##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended June 30, 2007

or



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

For the transition period fromto

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 July 27, 2007
|Common Stock, par value $0.16 per share |  | 14,434,297 Shares           



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Form 10-Q

TABLE OF CONTENTS



|         |  |     |  |                                                                                       |  |                                                                                                                                             |  |  
|-------- |  | --- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------- |  | -
|Item No. |  |     |  |                                                                                       |  | Page                                                                                                                                       
|         |  |     |  |                                                                                       |  |                                                                                                                                             |  |  
|         |  |     |  |                                                                                       |  | PART I. FINANCIAL INFORMATION                                                                                                               |  |  
|         |  |     | 
|         |  | 1.  |  | Unaudited Financial Statements                                                        |  |                                                                                                                                            
|         |  |     |  |                                                                                      
|         |  |     |  |                                                                                       |  | Condensed Consolidated Statements of Operations  For the three months and six months ended June 30, 2007 and 2006                          |  | 1
|         |  |     |  |                                                                                      
|         |  |     |  |                                                                                       |  | Condensed Consolidated Balance Sheets  June 30, 2007 and December 31, 2006                                                                 |  | 2
|         |  |     |  |                                                                                      
|         |  |     |  |                                                                                       |  | Condensed Consolidated Statements of Cash Flows  For the six months ended June 30, 2007 and 2006                                           |  | 3
|         |  |     |  |                                                                                      
|         |  |     |  |                                                                                       |  | Condensed Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss)  For the six months ended June 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 |  | 18                                                                                                                                         
|         |  |     | 
|         |  | 3.  |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 43                                                                                                                                         
|         |  |     | 
|         |  | 4.  |  | Controls and Procedures                                                               |  | 43                                                                                                                                         
|         |  |     |  |                                                                                      
|         |  |     |  |                                                                                       |  | PART II. OTHER INFORMATION                                                                                                                  |  |  
|         |  |     | 
|         |  | 1.  |  | Legal Proceedings                                                                     |  | 45                                                                                                                                         
|         |  |     | 
|         |  | 1A. |  | Risk Factors                                                                          |  | 45                                                                                                                                         
|         |  |     | 
|         |  | 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 45                                                                                                                                         
|         |  |     | 
|         |  | 3.  |  | Defaults Upon Senior Securities                                                       |  | 45                                                                                                                                         
|         |  |     | 
|         |  | 4.  |  | Submissions of Matters to a Vote of Security Holders                                  |  | 45                                                                                                                                         
|         |  |     | 
|         |  | 5.  |  | Other Information                                                                     |  | 46                                                                                                                                         
|         |  |     | 
|         |  | 6.  |  | Exhibits                                                                              |  | 46                                                                                                                                         
|         |  |     | 
|         |  |     |  | SIGNATURES                                                                            |  | 47                                                                                                                                         



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##### Table of Contents

Form 10-Q Part I  Financial Information

Item 1. Financial Statements

D&E Communications, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per-share amounts)

(Unaudited)



|                                                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                               |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                                                               |  | 2007                       |        |   | 2006                     |   |        | 2007 |  |   | 2006   |  
|OPERATING REVENUES                                                                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Communication service revenues                                                                 |  | $                          | 35,913 |   |                          | $ | 40,175 |      |  | $ | 72,867 |   |  | $ | 79,236 |  
|Communication products sold                                                                    |  |                            | 536    |   |                          |   | 460    |      |  |   | 1,160  |   |  |   | 961    |  
|Other                                                                                          |  |                            | 752    |   |                          |   | 724    |      |  |   | 1,538  |   |  |   | 1,450  |  
|                                                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total operating revenues                                                                       |  |                            | 37,201 |   |                          |   | 41,359 |      |  |   | 75,565 |   |  |   | 81,647 |  
|                                                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|OPERATING EXPENSES                                                                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Communication service expenses (exclusive of depreciation and amortization below)              |  |                            | 12,045 |   |                          |   | 15,835 |      |  |   | 25,138 |   |  |   | 31,130 |  
|Cost of communication products sold                                                            |  |                            | 426    |   |                          |   | 365    |      |  |   | 940    |   |  |   | 803    |  
|Depreciation and amortization                                                                  |  |                            | 9,210  |   |                          |   | 9,493  |      |  |   | 18,718 |   |  |   | 18,953 |  
|Marketing and customer services                                                                |  |                            | 3,517  |   |                          |   | 3,234  |      |  |   | 6,884  |   |  |   | 6,649  |  
|General and administrative services                                                            |  |                            | 5,477  |   |                          |   | 6,268  |      |  |   | 11,853 |   |  |   | 13,048 |  
|Intangible asset impairment                                                                    |  |                            |       |   |                          |   | 1,892  |      |  |   |       |   |  |   | 1,892  |  
|                                                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses                                                                       |  |                            | 30,675 |   |                          |   | 37,087 |      |  |   | 63,533 |   |  |   | 72,475 |  
|                                                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Operating income                                                                               |  |                            | 6,526  |   |                          |   | 4,272  |      |  |   | 12,032 |   |  |   | 9,172  |  
|                                                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|OTHER INCOME (EXPENSE)                                                                         |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Equity in net losses of affiliates                                                             |  |                            |       |   |                          |   | (135   | )    |  |   | (3     | ) |  |   | (217   | )
|Interest expense, net of interest capitalized                                                  |  |                            | (3,718 | ) |                          |   | (3,867 | )    |  |   | (7,454 | ) |  |   | (7,705 | )
|Other, net                                                                                     |  |                            | 400    |   |                          |   | 1,050  |      |  |   | 2,119  |   |  |   | 2,517  |  
|                                                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total other income (expense)                                                                   |  |                            | (3,318 | ) |                          |   | (2,952 | )    |  |   | (5,338 | ) |  |   | (5,405 | )
|                                                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Income from continuing operations before income taxes and dividends on utility preferred stock |  |                            | 3,208  |   |                          |   | 1,320  |      |  |   | 6,694  |   |  |   | 3,767  |  
|                                                                                               |  |                            |        |  
|INCOME TAXES AND DIVIDENDS ON UTILITY PREFERRED STOCK                                          |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Income taxes                                                                                   |  |                            | 905    |   |                          |   | 181    |      |  |   | 1,765  |   |  |   | 902    |  
|Dividends on utility preferred stock                                                           |  |                            | 17     |   |                          |   | 17     |      |  |   | 33     |   |  |   | 33     |  
|                                                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total income taxes and dividends on utility preferred stock                                    |  |                            | 922    |   |                          |   | 198    |      |  |   | 1,798  |   |  |   | 935    |  
|                                                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Income from continuing operations                                                              |  |                            | 2,286  |   |                          |   | 1,122  |      |  |   | 4,896  |   |  |   | 2,832  |  
|                                                                                               |  |                            |        |  
|DISCONTINUED OPERATIONS:                                                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Loss from operations of Voice Systems Business, net of income tax benefit of ($187) and ($239) |  |                            |       |   |                          |   | (225   | )    |  |   |       |   |  |   | (304   | )
|                                                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|NET INCOME                                                                                     |  | $                          | 2,286  |   |                          | $ | 897    |      |  | $ | 4,896  |   |  | $ | 2,528  |  
|                                                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Weighted average common shares outstanding (basic)                                             |  |                            | 14,413 |   |                          |   | 14,360 |      |  |   | 14,406 |   |  |   | 14,354 |  
|Weighted average common shares outstanding (diluted)                                           |  |                            | 14,534 |   |                          |   | 14,424 |      |  |   | 14,511 |   |  |   | 14,409 |  
|                                                                                               |  |                            |        |  
|BASIC AND DILUTED EARNINGS PER COMMON SHARE                                                    |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Earnings per common share-continuing operations                                                |  | $                          | 0.16   |   |                          | $ | 0.08   |      |  | $ | 0.34   |   |  | $ | 0.20   |  
|Earnings per common share-discontinued operations                                              |  |                            |       |   |                          |   | (0.02  | )    |  |   |       |   |  |   | (0.02  | )
|                                                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                                                               |  | $                          | 0.16   |   |                          | $ | 0.06   |      |  | $ | 0.34   |   |  | $ | 0.18   |  
|                                                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Dividends per common share                                                                     |  | $                          | 0.13   |   |                          | $ | 0.13   |      |  | $ | 0.25   |   |  | $ | 0.25   |  
|                                                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  

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)



|                                                                                                                                                                              |  |              |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                              |  | June 30,2007 |         |   | December 31,2006 |  
|ASSETS                                                                                                                                                                        |  |              |         |   |                  |   |         |  
|CURRENT ASSETS                                                                                                                                                                |  |              |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                     |  | $            | 6,547   |   |                  | $ | 3,101   |  
|Short-term investments                                                                                                                                                        |  |              | 987     |   |                  |   | 7,746   |  
|Accounts and notes receivable, net of reserves of $572 and $609                                                                                                               |  |              | 15,253  |   |                  |   | 16,037  |  
|Inventories, lower of cost or market, at average cost                                                                                                                         |  |              | 2,690   |   |                  |   | 2,704   |  
|Prepaid expenses                                                                                                                                                              |  |              | 6,632   |   |                  |   | 3,310   |  
|Other                                                                                                                                                                         |  |              | 1,895   |   |                  |   | 1,150   |  
|                                                                                                                                                                              |  |              |         |   |                  |   |         |  
|TOTAL CURRENT ASSETS                                                                                                                                                          |  |              | 34,004  |   |                  |   | 34,048  |  
|                                                                                                                                                                              |  |              |         |   |                  |   |         |  
|PROPERTY, PLANT AND EQUIPMENT                                                                                                                                                 |  |              |         |   |                  |   |         |  
|In service                                                                                                                                                                    |  |              | 386,322 |   |                  |   | 380,630 |  
|Under construction                                                                                                                                                            |  |              | 8,047   |   |                  |   | 5,504   |  
|                                                                                                                                                                              |  |              |         |   |                  |   |         |  
|                                                                                                                                                                              |  |              | 394,369 |   |                  |   | 386,134 |  
|Less accumulated depreciation                                                                                                                                                 |  |              | 226,811 |   |                  |   | 214,722 |  
|                                                                                                                                                                              |  |              |         |   |                  |   |         |  
|                                                                                                                                                                              |  |              | 167,558 |   |                  |   | 171,412 |  
|                                                                                                                                                                              |  |              |         |   |                  |   |         |  
|OTHER ASSETS                                                                                                                                                                  |  |              |         |   |                  |   |         |  
|Goodwill                                                                                                                                                                      |  |              | 142,819 |   |                  |   | 143,667 |  
|Intangible assets, net of accumulated amortization                                                                                                                            |  |              | 151,027 |   |                  |   | 153,072 |  
|Other                                                                                                                                                                         |  |              | 7,820   |   |                  |   | 8,375   |  
|                                                                                                                                                                              |  |              |         |   |                  |   |         |  
|                                                                                                                                                                              |  |              | 301,666 |   |                  |   | 305,114 |  
|                                                                                                                                                                              |  |              |         |   |                  |   |         |  
|TOTAL ASSETS                                                                                                                                                                  |  | $            | 503,228 |   |                  | $ | 510,574 |  
|                                                                                                                                                                              |  |              |         |   |                  |   |         |  
|                                                                                                                                                                              |  |             
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                          |  |              |         |   |                  |   |         |  
|CURRENT LIABILITIES                                                                                                                                                           |  |              |         |   |                  |   |         |  
|Long-term debt maturing within one year                                                                                                                                       |  | $            | 7,069   |   |                  | $ | 7,066   |  
|Accounts payable and accrued liabilities                                                                                                                                      |  |              | 14,140  |   |                  |   | 13,654  |  
|Accrued taxes                                                                                                                                                                 |  |              | 100     |   |                  |   | 195     |  
|Accrued interest and dividends                                                                                                                                                |  |              | 1,028   |   |                  |   | 1,149   |  
|Advance billings, customer deposits and other                                                                                                                                 |  |              | 5,298   |   |                  |   | 4,880   |  
|                                                                                                                                                                              |  |              |         |   |                  |   |         |  
|TOTAL CURRENT LIABILITIES                                                                                                                                                     |  |              | 27,635  |   |                  |   | 26,944  |  
|                                                                                                                                                                              |  |              |         |   |                  |   |         |  
|LONG-TERM DEBT                                                                                                                                                                |  |              | 193,915 |   |                  |   | 199,950 |  
|                                                                                                                                                                              |  |              |         |   |                  |   |         |  
|OTHER LIABILITIES                                                                                                                                                             |  |              |         |   |                  |   |         |  
|Deferred income taxes                                                                                                                                                         |  |              | 72,645  |   |                  |   | 74,849  |  
|Other                                                                                                                                                                         |  |              | 19,904  |   |                  |   | 21,806  |  
|                                                                                                                                                                              |  |              |         |   |                  |   |         |  
|                                                                                                                                                                              |  |              | 92,549  |   |                  |   | 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: 14,426 at June 30, 2007 and 14,399 at December 31, 2006                                          |  |              | 2,568   |   |                  |   | 2,563   |  
|Additional paid-in capital                                                                                                                                                    |  |              | 162,600 |   |                  |   | 162,010 |  
|Accumulated other comprehensive income (loss)                                                                                                                                 |  |              | (4,930  | ) |                  |   | (5,028  | )
|Retained earnings                                                                                                                                                             |  |              | 46,110  |   |                  |   | 44,651  |  
|Treasury stock at cost, 1,644 shares at June 30, 2007 and 1,640 shares at December 31, 2006                                                                                   |  |              | (18,665 | ) |                  |   | (18,617 | )
|                                                                                                                                                                              |  |              |         |   |                  |   |         |  
|                                                                                                                                                                              |  |              | 187,683 |   |                  |   | 185,579 |  
|                                                                                                                                                                              |  |              |         |   |                  |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                    |  | $            | 503,228 |   |                  | $ | 510,574 |  
|                                                                                                                                                                              |  |              |         |   |                  |   |         |  

See notes to condensed consolidated financial statements.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                                                         |  |                           |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                         |  | Six Months Ended June 30, |        
|                                                                                                         |  | 2007                      |         |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                     |  |                           |         |   |      |   |         |  
|Net income                                                                                               |  | $                         | 4,896   |   |      | $ | 2,528   |  
|Loss from discontinued operations                                                                        |  |                           |        |   |      |   | 304     |  
|                                                                                                         |  |                           |         |   |      |   |         |  
|Income from continuing operations                                                                        |  |                           | 4,896   |   |      |   | 2,832   |  
|Adjustments to reconcile income from continuing operations to net cash provided by operating activities: |  |                           |         |   |      |   |         |  
|Depreciation and amortization                                                                            |  |                           | 18,718  |   |      |   | 18,953  |  
|Bad debt expense                                                                                         |  |                           | 318     |   |      |   | 352     |  
|Deferred income taxes                                                                                    |  |                           | (3,005  | ) |      |   | (3,315  | )
|Equity in net losses of affiliates                                                                       |  |                           | 3       |   |      |   | 217     |  
|Gain from cash recovery of note receivable                                                               |  |                           | (300    | ) |      |   | (1,375  | )
|Gain from life insurance proceeds                                                                        |  |                           | (588    | ) |      |   |        |  
|Intangible asset impairment                                                                              |  |                           |        |   |      |   | 1,892   |  
|Stock-based compensation expense                                                                         |  |                           | 164     |   |      |   | 160     |  
|(Gain) loss on retirement of property, plant and equipment                                               |  |                           | (86     | ) |      |   | 95      |  
|Changes in operating assets and liabilities:                                                             |  |                           |         |   |      |   |         |  
|Accounts receivable                                                                                      |  |                           | 466     |   |      |   | 968     |  
|Inventories                                                                                              |  |                           | 15      |   |      |   | 72      |  
|Prepaid expenses                                                                                         |  |                           | (3,252  | ) |      |   | 74      |  
|Accounts payable and accrued liabilities                                                                 |  |                           | 319     |   |      |   | (1,987  | )
|Accrued taxes and accrued interest                                                                       |  |                           | (209    | ) |      |   | (2,798  | )
|Advance billings, customer deposits and other                                                            |  |                           | 419     |   |      |   | (1,279  | )
|Other, net                                                                                               |  |                           | (975    | ) |      |   | (359    | )
|                                                                                                         |  |                           |         |   |      |   |         |  
|Net Cash Provided by Operating Activities from Continuing Operations                                     |  |                           | 16,903  |   |      |   | 14,502  |  
|                                                                                                         |  |                           |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                     |  |                           |         |   |      |   |         |  
|Capital expenditures, net of proceeds from sales                                                         |  |                           | (11,956 | ) |      |   | (14,704 | )
|Collection of note receivable                                                                            |  |                           | 679     |   |      |   | 1,375   |  
|Proceeds from sale of investment                                                                         |  |                           | 9,946   |   |      |   |        |  
|Purchase of short-term investments                                                                       |  |                           | (3,187  | ) |      |   |        |  
|Life insurance proceeds                                                                                  |  |                           | 1,000   |   |      |   |        |  
|Increase in investments and advances to affiliates                                                       |  |                           |        |   |      |   | (350    | )
|Acquisition of customer list intangible asset                                                            |  |                           | (606    | ) |      |   |        |  
|                                                                                                         |  |                           |         |   |      |   |         |  
|Net Cash Used In Investing Activities of Continuing Operations                                           |  |                           | (4,124  | ) |      |   | (13,679 | )
|                                                                                                         |  |                           |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                     |  |                           |         |   |      |   |         |  
|Dividends on common stock                                                                                |  |                           | (3,426  | ) |      |   | (3,420  | )
|Payments on long-term debt                                                                               |  |                           | (6,033  | ) |      |   | (5,026  | )
|Proceeds from issuance of common stock and stock options exercised                                       |  |                           | 159     |   |      |   | 88      |  
|Excess tax benefits from exercise of stock options                                                       |  |                           | 15      |   |      |   |        |  
|Purchase of treasury stock                                                                               |  |                           | (48     | ) |      |   |        |  
|                                                                                                         |  |                           |         |   |      |   |         |  
|Net Cash Used In Financing Activities of Continuing Operations                                           |  |                           | (9,333  | ) |      |   | (8,358  | )
|                                                                                                         |  |                           |         |   |      |   |         |  
|CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS                                                         |  |                           | 3,446   |   |      |   | (7,535  | )
|                                                                                                         |  |                          
|CASH USED IN DISCONTINUED OPERATIONS                                                                     |  |                           |         |   |      |   |         |  
|Cash provided by operating activities of discontinued operations                                         |  |                           |        |   |      |   | 150     |  
|Cash used in investing activities of discontinued operations                                             |  |                           |        |   |      |   | (364    | )
|                                                                                                         |  |                           |         |   |      |   |         |  
|Net Cash Used In Discontinued Operations                                                                 |  |                           |        |   |      |   | (214    | )
|                                                                                                         |  |                           |         |   |      |   |         |  
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                         |  |                           | 3,446   |   |      |   | (7,749  | )
|                                                                                                         |  |                          
|CASH AND CASH EQUIVALENTS                                                                                |  |                           |         |   |      |   |         |  
|BEGINNING OF PERIOD                                                                                      |  |                           | 3,101   |   |      |   | 10,325  |  
|                                                                                                         |  |                           |         |   |      |   |         |  
|END OF PERIOD                                                                                            |  | $                         | 6,547   |   |      | $ | 2,576   |  
|                                                                                                         |  |                           |         |   |      |   |         |  
|Supplemental Disclosures of Cash Flow Information                                                        |  |                           |         |   |      |   |         |  
|Cash paid for interest                                                                                   |  | $                         | 7,607   |   |      | $ | 7,396   |  
|Cash paid for income taxes                                                                               |  |                           | 4,300   |   |      |   | 6,830   |  

During the six months ended June 30, 2006, D&E entered into a capital lease obligation
for equipment in the amount of $1,573.

See notes to condensed consolidated financial statements.



3



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

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

For the six months ended June 30, 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 |  |                            | 23     |   |                           |   | 4       |        |  |   | 29     |   |  |   | 5       |  
|Common stock issued for stock options exercised                                                                                                            |  |                            | 8      |   |                           |   | 1       |        |  |   |       |   |  |   |        |  
|                                                                                                                                                           |  |                            |        |   |                           |   |         |        |  |   |        |   |  |   |         |  
|Balance at June 30                                                                                                                                         |  |                            | 16,070 |   |                           |   | 2,568   |        |  |   | 16,014 |   |  |   | 2,559   |  
|                                                                                                                                                           |  |                            |        |   |                           |   |         |        |  |   |        |   |  |   |         |  
|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 |  |                            |        |   |                           |   | 504     |        |  |   |        |   |  |   | 625     |  
|Common stock issued for stock options exercised                                                                                                            |  |                            |        |   |                           |   | 86      |        |  |   |        |   |  |   |        |  
|                                                                                                                                                           |  |                            |        |   |                           |   |         |        |  |   |        |   |  |   |         |  
|Balance at June 30                                                                                                                                         |  |                            |        |   |                           |   | 162,600 |        |  |   |        |   |  |   | 161,549 |  
|                                                                                                                                                           |  |                            |        |   |                           |   |         |        |  |   |        |   |  |   |         |  
|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                                                              |  |                            |        |   |                           |   | (171    | )      |  |   |        |   |  |   |        |  
|Defined benefit plans, net of tax                                                                                                                          |  |                            |        |   |                           |   | 369     |        |  |   |        |   |  |   |        |  
|Unrealized gain (loss) on derivative financial instruments, net of tax                                                                                     |  |                            |        |   |                           |   | (100    | )      |  |   |        |   |  |   | 849     |  
|                                                                                                                                                           |  |                            |        |   |                           |   |         |        |  |   |        |   |  |   |         |  
|Balance at June 30                                                                                                                                         |  |                            |        |   |                           |   | (4,930  | )      |  |   |        |   |  |   | (4,749  | )
|                                                                                                                                                           |  |                            |        |   |                           |   |         |        |  |   |        |   |  |   |         |  
|RETAINED EARNINGS                                                                                                                                          |  |                            |        |   |                           |   |         |        |  |   |        |   |  |   |         |  
|Balance at beginning of year                                                                                                                               |  |                            |        |   |                           |   | 44,651  |        |  |   |        |   |  |   | 45,083  |  
|Adjustment to adopt FIN 48                                                                                                                                 |  |                            |        |   |                           |   | 173     |        |  |   |        |   |  |   |        |  
|Net income                                                                                                                                                 |  |                            |        |   |                           |   | 4,896   |        |  |   |        |   |  |   | 2,528   |  
|Dividends on common stock: $0.25 per share for each period                                                                                                 |  |                            |        |   |                           |   | (3,610  | )      |  |   |        |   |  |   | (3,583  | )
|                                                                                                                                                           |  |                            |        |   |                           |   |         |        |  |   |        |   |  |   |         |  
|Balance at June 30                                                                                                                                         |  |                            |        |   |                           |   | 46,110  |        |  |   |        |   |  |   | 44,028  |  
|                                                                                                                                                           |  |                            |        |   |                           |   |         |        |  |   |        |   |  |   |         |  
|TREASURY STOCK                                                                                                                                             |  |                            |        |   |                           |   |         |        |  |   |        |   |  |   |         |  
|Balance at beginning of year                                                                                                                               |  |                            | (1,640 | ) |                           |   | (18,617 | )      |  |   | (1,640 | ) |  |   | (18,617 | )
|Treasury stock acquired                                                                                                                                    |  |                            | (4     | ) |                           |   | (48     | )      |  |   |       |   |  |   |        |  
|                                                                                                                                                           |  |                            |        |   |                           |   |         |        |  |   |        |   |  |   |         |  
|Balance at June 30                                                                                                                                         |  |                            | (1,644 | ) |                           |   | (18,665 | )      |  |   | (1,640 | ) |  |   | (18,617 | )
|                                                                                                                                                           |  |                            |        |   |                           |   |         |        |  |   |        |   |  |   |         |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                 |  |                            | 14,426 |   |                           | $ | 187,683 |        |  |   | 14,374 |   |  | $ | 184,770 |  
|                                                                                                                                                           |  |                            |        |   |                           |   |         |        |  |   |        |   |  |   |         |  
|                                                                                                                                                           |  |                           
|                                                                                                                                                           |  | Three months endedJune 30, |        |   | Six months ended June 30, |  
|                                                                                                                                                           |  | 2007                       |        |   | 2006                      |   |         | 2007   |  |   | 2006   |  
|COMPREHENSIVE INCOME (LOSS)                                                                                                                                |  |                            |        |   |                           |   |         |        |  |   |        |   |  |   |         |  
|Net income                                                                                                                                                 |  | $                          | 2,286  |   |                           | $ | 897     |        |  | $ | 4,896  |   |  | $ | 2,528   |  
|Reclassification adjustment for realized gain on derivative financial instruments, net of income tax of ($57) and ($122)                                   |  |                            | (80    | ) |                           |   |        |        |  |   | (171   | ) |  |   |        |  
|Defined benefit plans, net of income taxes of $134 and $262                                                                                                |  |                            | 188    |   |                           |   |        |        |  |   | 369    |   |  |   |        |  
|Unrealized gain (loss) on derivative financial instruments, net of income taxes of ($70), $235, ($70) and $603                                             |  |                            | (100   | ) |                           |   | 331     |        |  |   | (100   | ) |  |   | 849     |  
|                                                                                                                                                           |  |                            |        |   |                           |   |         |        |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                                                                 |  | $                          | 2,294  |   |                           | $ | 1,228   |        |  | $ | 4,994  |   |  | $ | 3,377   |  
|                                                                                                                                                           |  |                            |        |   |                           |   |         |        |  |   |        |   |  |   |         |  

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.

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 5). 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 six months ended June 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)



|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 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, and also recognized $266 of interest income. See Note 9 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. | 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.



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)



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



|                    |  |                            |   |      |                          |      |      |  |   |      |   |  |   |      |  
|------------------- |  | -------------------------- | - | ---- | ------------------------ | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                    |  | Three months endedJune 30, |   |      | Six months endedJune 30, |     
|                    |  | 2007                       |   | 2006 |                          |      | 2007 |  |   | 2006 |  
|Net sales           |  | $                          |  |      | $                        |     |      |  | $ |     |   |  | $ |     |  
|Net loss            |  |                            |  |      |                          | (405 | )    |  |   | (10  | ) |  |   | (652 | )
|D&Es share of loss |  |                            |  |      |                          | (135 | )    |  |   | (3   | ) |  |   | (217 | )



|4. | Intangible Assets
|-- | -----------------

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



|                              |  |               |         |   |                   |   |         |  
|----------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                              |  | June 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      |  |               | (29,207 | ) |                   |   | (26,556 | )
|                              |  |               |         |   |                   |   |         |  
|Net intangible assets         |  | $             | 151,027 |   |                   | $ | 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 six months ended June 30, 2007 and 2006 was $1,326, $1,379, $2,651 and $2,757, respectively.

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.



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)



|5. | 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 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 months ended June 30, 2006 |       |   | Six months ended June 30, 2006 |  
|Revenue                                                      |  | $                                | 2,180 |   |                                | $ | 4,514 |  
|                                                             |  |                                 
|Depreciation and amortization                                |  |                                  | 139   |   |                                |   | 285   |  
|Other operating expenses                                     |  |                                  | 1,970 |   |                                |   | 4,289 |  
|Intangible asset impairment                                  |  |                                  | 483   |   |                                |   | 483   |  
|                                                             |  |                                  |       |   |                                |   |       |  
|Total operating expenses                                     |  |                                  | 2,592 |   |                                |   | 5,057 |  
|                                                             |  |                                  |       |   |                                |   |       |  
|                                                             |  |                                 
|Operating loss                                               |  |                                  | (412  | ) |                                |   | (543  | )
|Income tax (benefit)                                         |  |                                  | (187  | ) |                                |   | (239  | )
|                                                             |  |                                  |       |   |                                |   |       |  
|Loss from discontinued operations, net of income tax benefit |  | $                                | (225  | ) |                                | $ | (304  | )
|                                                             |  |                                  |       |   |                                |   |       |  



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)



|6. | Long-Term Debt
|-- | --------------

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



|                           |  |                                     |   |  |          |  |               |         |                  |   |        
|-------------------------- |  | ----------------------------------- | - |  | -------- |  | ------------- | ------- | ---------------- | - | -------
|                           |  | June 30, 2007 Average Interest Rate |   |  | Maturity |  | June 30, 2007 |         | December 31,2006
|Senior Secured Term Loan A |  | 7.14                                | % |  | 2011     |  | $             | 31,365  |                  | $ | 33,980 
|Senior Secured Term Loan B |  | 7.13                                | % |  | 2011     |  |               | 141,885 |                  |   | 143,520
|Secured Term Loan          |  | 9.00                                | % |  | 2014     |  |               | 15,000  |                  |   | 16,000 
|Secured Term Loan          |  | 9.00                                | % |  | 2014     |  |               | 11,250  |                  |   | 12,000 
|Capital lease obligation   |  |                                     |   |  |          |  |               | 1,484   |                  |   | 1,516  
|                           |  |                                     |   |  |          |  |               |         |                  |   |        
|                           |  |                                     |   |  |          |  |               | 200,984 |                  |   | 207,016
|Less current maturities    |  |                                     |   |  |          |  |               | 7,069   |                  |   | 7,066  
|                           |  |                                     |   |  |          |  |               |         |                  |   |        
|Total long-term debt       |  |                                     |   |  |          |  | $             | 193,915 |                  | $ | 199,950
|                           |  |                                     |   |  |          |  |               |         |                  |   |        

In the six months ended June 30, 2007, D&E made voluntary principal prepayments of $2,500
of which $1,615 and $885 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 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.



|7. | 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.



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)



At June 30, 2007, the Company had an interest rate swap agreement with a total notional amount
of $50,000 and a maturity date 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 June 30, 2007, the fair value of the derivative was recorded as a long-term liability of $170. An unrealized net loss of $170 ($100 net of tax) at June 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.

On July 30, 2007, the Company entered into an interest rate swap agreement with a total notional amount of $25,000 and a maturity date in September
2009.



|8. | 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 provided on an individual tower site basis. The lease payments start at $1.5 per site
per month, with provision for an increase of 4% per year. The maximum potential amount of undiscounted future payments that D&E could be required to make under the guarantee as of June 30, 2007 is $8,656. The majority of these tower
site leases and our guarantee will expire between 2011 and 2013. As of June 30, 2007, D&E has recorded a liability for the lease guarantees of $3,200. In the event that D&E is required to pay in excess of $100 to 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 $5,200 as of June 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. D&E will recognize release from risk for the guarantee upon expiration or settlement of the guarantee.



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)



|9. | 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, and also recognized $266 of interest income. 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 six months ending June 30, 2007, the Company recognized $45 of interest income in income tax expense resulting in accrued interest income of $311 at June 30,
2007.



|10. | 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 months ended June 30, 2007. Options to purchase 44,500 shares for the six months ended June 30, 2007 and 55,104 shares for the three and six months ended June 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.



11



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 1. Notes to Condensed Consolidated Financial Statements

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

(Unaudited)



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



|                                                                                                    |  |                            |        |      |                          |        |      |  |      |        |  |   |        |  
|--------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | ---- | ------------------------ | ------ | ---- |  | ---- | ------ |  | - | ------ | -
|                                                                                                    |  | Three months endedJune 30, |        |      | Six months endedJune 30, |       
|                                                                                                    |  | 2007                       |        | 2006 |                          |        | 2007 |  | 2006 |       
|Income from continuing operations                                                                   |  | $                          | 2,286  |      | $                        | 1,122  |      |  | $    | 4,896  |  | $ | 2,832  |  
|Loss from discontinued operations                                                                   |  |                            |       |      |                          | (225   | )    |  |      |       |  |   | (304   | )
|                                                                                                    |  |                            |        |      |                          |        |      |  |      |        |  |   |        |  
|Net income                                                                                          |  | $                          | 2,286  |      | $                        | 897    |      |  | $    | 4,896  |  | $ | 2,528  |  
|                                                                                                    |  |                            |        |      |                          |        |      |  |      |        |  |   |        |  
|Basic earnings per share:                                                                           |  |                            |        |      |                          |        |      |  |      |        |  |   |        |  
|Weighted average shares outstanding (thousands)                                                     |  |                            | 14,413 |      |                          | 14,360 |      |  |      | 14,406 |  |   | 14,354 |  
|                                                                                                    |  |                            |        |      |                          |        |      |  |      |        |  |   |        |  
|Income from continuing operations                                                                   |  | $                          | 0.16   |      | $                        | 0.08   |      |  | $    | 0.34   |  | $ | 0.20   |  
|Loss from discontinued operations                                                                   |  |                            |       |      |                          | (0.02  | )    |  |      |       |  |   | (0.02  | )
|                                                                                                    |  |                            |        |      |                          |        |      |  |      |        |  |   |        |  
|Net income per common share                                                                         |  | $                          | 0.16   |      | $                        | 0.06   |      |  | $    | 0.34   |  | $ | 0.18   |  
|                                                                                                    |  |                            |        |      |                          |        |      |  |      |        |  |   |        |  
|Diluted earnings per share:                                                                         |  |                            |        |      |                          |        |      |  |      |        |  |   |        |  
|Weighted average shares outstanding (thousands)                                                     |  |                            | 14,413 |      |                          | 14,360 |      |  |      | 14,406 |  |   | 14,354 |  
|Incremental shares from assumed stock option exercises and contingently issuable shares (thousands) |  |                            | 121    |      |                          | 64     |      |  |      | 105    |  |   | 55     |  
|                                                                                                    |  |                            |        |      |                          |        |      |  |      |        |  |   |        |  
|Adjusted weighted average shares outstanding (thousands)                                            |  |                            | 14,534 |      |                          | 14,424 |      |  |      | 14,511 |  |   | 14,409 |  
|                                                                                                    |  |                            |        |      |                          |        |      |  |      |        |  |   |        |  
|Income from continuing operations                                                                   |  | $                          | 0.16   |      | $                        | 0.08   |      |  | $    | 0.34   |  | $ | 0.20   |  
|Loss from discontinued operations                                                                   |  |                            |       |      |                          | (0.02  | )    |  |      |       |  |   | (0.02  | )
|                                                                                                    |  |                            |        |      |                          |        |      |  |      |        |  |   |        |  
|Net income per common share                                                                         |  | $                          | 0.16   |      | $                        | 0.06   |      |  | $    | 0.34   |  | $ | 0.18   |  
|                                                                                                    |  |                            |        |      |                          |        |      |  |      |        |  |   |        |  



|11. | Stock-Based Compensation
|--- | ------------------------

Stock Options

The grant-date fair value of 62,900 stock options awarded in the six months ended June 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 six months ended June 30, 2006. There were
forfeitures of 6,000 stock option grants in the six months ended June 30, 2007. There were a total of 213,452 stock options exercisable with a weighted-average exercise price of $10.10 at June 30, 2007. The weighted average remaining
contractual term was approximately 4.9 years for stock options outstanding as of June 30, 2007. The total intrinsic value was approximately $1,921 for stock options outstanding as of June 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)



Compensation expense related to stock options in the three and six months ended June 30, 2007
was $20 and $41, respectively. The related tax benefits were $8 and $17 for the three and six months ended June 30, 2007, respectively. There was no compensation expense related to stock option grants in the six months ended June 30, 2006.

Performance Restricted Shares

During
the six months ended June 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 six
months ended June 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 six
months ended June 30, 2007 and 2006 was $53, $71, $120 and $132, respectively. The related tax benefits for the three and six months ended June 30, 2007 and 2006 were $23, $30, $50 and $55, respectively.

In the second quarter of 2007, the performance goals for 5,000 performance restricted shares were met and the remaining expense of $4 was recognized. The
performance restricted shares plus dividend equivalents were converted to shares of common stock in July 2007.

Fully Vested Shares

During the six months ended June 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 six months ended June 30, 2007 and 2006 was $3 and $28, respectively, and the related tax benefits were $1 and $11, respectively.



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

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



|                                         |  |                             |      |   |                         |   |       |      |  |   |      |   |  |   |     |  
|---------------------------------------- |  | --------------------------- | ---- | - | ----------------------- | - | ----- | ---- |  | - | ---- | - |  | - | --- | -
|                                         |  | Pension Benefits            |      |   | Postretirement Benefits |  
|                                         |  | Three months ended June 30, |     
|                                         |  | 2007                        |      |   | 2006                    |   |       | 2007 |  |   | 2006 |  
|Components of Net Periodic Benefit Cost: |  |                             |      |   |                         |   |       |      |  |   |      |   |  |   |     |  
|Service cost                             |  | $                           | 410  |   |                         | $ | 584   |      |  | $ |     |   |  | $ | 2   |  
|Interest cost                            |  |                             | 993  |   |                         |   | 929   |      |  |   | 52   |   |  |   | 40  |  
|Expected return on plan assets           |  |                             | (919 | ) |                         |   | (852  | )    |  |   | (9   | ) |  |   | (7  | )
|Amortization of prior service cost       |  |                             | (32  | ) |                         |   | (17   | )    |  |   | (40  | ) |  |   | (41 | )
|Amortization of net loss                 |  |                             | 357  |   |                         |   | 358   |      |  |   | 35   |   |  |   | 20  |  
|                                         |  |                             |      |   |                         |   |       |      |  |   |      |   |  |   |     |  
|Net periodic benefit cost                |  | $                           | 809  |   |                         | $ | 1,002 |      |  | $ | 38   |   |  | $ | 14  |  
|                                         |  |                             |      |   |                         |   |       |      |  |   |      |   |  |   |     |  



|                                         |  |                           |        |   |                         |   |        |      |  |   |      |   |  |   |     |  
|---------------------------------------- |  | ------------------------- | ------ | - | ----------------------- | - | ------ | ---- |  | - | ---- | - |  | - | --- | -
|                                         |  | Pension Benefits          |        |   | Postretirement Benefits |  
|                                         |  | Six months ended June 30, |       
|                                         |  | 2007                      |        |   | 2006                    |   |        | 2007 |  |   | 2006 |  
|Components of Net Periodic Benefit Cost: |  |                           |        |   |                         |   |        |      |  |   |      |   |  |   |     |  
|Service cost                             |  | $                         | 819    |   |                         | $ | 1,168  |      |  | $ | 1    |   |  | $ | 4   |  
|Interest cost                            |  |                           | 1,985  |   |                         |   | 1,858  |      |  |   | 92   |   |  |   | 80  |  
|Expected return on plan assets           |  |                           | (1,838 | ) |                         |   | (1,704 | )    |  |   | (16  | ) |  |   | (14 | )
|Amortization of prior service cost       |  |                           | (63    | ) |                         |   | (34    | )    |  |   | (81  | ) |  |   | (82 | )
|Amortization of net loss                 |  |                           | 715    |   |                         |   | 716    |      |  |   | 59   |   |  |   | 40  |  
|Special termination benefits             |  |                           |       |   |                         |   |       |      |  |   |     |   |  |   | 112 |  
|                                         |  |                           |        |   |                         |   |        |      |  |   |      |   |  |   |     |  
|Net periodic benefit cost                |  | $                         | 1,618  |   |                         | $ | 2,004  |      |  | $ | 55   |   |  | $ | 140 |  
|                                         |  |                           |        |   |                         |   |        |      |  |   |      |   |  |   |     |  

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



|                          |  |                             |     |                         |   |       |  |      |    |  |   |   
|------------------------- |  | --------------------------- | --- | ----------------------- | - | ----- |  | ---- | -- |  | - | --
|                          |  | Pension Benefits            |     | Postretirement Benefits
|                          |  | Three months ended June 30,
|                          |  | 2007                        |     | 2006                    |   | 2007  |  | 2006
|Continuing operations     |  | $                           | 809 |                         | $ | 904   |  | $    | 38 |  | $ | 13
|Discontinued operations   |  |                             |    |                         |   | 98    |  |      |   |  |   | 1 
|                          |  |                             |     |                         |   |       |  |      |    |  |   |   
|Net periodic benefit cost |  | $                           | 809 |                         | $ | 1,002 |  | $    | 38 |  | $ | 14
|                          |  |                             |     |                         |   |       |  |      |    |  |   |   



|                          |  |                           |       |                         |   |       |  |      |    |  |   |    
|------------------------- |  | ------------------------- | ----- | ----------------------- | - | ----- |  | ---- | -- |  | - | ---
|                          |  | Pension Benefits          |       | Postretirement Benefits
|                          |  | Six months ended June 30,
|                          |  | 2007                      |       | 2006                    |   | 2007  |  | 2006
|Continuing operations     |  | $                         | 1,618 |                         | $ | 1,781 |  | $    | 55 |  | $ | 123
|Discontinued operations   |  |                           |      |                         |   | 223   |  |      |   |  |   | 17 
|                          |  |                           |       |                         |   |       |  |      |    |  |   |    
|Net periodic benefit cost |  | $                         | 1,618 |                         | $ | 2,004 |  | $    | 55 |  | $ | 140
|                          |  |                           |       |                         |   |       |  |      |    |  |   |    



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)



During the six months ended June 30, 2007, D&E contributed $2,900 to its defined benefit
pension plans and made no contribution to its other postretirement benefit plan. The Company presently anticipates making additional contributions in the amount of $1,900 to its defined benefit plans 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.



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)



|13. | 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 endedJune 30, |        | Three months endedJune 30, |   |        | Three months endedJune 30, |  
|                    |  | 2007                       |        | 2006                       |   | 2007   |                            |   | 2006 |   |  | 2007 |    |   | 2006 |  
|Segment             |  |                            |        |                            |   |        |                            |   |      |   |  |      |    |   |      |   |       |   |  |   |        |  
|Wireline            |  | $                          | 35,858 |                            | $ | 39,386 |                            | $ | 6    |   |  | $    | 1  |   |      | $ | 7,149 |   |  | $ | 7,354  |  
|Systems Integration |  |                            | 967    |                            |   | 1,595  |                            |   |     |   |  |      | 1  |   |      |   | (446  | ) |  |   | (2,938 | )
|Corporate and Other |  |                            | 376    |                            |   | 378    |                            |   |     |   |  |      |   |   |      |   | (177  | ) |  |   | (144   | )
|Eliminations        |  |                            |       |                            |   |       |                            |   | (6   | ) |  |      | (2 | ) |      |   |      |   |  |   |       |  
|                    |  |                            |        |                            |   |        |                            |   |      |   |  |      |    |   |      |   |       |   |  |   |        |  
|Total               |  | $                          | 37,201 |                            | $ | 41,359 |                            | $ |     |   |  | $    |   |   |      | $ | 6,526 |   |  | $ | 4,272  |  
|                    |  |                            |        |                            |   |        |                            |   |      |   |  |      |    |   |      |   |       |   |  |   |        |  



|                    |  |                           |        |                          |   |        |                           |   |      |   |  |      |    |   |      |   |        |   |  |   |        |  
|------------------- |  | ------------------------- | ------ | ------------------------ | - | ------ | ------------------------- | - | ---- | - |  | ---- | -- | - | ---- | - | ------ | - |  | - | ------ | -
|                    |  | External Revenues         |        | Intersegment Revenues    |   |        | Operating Income (Loss)   |  
|                    |  | Six months ended June 30, |        | Six months endedJune 30, |   |        | Six months ended June 30, |  
|                    |  | 2007                      |        | 2006                     |   | 2007   |                           |   | 2006 |   |  | 2007 |    |   | 2006 |  
|Segment             |  |                           |        |                          |   |        |                           |   |      |   |  |      |    |   |      |   |        |   |  |   |        |  
|Wireline            |  | $                         | 72,079 |                          | $ | 77,834 |                           | $ | 12   |   |  | $    | 2  |   |      | $ | 13,795 |   |  | $ | 14,002 |  
|Systems Integration |  |                           | 2,751  |                          |   | 3,020  |                           |   |     |   |  |      | 4  |   |      |   | (1,358 | ) |  |   | (4,435 | )
|Corporate and Other |  |                           | 735    |                          |   | 793    |                           |   |     |   |  |      |   |   |      |   | (405   | ) |  |   | (395   | )
|Eliminations        |  |                           |       |                          |   |       |                           |   | (12  | ) |  |      | (6 | ) |      |   |       |   |  |   |       |  
|                    |  |                           |        |                          |   |        |                           |   |      |   |  |      |    |   |      |   |        |   |  |   |        |  
|Total               |  | $                         | 75,565 |                          | $ | 81,647 |                           | $ |     |   |  | $    |   |   |      | $ | 12,032 |   |  | $ | 9,172  |  
|                    |  |                           |        |                          |   |        |                           |   |      |   |  |      |    |   |      |   |        |   |  |   |        |  



|                    |  |                |          |   |                  |   |          |  
|------------------- |  | -------------- | -------- | - | ---------------- | - | -------- | -
|                    |  | Segment Assets |         
|                    |  | June 30,2007   |          |   | December 31,2006 |  
|Segment             |  |                |          |   |                  |   |          |  
|Wireline            |  | $              | 493,388  |   |                  | $ | 495,721  |  
|Systems Integration |  |                | 6,916    |   |                  |   | 10,628   |  
|Corporate and Other |  |                | 444,978  |   |                  |   | 440,430  |  
|Eliminations        |  |                | (442,054 | ) |                  |   | (436,205 | )
|                    |  |                |          |   |                  |   |          |  
|Total               |  | $              | 503,228  |   |                  | $ | 510,574  |  
|                    |  |                |          |   |                  |   |          |  



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)



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



|                                                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                               |  | Three months endedJune 30, |        |   | Six months endedJune 30, |  
|                                                                                               |  | 2007                       |        |   | 2006                     |   |        | 2007 |  |   | 2006   |  
|Operating income from reportable segments                                                      |  | $                          | 6,703  |   |                          | $ | 4,416  |      |  | $ | 12,437 |   |  | $ | 9,567  |  
|Corporate and other operating loss                                                             |  |                            | (177   | ) |                          |   | (144   | )    |  |   | (405   | ) |  |   | (395   | )
|Equity in net losses of affiliates                                                             |  |                            |       |   |                          |   | (135   | )    |  |   | (3     | ) |  |   | (217   | )
|Interest expense                                                                               |  |                            | (3,718 | ) |                          |   | (3,867 | )    |  |   | (7,454 | ) |  |   | (7,705 | )
|Other, net                                                                                     |  |                            | 400    |   |                          |   | 1,050  |      |  |   | 2,119  |   |  |   | 2,517  |  
|                                                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Income from continuing operations before income taxes and dividends on utility preferred stock |  | $                          | 3,208  |   |                          | $ | 1,320  |      |  | $ | 6,694  |   |  | $ | 3,767  |  
|                                                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  



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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



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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)



report on Form 10-Q, as well as our audited consolidated financial statements for the year ended December 31, 2006, as filed on Form 10-K with the
Securities and Exchange Commission (SEC). We have attempted to identify the most important matters on which our management focuses in evaluating our financial condition and operating performance and the short-term and long-term
opportunities, challenges and risks (including material trends and uncertainties) which we face. We also discuss the actions we are taking to address these opportunities, challenges and risks. The Overview is not intended as a summary of, or a
substitute for review of, Managements Discussion and Analysis of Financial Condition and Results of Operations.

Business Segments

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, Harrisburg, Reading, Altoona, Pottstown, State College and Williamsport, 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 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.

As of June 30, 2007, we served 127,278 RLEC access lines, 44,891
CLEC access lines, 34,078 digital subscriber lines (DSL)/high-speed Internet subscribers, 4,425 dial-up Internet access subscribers, 6,765 video subscribers and 989 web-hosting customers. For the quarter ended June 30, 2007, we
generated total revenues of $37,201, operating income of $6,526 and net income of $2,286.



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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 will continue to pursue the following goals:



| |  |  | We will 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 will implement 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 will continue 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 will pursue the goal of Delivering Excellence for our customers by providing reliable, responsive, state-of-the-art broadband communications
services, including voice, high-speed data and, in certain of our markets, video. We will 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 will endeavor to be a single source provider of voice and data communications services to our business customers. We believe that the convergence and complexity
of voice communications and data network technologies has increased the need for businesses to seek a single provider for all of their communications, information technology and collocation needs. We are creating 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 Wireline services for a customized and differentiated offering,
including professional information technology services, network security services and network monitoring and response.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will 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
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



| | our relationships with our customers and enhances our competitive position. In an effort to enhance the customers experience when they call in service
issues, we integrated a case management system into the NOC. The system has given us the ability to better manage and prioritize service calls resulting in greater ability to manage the customers request. To further enable this capability,
several automated tests were developed and implemented 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 offer customers our Managed
Services products, which are internal monitoring (within the customers enterprise), external monitoring (devices outside the customers enterprise), collocation facilities 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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

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



| |  | Risk of 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 $200,984 as of June 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 and our
ability to compete. In this regard, the regulatory environment governing ILEC operations has been and will likely continue to be very liberal in its approach to promoting competition and network access, which may increase the likelihood of new
competitors offering similar services in our service areas. The introduction of new competitors could have a negative effect on our RLEC 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 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. It is
possible that the Commonwealth Court will schedule oral arguments in this petition for late summer or fall 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. We are addressing interconnection agreement issues with the PA PUC while we await the outcome of the Commonwealth Court proceeding.

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 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



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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)



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 $1,500 for the last six 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 open 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 investigation. On November 9, 2006, the PA PUC granted in
its entirety a stay of this investigation pending the outcome of the FCCs Unified Intercarrier Compensation proceeding at CC Docket No. 01-92 or for one year, whichever is earlier. At this time, we cannot predict what the outcome will be
of the FCCs investigation or what the PA PUC may do if the FCC approves changes or fails to act within the one-year delay.

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 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 June 30, 2007 was $1,000, of which $812 and $188 were recorded in the
six months ending June 30, 2007 and the fourth quarter of 2006, respectively. The amounts that have been collected from the carriers related to this rate increase will be refunded in the near future.



24



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



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. After July 1, 2007, management anticipates the monthly increase in local service revenue to be $96.

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.



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

We had
indebtedness of $200,984, including current maturities and a capital lease obligation of $1,484, at June 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Results of Operations

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



|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |    |   |  |   |       
|----------------------------- |  | -------- | ------ | ------------------- | - | ------ | ------------------ |  | - | ------------ | - |  | ------------ | -- | - |  | - | ------
|Three months ended            |  | Wireline |        | Systems Integration |   |        | Corporateand Other |  |   | Eliminations |   |  | TotalCompany
|June 30, 2007                 |  |          |        |                     |   |        |                    |  |   |              |   |  |              |    |   |  |   |       
|Revenues  External           |  | $        | 35,858 |                     | $ | 967    |                    |  | $ | 376          |   |  | $            |   |   |  | $ | 37,201
|Revenues  Intercompany       |  |          | 6      |                     |   |       |                    |  |   |             |   |  |              | (6 | ) |  |   |      
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |    |   |  |   |       
|Total Revenues                |  |          | 35,864 |                     |   | 967    |                    |  |   | 376          |   |  |              | (6 | ) |  |   | 37,201
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |    |   |  |   |       
|Depreciation and Amortization |  |          | 8,980  |                     |   | 48     |                    |  |   | 182          |   |  |              |   |   |  |   | 9,210 
|Other Operating Expenses      |  |          | 19,735 |                     |   | 1,365  |                    |  |   | 371          |   |  |              | (6 | ) |  |   | 21,465
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |    |   |  |   |       
|Total Operating Expenses      |  |          | 28,715 |                     |   | 1,413  |                    |  |   | 553          |   |  |              | (6 | ) |  |   | 30,675
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |    |   |  |   |       
|Operating Income (Loss)       |  | $        | 7,149  |                     | $ | (446   | )                  |  | $ | (177         | ) |  | $            |   |   |  | $ | 6,526 
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |    |   |  |   |       
|June 30, 2006                 |  |          |        |                     |   |        |                    |  |   |              |   |  |              |    |   |  |   |       
|Revenues  External           |  | $        | 39,386 |                     | $ | 1,595  |                    |  | $ | 378          |   |  | $            |   |   |  | $ | 41,359
|Revenues  Intercompany       |  |          | 1      |                     |   | 1      |                    |  |   |             |   |  |              | (2 | ) |  |   |      
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |    |   |  |   |       
|Total Revenues                |  |          | 39,387 |                     |   | 1,596  |                    |  |   | 378          |   |  |              | (2 | ) |  |   | 41,359
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |    |   |  |   |       
|Depreciation and Amortization |  |          | 9,107  |                     |   | 197    |                    |  |   | 189          |   |  |              |   |   |  |   | 9,493 
|Intangible Asset Impairment   |  |          |       |                     |   | 1,892  |                    |  |   |             |   |  |              |   |   |  |   | 1,892 
|Other Operating Expenses      |  |          | 22,926 |                     |   | 2,445  |                    |  |   | 333          |   |  |              | (2 | ) |  |   | 25,702
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |    |   |  |   |       
|Total Operating Expenses      |  |          | 32,033 |                     |   | 4,534  |                    |  |   | 522          |   |  |              | (2 | ) |  |   | 37,087
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |    |   |  |   |       
|Operating Income (Loss)       |  | $        | 7,354  |                     | $ | (2,938 | )                  |  | $ | (144         | ) |  | $            |   |   |  | $ | 4,272 
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |    |   |  |   |       



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)



|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |       
|----------------------------- |  | -------- | ------ | ------------------- | - | ------ | ------------------ |  | - | ------------ | - |  | ------------ | --- | - |  | - | ------
|Six months ended              |  | Wireline |        | Systems Integration |   |        | Corporateand Other |  |   | Eliminations |   |  | TotalCompany
|June 30, 2007                 |  |          |        |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |       
|Revenues  External           |  | $        | 72,079 |                     | $ | 2,751  |                    |  | $ | 735          |   |  | $            |    |   |  | $ | 75,565
|Revenues  Intercompany       |  |          | 12     |                     |   |       |                    |  |   |             |   |  |              | (12 | ) |  |   |      
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |       
|Total Revenues                |  |          | 72,091 |                     |   | 2,751  |                    |  |   | 735          |   |  |              | (12 | ) |  |   | 75,565
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |       
|Depreciation and Amortization |  |          | 18,172 |                     |   | 177    |                    |  |   | 369          |   |  |              |    |   |  |   | 18,718
|Other Operating Expenses      |  |          | 40,124 |                     |   | 3,932  |                    |  |   | 771          |   |  |              | (12 | ) |  |   | 44,815
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |       
|Total Operating Expenses      |  |          | 58,296 |                     |   | 4,109  |                    |  |   | 1,140        |   |  |              | (12 | ) |  |   | 63,533
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |       
|Operating Income (Loss)       |  | $        | 13,795 |                     | $ | (1,358 | )                  |  | $ | (405         | ) |  | $            |    |   |  | $ | 12,032
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |       
|June 30, 2006                 |  |          |        |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |       
|Revenues  External           |  | $        | 77,834 |                     | $ | 3,020  |                    |  | $ | 793          |   |  | $            |    |   |  | $ | 81,647
|Revenues  Intercompany       |  |          | 2      |                     |   | 4      |                    |  |   |             |   |  |              | (6  | ) |  |   |      
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |       
|Total Revenues                |  |          | 77,836 |                     |   | 3,024  |                    |  |   | 793          |   |  |              | (6  | ) |  |   | 81,647
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |       
|Depreciation and Amortization |  |          | 18,171 |                     |   | 402    |                    |  |   | 380          |   |  |              |    |   |  |   | 18,953
|Intangible Asset Impairment   |  |          |       |                     |   | 1,892  |                    |  |   |             |   |  |              |    |   |  |   | 1,892 
|Other Operating Expenses      |  |          | 45,663 |                     |   | 5,165  |                    |  |   | 808          |   |  |              | (6  | ) |  |   | 51,630
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |       
|Total Operating Expenses      |  |          | 63,834 |                     |   | 7,459  |                    |  |   | 1,188        |   |  |              | (6  | ) |  |   | 72,475
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |       
|Operating Income (Loss)       |  | $        | 14,002 |                     | $ | (4,435 | )                  |  | $ | (395         | ) |  | $            |    |   |  | $ | 9,172 
|                              |  |          |        |                     |   |        |                    |  |   |              |   |  |              |     |   |  |   |       

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.



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)



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.

Consolidated Operations

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

Consolidated revenues decreased $4,158, or 10.1%, to $37,201 for the quarter ended June 30, 2007, from $41,359 for the same period in
2006. The primary reason for the decrease was a reduction in Wireline directory revenue of $3,390, primarily as the result of three of our four directories being published under a new contract which became effective in the fourth quarter of 2006.
Systems Integration segment revenue decreased $629 due to the expiration of a customer contract on March 31, 2007. 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 beginning in the first quarter of 2007 for one 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 $4,400 in the
last six months of 2007, $11,000 in 2008 and $11,200 in 2009. Our directory expense, based on 2006 levels, will also decrease approximately $4,100 in the last six 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 $300 in the last six months of 2007, $1,200 in 2008 and $1,400 in 2009.

Consolidated operating expenses decreased $6,412, or 17.3%, to $30,675 for the quarter ended June 30, 2007, from $37,087 for the same period in 2006. The primary reasons for the decrease were a reduction in
directory expense of $3,092, primarily as the result of three of our four directories being published under a contract which became effective in the fourth quarter of 2006 and the intangible asset impairment of $1,892 recognized in the second
quarter of last year. Employee wages decreased $378 primarily from a reduction in the number of employees in the Systems Integration segment related to the expiration of a customer contract, partially offset by merit pay increases effective
March 19, 2007 and a minimal increase in personnel in the Wireline segment. Employee



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)



benefits decreased $15 due to a reduction in the defined benefit pension plan expense, partially offset by an increase in health insurance costs due to the
effect of 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 decreased $143.
Depreciation and amortization decreased $283 primarily as a result of certain fixed assets becoming fully depreciated and the disposal of equipment used in the Systems Integration segment related to a contract expiration. Customer billing expenses
decreased $133 as a result of vendor rate reductions that became effective January 1, 2007. Management anticipates a similar reduction in billing expenses for the remaining quarters in fiscal year 2007 compared to their respective quarters in
2006. Leased communications facilities expense decreased $296 primarily due to a one-time vendor billing adjustment of $248 for fiber circuits in May 2006.

Consolidated operating income increased $2,254, to $6,526, for the second quarter of 2007, from $4,272 in the same period of 2006. Operating income as a percentage of revenue increased to 17.5% in the second quarter
of 2007, compared to 10.3% in the same period of 2006.

Other income and expense was a net expense of $3,318 in the second quarter of 2007,
compared to a net expense of $2,952 for the same period in 2006. Interest expense decreased to $3,718 in the second quarter of 2007, compared to $3,867 in the same period of 2006, as a result of reductions in debt and the lower interest rate margins
as a result of the credit facility amendment in September 2006, partially offset by increases in short-term interest rates. Other income was $400 in 2007 compared to $1,050 in 2006. Other income included $135 of interest income collected in the
second quarter of 2007 on the note received from the sale of assets of Conestoga Wireless compared to $941 of principal and interest received in the second quarter of 2006. The Company negotiated a six-month grace period ending 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 $1,500 on this note during the
remainder of 2007 and has received the payment that was due August 1, 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
were $905 in the second quarter of 2007, compared to $181 for the same period in 2006 due to the increase in income before taxes. The effective income tax rate of approximately 28.2% for the second quarter of 2007 is lower than the federal statutory
rate primarily due to the reversal of temporary book to tax differences providing deferred state income tax benefits and no corresponding current state income tax expense. The effective income tax rate of 13.7% for the second quarter of 2006 is
substantially different than the federal statutory rate primarily due to the net effect of a 30.1% effective tax rate on net income excluding the intangible asset impairment loss, offset by a deferred tax benefit with a 41.5% effective tax rate on
the intangible asset impairment loss.

Net income was $2,286, or $0.16 per share, in the second quarter of 2007 compared to a net income of
$897, or $0.06 per share, in the second quarter of 2006. The primary reason for the increase in net income was the operating income increase of $2,254, partially offset by the increase in income taxes of $724.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Six months ended June 30, 2007 compared to six months ended June 30, 2006

Consolidated revenues decreased $6,082, or 7.4%, to $75,565 for the six months ended June 30, 2007, from $81,647 for the same
period in 2006. The primary reason for the decrease was a reduction in Wireline directory revenue of $5,859, primarily as the result of three of our four directories being published under a new contract which became effective in the fourth quarter
of 2006. Systems Integration segment revenue decreased $273 due to the expiration of a customer contract on March 31, 2007. These revenue changes are more fully described in the Wireline and Systems Integration segment results.

Consolidated operating expenses decreased $8,942, or 12.3%, to $63,533 for the six months ended June 30, 2007, from $72,475 for the same period in
2006. The primary reasons for the decrease were a reduction in directory expense of $5,436, primarily as the result of three of our four directories being published under a contract which became effective in the fourth quarter of 2006 and the
intangible asset impairment of $1,892 recognized in the second quarter of last year. Consulting fees decreased $469 primarily due to expenses incurred in the prior year for data conversion required in implementing new software to provide enhanced
customer service and communication facility maintenance support. Insurance expense decreased $129, primarily as a result of a one-time expense recorded in the prior year related to special termination benefits provided to two employees upon their
retirement. Customer billing expenses decreased $290 as a result of vendor rate reductions that became effective January 1, 2007. Management anticipates a similar reduction in billing expenses for the remaining six months in fiscal year 2007
compared to their respective quarters in 2006. Leased communications facilities expense decreased $296 primarily due to a one-time vendor billing adjustment of $248 for fiber circuits in May 2006. Building rent expense decreased $124 due to
reductions in office space in the Systems Integration segment. Depreciation and amortization decreased $235 primarily as a result of certain fixed assets becoming fully depreciated, the disposal of equipment used in the Systems Integration segment
and certain intangible assets becoming fully amortized in the prior year. Gains on disposal of equipment increased $178. Employee wages decreased $281 due to a reduction in the number of employees in the Systems Integration segment, partially offset
by merit pay increases effective in March of 2007 and 2006 and a minimal increase in personnel in the Wireline segment. Employee benefits increased $232 as a result of an increase in health insurance costs due to a reduction of our estimate of
health insurance expenses recognized in the first six months of 2006 related to the transition from a self-funded medical plan to one that is fully insured. Short-term incentive plan expenses increased $147 as a result of the increase in
consolidated operating income. Subcontractor costs increased $285 primarily in the Systems Integration segment in the first quarter of 2007 to provide services to the large retail services customer prior to the contract expiration.

Consolidated operating income increased $2,860, to $12,032, for the first six months of 2007, from $9,172 in the same period of 2006. Operating income as
a percentage of revenue increased to 15.9% in the first six months of 2007, compared to 11.2% in the same period of 2006.

Other income and
expense was a net expense of $5,338 in the first six months of 2007, compared to a net expense of $5,405 for the same period in 2006. Interest expense decreased to $7,454 in the first six months of 2007, compared to $7,705 in the same period of
2006, as a result of reductions in debt and the lower interest rate margins as a result of the credit facility amendment in September 2006, partially offset by increases in short-term interest rates. Other income was $2,119 in 2007 compared to
$2,517 in 2006. We recorded income of $588 in the first half of 2007 from proceeds of a key-person life insurance policy, in excess of the cash surrender



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)



value, of which the Company was the named beneficiary. Other income included $584 of interest income and principal repayments collected in the first half of
2007 on the note received from the sale of assets of Conestoga Wireless compared to $1,761 of principal and interest received in the first half of 2006 due to the receipt of only one of six scheduled principal payments on the note during the first
half 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. The Company negotiated a six-month grace period ending 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 $1,500 on this note during the remainder of 2007 and has received the payment that was due August 1, 2007.

Income taxes were $1,765 in the first six months of 2007, compared to $902 for the same period in 2006. The effective income tax rate was 26.4% for the
first six months of 2007, compared to 23.9% for the same period of the prior year. In the first six months of 2007, a permanent book to tax difference of $588 on the key-person life insurance gain resulted in a 2.5% reduction in the effective tax
rate. The effective income tax rate of 23.9% for the second quarter of 2006 is substantially different than the federal statutory rate primarily due to the net effect of a 29.8% effective tax rate on net income excluding the intangible asset
impairment loss, offset by a deferred tax benefit with a 41.5% effective tax rate on the intangible asset impairment loss.

Net income was
$4,896, or $0.34 per share, in the first six months of 2007 compared to a net income of $2,528, or $0.18 per share, in the first six months of 2006. The primary reason for the increase in net income was the operating income increase of $2,860,
partially offset by the increase in income taxes of $863.



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)



Wireline Segment Results



|                                |  |                             |         |      |   |         |  |   |          |   |  |       |  
|------------------------------- |  | --------------------------- | ------- | ---- | - | ------- |  | - | -------- | - |  | ----- | -
|                                |  | Three months ended June 30, |        
|                                |  | 2007                        |         | 2006 |   | Change  |  |   | % Change |  
|Revenues:                       |  |                             |         |      |   |         |  |   |          |   |  |       |  
|Local Telephone Service         |  | $                           | 12,108  |      | $ | 11,925  |  | $ | 183      |   |  | 1.5   |  
|Network Access                  |  |                             | 11,060  |      |   | 12,198  |  |   | (1,138   | ) |  | (9.3  | )
|Long Distance                   |  |                             | 5,257   |      |   | 5,367   |  |   | (110     | ) |  | (2.0  | )
|Communication Services          |  |                             | 5,699   |      |   | 4,761   |  |   | 938      |   |  | 19.7  |  
|Directory                       |  |                             | 1,233   |      |   | 4,623   |  |   | (3,390   | ) |  | (73.3 | )
|Other                           |  |                             | 507     |      |   | 513     |  |   | (6       | ) |  | (1.2  | )
|                                |  |                             |         |      |   |         |  |   |          |   |  |       |  
|Total Revenues                  |  |                             | 35,864  |      |   | 39,387  |  |   | (3,523   | ) |  | (8.9  | )
|                                |  |                             |         |      |   |         |  |   |          |   |  |       |  
|Depreciation and Amortization   |  |                             | 8,980   |      |   | 9,107   |  |   | (127     | ) |  | (1.4  | )
|Other Operating Expenses        |  |                             | 19,735  |      |   | 22,926  |  |   | (3,191   | ) |  | (13.9 | )
|                                |  |                             |         |      |   |         |  |   |          |   |  |       |  
|Total Operating Expenses        |  |                             | 28,715  |      |   | 32,033  |  |   | (3,318   | ) |  | (10.4 | )
|                                |  |                             |         |      |   |         |  |   |          |   |  |       |  
|Operating Income                |  | $                           | 7,149   |      | $ | 7,354   |  | $ | (205     | ) |  | (2.8  | )
|                                |  |                             |         |      |   |         |  |   |          |   |  |       |  
|Customer Connections at June 30 |  |                             |         |      |   |         |  |   |          |   |  |       |  
|RLEC Access Lines               |  |                             | 127,278 |      |   | 132,010 |  |   | (4,732   | ) |  | (3.6  | )
|CLEC Access Lines               |  |                             | 44,891  |      |   | 41,599  |  |   | 3,292    |   |  | 7.9   |  
|DSL/High-Speed Internet         |  |                             | 34,078  |      |   | 26,914  |  |   | 7,164    |   |  | 26.6  |  
|Dial-up Access                  |  |                             | 4,425   |      |   | 6,560   |  |   | (2,135   | ) |  | (32.5 | )
|Video                           |  |                             | 6,765   |      |   | 6,300   |  |   | 465      |   |  | 7.4   |  
|Web-hosting                     |  |                             | 989     |      |   | 931     |  |   | 58       |   |  | 6.2   |  
|                                |  |                             |         |      |   |         |  |   |          |   |  |       |  
|Total                           |  |                             | 218,426 |      |   | 214,314 |  |   | 4,112    |   |  | 1.9   |  
|                                |  |                             |         |      |   |         |  |   |          |   |  |       |  

Wireline segment revenues decreased $3,523, or 8.9%, to $35,864 in the three months ended
June 30, 2007, from $39,387 in the three months ended June 30, 2006. Local telephone service revenue increased $183 primarily from increased local private network revenue of $190 due to additional circuits in service and increased custom
calling feature revenues, partially offset by the effect of the decline in access lines. Network access revenue decreased $1,138, primarily due to lower NECA settlements of $1,795, partially offset by increased intrastate access revenue of $440 due
to increased minutes of use and a $294 revenue reduction due to a billing adjustment correction recognized in the second quarter of 2006. Long distance toll revenues decreased $219 due to a reduction in the average rate per minute of use while long
distance circuit revenue increased $109. Communication services revenue increased $938 primarily from additional DSL/high-speed Internet revenue of $883 attributable to subscriber growth and increased video revenue of $76 due to additional
subscribers and increased rates, partially offset by a reduction in dial-up Internet revenue of $122. Directory revenue decreased $3,390 primarily as the result of three of our four directories being published under a contract which became effective
in the fourth quarter of 2006.

Wireline operating expenses decreased $3,318, or 10.4%, to $28,715 in the second quarter of 2007, from
$32,033 in the same period of the prior year. Directory expense decreased $3,092, primarily as the result of three of our four directories being published under a contract which became effective in the fourth quarter of 2006. Consulting fees
decreased $285 primarily due to expenses incurred in the prior year for data conversion required in implementing new software to provide enhanced customer service and



32



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



communication facility maintenance support. Leased communications facilities expense decreased $296 primarily due to a one-time vendor billing charge of $248
for fiber circuits in May 2006. Depreciation and amortization expense decreased $127 due to certain assets becoming fully depreciated. Wages increased $212 primarily due to merit pay increases that became effective March 19, 2007 and a minimal
increase in personnel. Employee benefits increased $121 as a result of the 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. Corporate overhead expenses increased $142 as a result of the increase in allocation of corporate overhead expenses to this segment.



|                                |  |                           |         |      |   |         |  |   |         |   |  |       |  
|------------------------------- |  | ------------------------- | ------- | ---- | - | ------- |  | - | ------- | - |  | ----- | -
|                                |  | Six months ended June 30, |        
|                                |  | 2007                      |         | 2006 |   | Change  |  |   | %Change |  
|Revenues:                       |  |                           |         |      |   |         |  |   |         |   |  |       |  
|Local Telephone Service         |  | $                         | 24,174  |      | $ | 23,863  |  | $ | 311     |   |  | 1.3   |  
|Network Access                  |  |                           | 22,259  |      |   | 24,057  |  |   | (1,798  | ) |  | (7.5  | )
|Long Distance                   |  |                           | 10,580  |      |   | 10,888  |  |   | (308    | ) |  | (2.8  | )
|Communication Services          |  |                           | 11,193  |      |   | 9,377   |  |   | 1,816   |   |  | 19.4  |  
|Directory                       |  |                           | 2,790   |      |   | 8,649   |  |   | (5,859  | ) |  | (67.7 | )
|Other                           |  |                           | 1,095   |      |   | 1,002   |  |   | 93      |   |  | 9.3   |  
|                                |  |                           |         |      |   |         |  |   |         |   |  |       |  
|Total Revenues                  |  |                           | 72,091  |      |   | 77,836  |  |   | (5,745  | ) |  | (7.4  | )
|                                |  |                           |         |      |   |         |  |   |         |   |  |       |  
|Depreciation and Amortization   |  |                           | 18,172  |      |   | 18,171  |  |   | 1       |   |  | 0.0   |  
|Other Operating Expenses        |  |                           | 40,124  |      |   | 45,663  |  |   | (5,539  | ) |  | (12.1 | )
|                                |  |                           |         |      |   |         |  |   |         |   |  |       |  
|Total Operating Expenses        |  |                           | 58,296  |      |   | 63,834  |  |   | (5,538  | ) |  | (8.7  | )
|                                |  |                           |         |      |   |         |  |   |         |   |  |       |  
|Operating Income                |  | $                         | 13,795  |      | $ | 14,002  |  | $ | (207    | ) |  | (1.5  | )
|                                |  |                           |         |      |   |         |  |   |         |   |  |       |  
|Customer Connections at June 30 |  |                           |         |      |   |         |  |   |         |   |  |       |  
|RLEC Access Lines               |  |                           | 127,278 |      |   | 132,010 |  |   | (4,732  | ) |  | (3.6  | )
|CLEC Access Lines               |  |                           | 44,891  |      |   | 41,599  |  |   | 3,292   |   |  | 7.9   |  
|DSL/High-Speed Internet         |  |                           | 34,078  |      |   | 26,914  |  |   | 7,164   |   |  | 26.6  |  
|Dial-up Access                  |  |                           | 4,425   |      |   | 6,560   |  |   | (2,135  | ) |  | (32.5 | )
|Video                           |  |                           | 6,765   |      |   | 6,300   |  |   | 465     |   |  | 7.4   |  
|Web-hosting                     |  |                           | 989     |      |   | 931     |  |   | 58      |   |  | 6.2   |  
|                                |  |                           |         |      |   |         |  |   |         |   |  |       |  
|Total                           |  |                           | 218,426 |      |   | 214,314 |  |   | 4,112   |   |  | 1.9   |  
|                                |  |                           |         |      |   |         |  |   |         |   |  |       |  

Wireline segment revenues decreased $5,745, or 7.4%, to $72,091 in the six months ended
June 30, 2007, from $77,836 in the six months ended June 30, 2006. Local telephone service revenue increased $311 primarily from increased local private network revenue of $387 due to additional circuits in service and increased custom
calling feature revenues, partially offset by the effect of the decline in access lines. Network access revenue decreased $1,798, primarily due to lower NECA settlements of $2,485, partially offset by increased special access revenue of $241 and
increased intrastate access revenue of $423 due to increased minutes of use and a $294 revenue reduction due to a billing adjustment correction recognized in the second quarter of 2006. Long distance toll revenues decreased $465 due to a reduction
in the average rate per minute of use while long distance circuit revenue increased $157. Communication services revenue increased $1,816 primarily from additional DSL/high-speed Internet revenue of $1,718 attributable to subscriber growth and
increased video revenue of $156 due to additional subscribers and increased rates, partially offset by a



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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)



reduction in dial-up Internet revenue of $244. Directory revenue decreased $5,859 primarily as the result of three of our four directories being published
under a contract which became effective in the fourth quarter of 2006.

Wireline operating expenses decreased $5,538, or 8.7%, to $58,296
in the first six months ended June 30, 2007, from $63,834 in the same period of the prior year. Directory expense decreased $5,436 primarily as the result of three of our four directories being published under a contract which became effective
in the fourth quarter of 2006. Consulting fees decreased $446 primarily due to expenses 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 $145 primarily related to Internet services. Leased communications facilities expense decreased $296 primarily due to a one-time vendor billing charge of $248 for fiber circuits in May 2006. Other operating
taxes decreased $154 primarily from a sales tax refund. Wages increased $522 primarily due to merit pay increases that became effective in March 2007 and 2006 and a minimal increase in personnel. Employee benefits increased $441 as a result of the
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 $153 due to increases in consolidated operating income.

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, monthly depreciation expense in the
Wireline segment will decline by approximately $354.



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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 June 30, |      
|                              |  | 2007                        |       |   | 2006 |   |        | Change |  |   | % Change |  
|Revenues                      |  | $                           | 967   |   |      | $ | 1,596  |        |  | $ | (629     | ) |  | (39.4  | )
|                              |  |                             |       |  
|Depreciation and Amortization |  |                             | 48    |   |      |   | 197    |        |  |   | (149     | ) |  | (75.6  | )
|Intangible Asset Impairment   |  |                             |      |   |      |   | 1,892  |        |  |   | (1,892   | ) |  | (100.0 | )
|Other Operating Expenses      |  |                             | 1,365 |   |      |   | 2,445  |        |  |   | (1,080   | ) |  | (44.2  | )
|                              |  |                             |       |   |      |   |        |        |  |   |          |   |  |        |  
|Total Operating Expenses      |  |                             | 1,413 |   |      |   | 4,534  |        |  |   | (3,121   | ) |  | (68.8  | )
|                              |  |                             |       |   |      |   |        |        |  |   |          |   |  |        |  
|Operating Loss                |  | $                           | (446  | ) |      | $ | (2,938 | )      |  | $ | 2,492    |   |  | (84.8  | )
|                              |  |                             |       |   |      |   |        |        |  |   |          |   |  |        |  

Systems Integration segment revenues decreased $629, or 39.4%, to $967 in the three months ended
June 30, 2007, from $1,596 in the three months ended June 30, 2006. Communications services revenue decreased $715 primarily due to the expiration of a contract with a large retail services customer on March 31, 2007. Communication
products sold increased $86 due to increased computer equipment sales.

Operating expenses for the Systems Integration segment decreased
$3,121, or 68.8%, to $1,413 in the second quarter of 2007, from $4,534 in the same period of 2006 primarily due to the expiration of a contract with a large retail services customer and the intangible asset impairment of $1,892 recognized in the
second quarter of last year. Labor, benefits and vehicle expenses decreased $506, $133 and $72, respectively, due to the contract expiration. Short-term incentive plan expense decreased $78. Gain on sales of equipment increased $60 due to the
disposition of equipment that was used in providing services to the large retail services customer. Depreciation and amortization decreased $149 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 $130 as a result of the reduction in allocation of corporate overhead expenses to this segment.



|                              |  |                           |        |   |      |   |        |        |  |   |          |   |  |        |  
|----------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | ------ |  | - | -------- | - |  | ------ | -
|                              |  | Six months ended June 30, |       
|                              |  | 2007                      |        |   | 2006 |   |        | Change |  |   | % Change |  
|Revenues                      |  | $                         | 2,751  |   |      | $ | 3,024  |        |  | $ | (273     | ) |  | (9.0   | )
|                              |  |                           |        |  
|Depreciation and Amortization |  |                           | 177    |   |      |   | 402    |        |  |   | (225     | ) |  | (56.0  | )
|Intangible Asset Impairment   |  |                           |       |   |      |   | 1,892  |        |  |   | (1,892   | ) |  | (100.0 | )
|Other Operating Expenses      |  |                           | 3,932  |   |      |   | 5,165  |        |  |   | (1,233   | ) |  | (23.9  | )
|                              |  |                           |        |   |      |   |        |        |  |   |          |   |  |        |  
|Total Operating Expenses      |  |                           | 4,109  |   |      |   | 7,459  |        |  |   | (3,350   | ) |  | (44.9  | )
|                              |  |                           |        |   |      |   |        |        |  |   |          |   |  |        |  
|Operating Loss                |  | $                         | (1,358 | ) |      | $ | (4,435 | )      |  | $ | 3,077    |   |  | (69.4  | )
|                              |  |                           |        |   |      |   |        |        |  |   |          |   |  |        |  

Systems Integration segment revenues decreased $273, or 9.0%, to $2,751 in the six months ended
June 30, 2007, from $3,024 in the six months ended June 30, 2006. Communications services revenue decreased $440 primarily due to the expiration of a contract with a large retail services customer on March 31, 2007. Communication
products sold increased $167 due to increased computer equipment and data cabling sales.



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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)



Operating expenses for the Systems Integration segment decreased $3,350, or 44.9%, to $4,109 in the
six months ended June 30, 2007, from $7,459 in the same period of 2006 primarily due to the expiration of a contract with a large retail services customer and the intangible asset impairment of $1,892 recognized in the second quarter of last
year. Labor, benefits and vehicle expenses decreased $626, $193 and $66, respectively, due to the contract expiration. Gain on sales of equipment increased $67 due to the disposition of equipment that was used in providing services to the large
retail services customer. Rent expense decreased $120 due to a reduction in office space. Depreciation and amortization decreased $225 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 $210 as a result of the reduction in allocation of corporate overhead expenses to this segment. Subcontractor expenses increased $157 primarily to provide services in the first
quarter of 2007 to the large retail services customer prior to the contract expiration.

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 $1,400 in the last six months of 2007 and $2,800 in 2008. The effect on operating
income (loss) is expected to be minimal.

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, and also recognized $266 of interest income.

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.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



|                                                      |  |                          |        |   |      |   |         |  
|----------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------- | -
|                                                      |  | Six months endedJune 30, |       
|                                                      |  | 2007                     |        |   | 2006 |  
|Net cash provided by (used in) continuing operations: |  |                          |        |   |      |   |         |  
|Operating activities                                  |  | $                        | 16,903 |   |      | $ | 14,502  |  
|Investing activities                                  |  |                          | (4,124 | ) |      |   | (13,679 | )
|Financing activities                                  |  |                          | (9,333 | ) |      |   | (8,358  | )
|                                                      |  |                          |        |   |      |   |         |  
|                                                      |  | $                        | 3,446  |   |      | $ | (7,535  | )
|                                                      |  |                          |        |   |      |   |         |  

Net cash provided by operating activities was $16,903 in the six months ended June 30, 2007,
compared with $14,502 in the same period of 2006. The primary reason for the increase in cash flow from operating activities was a $2,530 reduction in income tax payments in the six months ended June 30, 2007 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.

Net cash used in investing activities was $4,124
in the six months ended June 30, 2007, compared with net cash used of $13,679 in the same period of 2006 due mainly to the Company selling its short-term investments and investing most of the proceeds in United States Treasury notes with
maturity dates of less than 90 days and life insurance proceeds of $1,000. Capital additions in the first six months of 2007 were primarily for information technology upgrades of approximately $2,600, communications network enhancements of
approximately $4,600 and outside plant additions totaling approximately $3,900. In the first six months of 2007, we collected $679 of principal on notes receivable compared to $1,375 received in the same period of 2006 due to the receipt of only one
of six scheduled principal payments on the Keystone Note during the first six months of 2007. The Company negotiated the terms of a 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 $1,500 on this note during the remainder of 2007 and has received the payment that was due August 1, 2007. In
the six months ended June 30, 2007, we purchased short-term investments of $3,187 and sold short-term investments of $9,946 with no similar transactions in the same period of 2006. We also acquired a customer list intangible asset for $606 in
2007.

Net cash used in financing activities was $9,333 in the six months ended June 30, 2007, compared with $8,358 of net cash used
in the same period of 2006. In the first six months of 2007, payment of dividends of $3,426 was a slight increase in use of funds from dividends paid in the same period of 2006 as a result of an increase in shares outstanding. Long-term debt
payments were $6,033 in the six months ended June 30, 2007, including voluntary prepayments of $2,500. Scheduled repayments of long-term debt totaled $5,026 for the first six months of 2006.

External Sources of Capital at June 30, 2007

On
September 19, 2006, we completed an amendment to our 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 previously scheduled for December 31, 2006 and eliminated the requirement to maintain interest rate protection with a weighted average life of at least two years on 50% of total variable rate indebtedness. We also paid off the $7,000
balance on the revolving line of credit by drawing $7,000 from Term Loan A.



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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 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%. 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 June 30, 2007, our credit facility consists of Term Loan A (a single draw senior term loan with a remaining balance of
$31,365), Term Loan B (a single draw senior term loan with a remaining balance of $141,885), secured term loans (single draw loans with a remaining balance of $26,250) 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.

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 June 30, 2007, we had no other unsecured lines of
credit. As of June 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 51.5% at June 30, 2007 from 52.5% at
December 31, 2006 due to our long-term debt principal repayments and 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
July 26, 2007, we declared a quarterly common stock dividend of $0.125 per share payable on September 15, 2007, to holders of record on September 1, 2007. We expect that this dividend will result in an aggregate payment of
approximately $1,803. We believe that we have adequate internal and external resources available to meet ongoing operating requirements.



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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)



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 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 provided on an individual tower site basis. The lease payments start at $1.5 per site per month, with provision for an increase of 4% per year. The maximum potential amount of
undiscounted future payments that D&E could be required to make under the guarantee as of June 30, 2007 is $8,656. The majority of these tower site leases and our guarantee will expire between 2011 and 2013. As of June 30, 2007,
D&E has recorded a liability for the lease guarantees of $3,200. In the event that D&E is required to pay in excess of $100 to 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 the assets to Keystone Wireless. Upon such default, the entire remaining balance of the note, which was $5,200 as of June 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. D&E will recognize release from risk for the guarantee
upon expiration or settlement of the guarantee.

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 intangible assets, income taxes, revenues, contingencies and impairment of long-lived assets. We base our estimates on historical experience and other assumptions that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, as further described below.

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

Revenue Recognition

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



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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)



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

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 six months of 2007 and 2006, we have increased revenue by $225 and $677, respectively, as a result of our
participation in these pools.

Regulated Asset Depreciation

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

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

Impairment of Long-Lived Assets

Long-lived assets, including our property, plant and equipment and our finite-lived intangibles, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Recoverability is assessed based
on future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the undiscounted cash flows is less than the carrying value of the asset, an impairment loss is recognized. Any impairment loss, if
indicated, would be measured as the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. Future events or changes in circumstances could result in a material charge to earnings.

Impairment of Goodwill and Indefinite-Lived Intangibles

SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), requires that goodwill and intangible assets with indefinite lives no longer be amortized to earnings, but instead be subject to at least
an annual assessment for impairment and between annual



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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)



tests in certain circumstances by comparing carrying value to fair value. There is a two-step process for goodwill. The first step is to identify a potential
impairment by comparing the fair value of reporting units to their carrying value. If the results of the first step of the impairment testing indicate a potential impairment, the second step would be completed to measure the amount of any impairment
loss. We continually evaluate whether events and circumstances have occurred that indicate the remaining balances of goodwill and indefinite-lived intangibles may not be recoverable. In evaluating impairment, we estimate the sum of the expected
future cash flows derived from such goodwill and indefinite-lived intangibles. Such evaluations for impairment are significantly impacted by estimates of future revenues, costs and expenses, the market price of our stock and other factors.

The Company performed its annual impairment test 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. Significant judgment is required to determine the fair value of reporting units, the estimation of future cash flows, the estimation of discount rates, and other
assumptions. Changes in these estimates and assumptions could have a significant impact on the fair value and/or goodwill impairment of each reporting unit. If forecasts and assumptions used in the assessment analysis change in the future,
significant impairment charges could result that would adversely affect our results of operations and financial condition.

Retirement Benefits

Retirement benefits are a significant cost of doing business and yet represent obligations that will be settled in the future.
Retirement benefit accounting is intended to reflect the recognition of future benefit costs over the employees approximate service period based on the terms of the plans and the investment and funding decisions made by a company. Effective
December 31, 2006, the Company adopted SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106 and 132R (SFAS 158). Prior
to the adoption of SFAS 158, we accounted for our retirement benefit plans in accordance with SFAS No. 87 Employers Accounting for Pensions. Our estimates include assumptions regarding the discount rate to value the future
obligation and the expected return on our plan assets. We use discount rates in line with current market interest rates on high-quality fixed-rate debt securities. Our return on assets is based on our current expectation of the long-term returns on
assets held by the plan. Changes in these key assumptions can have a significant impact on the projected benefit obligations, funding requirements and periodic benefit costs that we incur.

Income Taxes

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



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



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

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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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 June 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)                                        |  | $         | 26,250  |              | 9.00 | % |            | $ | 27,829 
|Senior Secured Term Loans (fixed to September 2009 through an interest rate swap) |  |           | 50,000  |              | 7.16 | % |            |   | 50,000 
|                                                                                  |  |           |         |              |      |   |            |   |        
|                                                                                  |  |           | 76,250  |              | 7.79 | % |            |   | 77,829 
|Subject to interest rate fluctuations:                                            |  |           |         |              |      |   |            |   |        
|Senior Secured Term Loans                                                         |  |           | 123,250 |              | 7.13 | % |            |   | 123,250
|                                                                                  |  |           |         |              |      |   |            |   |        
|Total                                                                             |  | $         | 199,500 |              | 7.38 | % |            | $ | 201,079
|                                                                                  |  |           |         |              |      |   |            |   |        

If interest rates rise above the rates of the variable debt, we could incur extra annual interest
expense of $616 for each 50 basis points above the variable rates. If rates were to decline, we would realize reductions in annual interest expense of approximately $616 for each 50 basis point decrease in rates.

In June 2007, we entered into an interest rate swap agreement with a bank that participates in our senior indebtedness to hedge against the effect of
interest rate fluctuations. Under this interest rate swap contract, we agree to pay an amount equal to a specified fixed-rate of interest times a notional principal amount and to receive in turn an amount equal to a specified variable-rate of
interest times the same notional amount. The notional amounts of the contracts are not exchanged. Net interest positions are settled quarterly. As of June 30, 2007, our interest rate swap agreements were as follows:



|                     |  |                 |        |         |      |   |                       |      |   |                         |   |    
|-------------------- |  | --------------- | ------ | ------- | ---- | - | --------------------- | ---- | - | ----------------------- | - | ---
|Term of Swap         |  | Notional Amount |        | PayRate |      |   | Average Received Rate |      |   | Fair Value of Liability
|09/21/07 to 09/21/09 |  | $               | 50,000 |         | 7.16 | % |                       | 7.11 | % |                         | $ | 170

On July 30, 2007, we entered into an interest rate swap agreement with a notional amount of
$25,000, a pay rate of 6.81% and an average received rate of 7.08%. The agreement matures in September 2009.

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

Item 4. Controls and Procedures

As of June 30, 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



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D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)



disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commissions rules and forms. These controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files
under the Exchange Act is accumulated and communicated to the issuers management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. Based upon that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective as of the end of the period covered by this
Quarterly Report.

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

(a) Date of meeting. The Annual
Meeting of Shareholders was held on April 26, 2007.

(b) Matters Voted Upon at Annual Meeting. The vote tabulations in respect to the
two matters voted upon at the 2007 Annual Meeting were as follows:



| | (1) | Election of the three directors to hold office for a three-year term to expire in 2010.
| | --- | ---------------------------------------------------------------------------------------



|                    |  |            |  |         
|------------------- |  | ---------- |  | --------
|Director            |  | For        |  | Withheld
|Paul W. Brubaker    |  | 11,258,072 |  | 511,313 
|Hugh G. Courtney    |  | 11,432,785 |  | 336,600 
|Steven B. Silverman |  | 10,806,231 |  | 963,154 



| | (2) | Ratification of the Board of Directors selection of PricewaterhouseCoopers LLP as independent auditors in 2007.
| | --- | ----------------------------------------------------------------------------------------------------------------



|           |  |         |  |        
|---------- |  | ------- |  | -------
|For        |  | Against |  | Abstain
|11,706,703 |  | 52,176  |  | 10,506 



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Part II - Other Information



Item 5. Other Information

None

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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Signatures

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



|                     |  |  |  |                          |  |                                     |  | 
|-------------------- |  |  |  | ------------------------ |  | ----------------------------------- |  | 
|                     |  |  |  | D&E Communications, Inc. |  |                                    
|                     |  |  |  |                         
|Date: August 7, 2007 |  |  |  |                          |  |                                     |  | 
|                     |  |  |  |                         
|                     |  |  |  | By:                      |  | /s/ James W. Morozzi                |  | 
|                     |  |  |  |                          |  | James W. Morozzi                    |  | 
|                     |  |  |  |                          |  | President & Chief Executive Officer |  | 



|                     |  |  |  |     |  |                                       |  | 
|-------------------- |  |  |  | --- |  | ------------------------------------- |  | 
|Date: August 7, 2007 |  |  |  |     |  |                                       |  | 
|                     |  |  |  |    
|                     |  |  |  | By: |  | /s/ Thomas E. Morell                  |  | 
|                     |  |  |  |     |  | Thomas E. Morell                      |  | 
|                     |  |  |  |     |  | Senior Vice President,                |  | 
|                     |  |  |  |     |  | Chief Financial Officer and Treasurer |  | 



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