315     | ) |  | (58.4  | )
|Intangible Asset Impairment   |  |                                 |       |   |      |   | 1,892  |        |  |   | (1,892   | ) |  | (100.0 | )
|Other Operating Expenses      |  |                                 | 5,771  |   |      |   | 7,790  |        |  |   | (2,019   | ) |  | (25.9  | )
|                              |  |                                 |        |   |      |   |        |        |  |   |          |   |  |        |  
|Total Operating Expenses      |  |                                 | 5,995  |   |      |   | 10,221 |        |  |   | (4,226   | ) |  | (41.3  | )
|                              |  |                                 |        |   |      |   |        |        |  |   |          |   |  |        |  
|Operating Loss                |  | $                               | (1,817 | ) |      | $ | (5,424 | )      |  | $ | 3,607    |   |  | (66.5  | )
|                              |  |                                 |        |   |      |   |        |        |  |   |          |   |  |        |  

Communications services revenue decreased $1,105 primarily due to the expiration of the contract
referenced above. Communication products sold increased $486 due to increased computer equipment and data cabling sales.

Operating
expenses for the Systems Integration segment decreased primarily due to the expiration of the contract referenced above and the intangible asset impairment of $1,892 recognized in the second quarter of last year. Labor, benefits and vehicle



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



expenses decreased $1,138, $298 and $143, respectively, due to the contract expiration and a reduction in number of employees. Rent expense decreased $148
due to a reduction in office space. Depreciation and amortization decreased $315 due to equipment disposals as a result of the contract expiration and certain intangible assets becoming fully amortized in the prior year. Corporate overhead expenses
decreased $306 as a result of the reduction in allocation of corporate overhead expenses to this segment. Gain on sales of equipment increased $98 due to the disposition of equipment as a result of the contract expiration. Costs of products sold
increased $148 in conjunction with the increased communication products sold. Subcontractor expenses increased $163 primarily to provide services in the first quarter of 2007 to the large retail services customer prior to the contract expiration.

Recently Adopted Accounting Pronouncements

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a
two-step process for recognizing and measuring a tax position taken or expected to be taken in a tax return. The first step involves evaluating if a tax position is more likely than not to be sustained upon examination based on the technical merits
of the position. In applying this threshold, it should be presumed that the appropriate taxing authority will examine the tax position and that the authority is fully knowledgeable of all relevant information. The second step requires a tax position
that meets the more likely than not recognition threshold to be measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure, and transition. As a result of the adoption of FIN 48, the Company recognized a $1,013 tax benefit, consisting of an $840 decrease in goodwill and a $173 increase in
retained earnings. The increase in retained earnings consisted of the recognition of an interest receivable of $266 net of taxes of $93.

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.



|                                                      |  |                                 |         |   |      |   |         |  
|----------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                      |  | Nine months ended September 30, |        
|                                                      |  | 2007                            |         |   | 2006 |  
|Net cash provided by (used in) continuing operations: |  |                                 |         |   |      |   |         |  
|Operating activities                                  |  | $                               | 28,686  |   |      | $ | 24,559  |  
|Investing activities                                  |  |                                 | (7,403  | ) |      |   | (18,048 | )
|Financing activities                                  |  |                                 | (13,518 | ) |      |   | (11,855 | )
|                                                      |  |                                 |         |   |      |   |         |  
|                                                      |  | $                               | 7,765   |   |      | $ | (5,344  | )
|                                                      |  |                                 |         |   |      |   |         |  



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



The primary reasons for the increase in cash flow from operating activities during the nine months
ended September 30, 2007 were a $2,580 reduction in income tax payments made during the period compared to the same period of 2006 as a result of a $3,100 tax payment in the first quarter of 2006 for the 2005 tax year and the increase in net
income.

Net cash used in investing activities decreased mainly from the Company selling its short-term investments and reinvesting the
proceeds in cash equivalents, a reduction in capital expenditures and the receipt of life insurance proceeds of $1,000. Capital additions in the first nine months of 2007 were primarily for information technology upgrades of approximately $3,400,
communications network enhancements of approximately $6,300 and outside plant additions totaling approximately $5,600. In the first nine months of 2007, we collected $1,279 of principal on notes receivable compared to $2,125 received in the same
period of 2006 due to the receipt of only three of nine scheduled principal payments on the Keystone Note during the first nine months of 2007. The Company negotiated the terms of a six-month grace period until July 31, 2007 on the monthly
principal payments of the note receivable in exchange for a two-year extension of a telecommunications contract with the note issuer. The Company is scheduled to receive principal payments of $900 on this note during the remainder of 2007. In the
nine months ended September 30, 2007, we purchased short-term investments of $3,187 and sold short-term investments of $10,933 and reinvested the proceeds in cash equivalents. We also acquired a customer list intangible asset for $606 in 2007.

Net cash used in financing activities increased due to increased net payments on long-term debt of approximately $1,000 and the $1,064
interest-rate swap termination proceeds received in 2006 in connection with a debt refinancing not repeated in the current year. Dividend payments of $5,155 were a slight increase in use of funds from dividends paid in the same period of 2006 due to
an increase in shares outstanding. Long-term debt payments were $8,549 in the nine months ended September 30, 2007, including voluntary prepayments of $3,250. Long-term debt payments were $7,541 for the first nine months of 2006, including a
$750 voluntary prepayment. A credit facility amendment in September 2006 was a significant financing activity with proceeds of $180,750, which were used to repay the original loan.

External Sources of Capital at September 30, 2007

On September 19, 2006, we completed an
amendment to our syndicated senior secured debt financing, which is described in more detail in Note 7 of the Condensed Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q. We anticipate that the reduction in interest rates
will result in an average annual cash savings of approximately $600 assuming the margin added to the U.S. prime or LIBOR rates in effect prior to the amendment would have been in effect throughout the term of the credit facilities using the amended
loan amortization schedules.

As of September 30, 2007, our credit facility consists of Term Loan A (a single draw senior term loan
with a remaining balance of $30,730), Term Loan B (a single draw senior term loan with a remaining balance of $140,895), secured term loans (single draw loans with a remaining balance of $25,375) and a senior 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.



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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)



Term Loan A requires interest payments with $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 with $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 the U.S. prime rate plus 0.50% to 1.00% or at LIBOR
rates plus 1.50% to 2.00% based on our leverage ratio. Term Loan B bears interest at our option at either the U.S. prime rate plus 0.75% or a LIBOR rate plus 1.75%, regardless of the Companys leverage ratio. A commitment fee of 0.25% must be
paid on the unused portion of the revolving credit facility. The Secured Term Loans bear interest at a fixed rate of 9.0% and require equal quarterly principal payments through the fourth quarter of 2014.

The credit facility includes a number of significant covenants that impose restrictions on our business. These covenants include, among others,
restrictions on additional indebtedness, mergers, acquisitions and the disposition of assets, sale and leaseback transactions and capital lease payments. In addition, we are required to comply with financial covenants with respect to the maximum
leverage ratio, maximum indebtedness to total capitalization ratio, debt service coverage and fixed charge coverage. As of September 30, 2007, we had no other unsecured lines of credit. As of September 30, 2007, $25,000 of the revolving
credit facility was available for borrowing without violating any of the covenants. Our ratio of total debt to total debt plus capital decreased to 51.1% at September 30, 2007 from 52.5% at December 31, 2006 due to our long-term debt
principal repayments and an increase in shareholders equity.

Commitments, Contingencies and Projected Uses of Capital

We believe that our most significant commitments, contingencies and projected uses of funds in 2007, other than for operations, include capital
expenditures, scheduled principal payments on our long-term debt, the payment of quarterly common stock dividends, as and when declared by the board of directors, and other contractual obligations. On October 25, 2007, we declared a quarterly
common stock dividend of $0.125 per share payable on December 15, 2007, to holders of record on December 1, 2007. We expect that this dividend will result in an aggregate payment of approximately $1,806. We believe that we have adequate
internal and external resources available to meet ongoing operating requirements.

D&E has a guarantee agreement with Crown Castle
International, Inc. (Crown) for lease obligations on wireless tower sites. The guarantee agreement is described in more detail in Note 9 of 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, regulated asset depreciation,
long-lived

and indefinite lived assets, goodwill, retirement benefits, network access costs, income taxes and contingencies. We base our



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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)



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, 2006, 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 nine months ended September 30,
2007.

We receive a portion of our interstate access revenues in our RLEC companies from settlement pools in which we participate with
other telephone companies through NECA. These pools were established at the direction of the FCC and are funded by interstate access service revenues, which the FCC regulates. Revenues earned through this pooling process are initially recognized
based on estimates and are subject to adjustments that may either increase or decrease the amount of interstate access revenues. If the actual amounts that we receive from the settlement pools differ from the amounts that we have recorded as
accounts receivable 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 nine months of 2007 and 2006, we have increased revenue by $410 and $597,
respectively, due to a revision of the estimated revenue we expect to receive from or refund to the settlement pools in the future.

We
performed our annual impairment test of goodwill and indefinite-lived intangible assets as of April 30, 2007. Based on the results of managements assessment, no impairment of goodwill and indefinite-lived intangible assets was deemed
necessary. In July 2007, we revised the estimated useful lives of certain fixed assets to update their composite depreciation rates for certain regulated telephone property.

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, creates a framework within GAAP 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. SFAS 157 is effective for the Company in January 2008. The Company is currently evaluating the impact, if any, SFAS 157 will have on its financial position, results of
operations and cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 offers companies an irrevocable option to measure most financial assets and liabilities at fair value, with changes in fair value recorded in earnings. SFAS 159 is effective for the
Company in January 2008. The Company is currently evaluating the impact, if any, SFAS 159 will have on its financial position, results of operations and cash flows.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 3. Quantitative and Qualitative Disclosure

About Market Risks

(Dollar amounts are in thousands)

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 September 30, 2007, our debt, excluding capital lease obligations, can be categorized as follows:



|                                                                                |  |           |         |              |      |   |            |   |        
|------------------------------------------------------------------------------- |  | --------- | ------- | ------------ | ---- | - | ---------- | - | -------
|                                                                                |  | Principal |         | Average Rate |      |   | Fair Value
|Fixed interest rates:                                                           |  |           |         |              |      |   |            |   |        
|Secured Term Loans (fixed to October 2014)                                      |  | $         | 25,375  |              | 9.00 | % |            | $ | 26,990 
|Senior Secured Term Loans (fixed to September 2009 through interest rate swaps) |  |           | 75,000  |              | 7.04 | % |            |   | 75,000 
|                                                                                |  |           |         |              |      |   |            |   |        
|                                                                                |  |           | 100,375 |              | 7.58 | % |            |   | 101,990
|Subject to interest rate fluctuations:                                          |  |           |         |              |      |   |            |   |        
|Senior Secured Term Loans                                                       |  |           | 96,625  |              | 6.94 | % |            |   | 96,625 
|                                                                                |  |           |         |              |      |   |            |   |        
|Total                                                                           |  | $         | 197,000 |              | 7.24 | % |            | $ | 198,615
|                                                                                |  |           |         |              |      |   |            |   |        

If interest rates rise above the rates of the variable debt, we could incur extra annual interest
expense of $483 for each 50 basis points above the variable rates. If rates were to decline, we would realize reductions in annual interest expense of approximately $483 for each 50 basis point decrease in rates.

We have entered into interest rate swap agreements with a bank that participates in our senior indebtedness to hedge against the effect of interest rate
fluctuations. Under the 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 September 30, 2007, our interest rate swap agreements were as follows:



|                     |  |                 |        |          |      |   |                       |      |   |                         |   |    
|-------------------- |  | --------------- | ------ | -------- | ---- | - | --------------------- | ---- | - | ----------------------- | - | ---
|Term of Swap         |  | Notional Amount |        | Pay Rate |      |   | Average Received Rate |      |   | Fair Value of Liability
|09/21/07 to 09/21/09 |  | $               | 50,000 |          | 7.16 | % |                       | 6.99 | % |                         | $ | 805
|08/01/07 to 09/21/09 |  | $               | 25,000 |          | 6.81 | % |                       | 6.99 | % |                         | $ | 232

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

Item 4. Controls and Procedures

As of September 30, 2007, 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



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D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)



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 third quarter of 2007 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, 2006.

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

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

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None



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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.                          
|            |  |                                                                                                                                        
|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:     November 6, 2007 |  |  |  |                          |  |                                           
|                           |  |  |  | By:                      |  | /s/ James W. Morozzi                      
|                           |  |  |  |                          |  | James W. Morozzi                          
|                           |  |  |  |                          |  | President & Chief Executive Officer       
|                           |  |  | 
|Date:     November 6, 2007 |  |  |  |                          |  |                                           
|                           |  |  |  | By:                      |  | /s/ Thomas E. Morell                      
|                           |  |  |  |                          |  | Thomas E. Morell                          
|                           |  |  |  |                          |  | Senior Vice President, Chief Financial    
|                           |  |  |  |                          |  | Officer, Corporate Secretary and Treasurer



45