##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended September 30, 2006

or



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

For the transition period from  to

Commission File Number: 000-20709



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D&E Communications, Inc.

(Exact name of registrant as specified in its charter)



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PENNSYLVANIA

(State or other jurisdiction of

incorporation or organization)

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

Brossman Business Complex

124 East
Main Street

P. O. Box 458

Ephrata, Pennsylvania 17522

(Address of principal executive offices)

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



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

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

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

Indicate by check mark
whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes ̈No  x

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



|                                        |  |                                
|--------------------------------------- |  | -------------------------------
|Class                                   |  | Outstanding at October 27, 2006
|Common Stock, par value $0.16 per share |  | 14,385,559 Shares              



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Form 10-Q

TABLE OF CONTENTS



|         |  |                                                                                                                                                  |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|Item No. |  |                                                                                                                                                  |  | Page
|         |  | PART I. FINANCIAL INFORMATION                                                                                                                    |  |     
|         |  |                                                                                                                                                 
|1.       |  | Unaudited Financial Statements                                                                                                                   |  |     
|         |  |                                                                                                                                                 
|         |  | Condensed Consolidated Statements of Operations For the three months and nine months ended September 30, 2006 and 2005                          |  | 1   
|         |  |                                                                                                                                                 
|         |  | Condensed Consolidated Balance Sheets September 30, 2006 and December 31, 2005                                                                  |  | 2   
|         |  |                                                                                                                                                 
|         |  | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2006 and 2005                                           |  | 3   
|         |  |                                                                                                                                                 
|         |  | Condensed Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) For the nine months ended September 30, 2006 and 2005 |  | 4   
|         |  |                                                                                                                                                 
|         |  | Notes to Condensed Consolidated Financial Statements                                                                                             |  | 5   
|         |  |                                                                                                                                                 
|2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                            |  | 23  
|         |  |                                                                                                                                                 
|3.       |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                       |  | 52  
|         |  |                                                                                                                                                 
|4.       |  | Controls and Procedures                                                                                                                          |  | 53  
|         |  |                                                                                                                                                 
|         |  | PART II. OTHER INFORMATION                                                                                                                       |  |     
|         |  |                                                                                                                                                 
|1.       |  | Legal Proceedings                                                                                                                                |  | 54  
|         |  |                                                                                                                                                 
|1A.      |  | Risk Factors                                                                                                                                     |  | 54  
|         |  |                                                                                                                                                 
|2.       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                      |  | 54  
|         |  |                                                                                                                                                 
|6.       |  | Exhibits                                                                                                                                         |  | 55  
|         |  |                                                                                                                                                 
|         |  | SIGNATURES                                                                                                                                       |  | 56  



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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 Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                                                                                            |  | 2006                             |        |   | 2005                            |   |        | 2006 |  |   | 2005    |  
|OPERATING REVENUES                                                                                          |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Communication service revenues                                                                              |  | $                                | 39,221 |   |                                 | $ | 39,198 |      |  | $ | 118,457 |   |  | $ | 118,141 |  
|Communication products sold                                                                                 |  |                                  | 711    |   |                                 |   | 1,083  |      |  |   | 1,672   |   |  |   | 2,277   |  
|Other                                                                                                       |  |                                  | 693    |   |                                 |   | 796    |      |  |   | 2,142   |   |  |   | 2,262   |  
|                                                                                                            |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Total operating revenues                                                                                    |  |                                  | 40,625 |   |                                 |   | 41,077 |      |  |   | 122,271 |   |  |   | 122,680 |  
|                                                                                                            |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|OPERATING EXPENSES                                                                                          |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Communication service expenses (exclusive of depreciation and amortization below)                           |  |                                  | 15,672 |   |                                 |   | 15,330 |      |  |   | 46,801  |   |  |   | 47,339  |  
|Cost of communication products sold                                                                         |  |                                  | 626    |   |                                 |   | 867    |      |  |   | 1,428   |   |  |   | 1,885   |  
|Depreciation and amortization                                                                               |  |                                  | 9,536  |   |                                 |   | 9,663  |      |  |   | 28,489  |   |  |   | 28,723  |  
|Marketing and customer services                                                                             |  |                                  | 3,528  |   |                                 |   | 3,479  |      |  |   | 10,177  |   |  |   | 10,110  |  
|General and administrative services                                                                         |  |                                  | 5,092  |   |                                 |   | 5,723  |      |  |   | 18,141  |   |  |   | 18,897  |  
|Intangible asset impairment                                                                                 |  |                                  |       |   |                                 |   |       |      |  |   | 1,892   |   |  |   |        |  
|                                                                                                            |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                                                    |  |                                  | 34,454 |   |                                 |   | 35,062 |      |  |   | 106,928 |   |  |   | 106,954 |  
|                                                                                                            |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Operating income                                                                                            |  |                                  | 6,171  |   |                                 |   | 6,015  |      |  |   | 15,343  |   |  |   | 15,726  |  
|                                                                                                            |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|OTHER INCOME (EXPENSE)                                                                                      |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Equity in net losses of affiliates                                                                          |  |                                  | (21    | ) |                                 |   | (29    | )    |  |   | (238    | ) |  |   | (142    | )
|Interest expense, net of interest capitalized                                                               |  |                                  | (3,832 | ) |                                 |   | (3,615 | )    |  |   | (11,537 | ) |  |   | (10,436 | )
|Loss on early extinguishment of debt                                                                        |  |                                  | (1,094 | ) |                                 |   |       |      |  |   | (1,094  | ) |  |   |        |  
|Gain on investment                                                                                          |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   | 2,043   |  
|Other, net                                                                                                  |  |                                  | 1,038  |   |                                 |   | 762    |      |  |   | 3,555   |   |  |   | 2,458   |  
|                                                                                                            |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Total other income (expense)                                                                                |  |                                  | (3,909 | ) |                                 |   | (2,882 | )    |  |   | (9,314  | ) |  |   | (6,077  | )
|                                                                                                            |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Income from continuing operations before income taxes and dividends on utility preferred stock              |  |                                  | 2,262  |   |                                 |   | 3,133  |      |  |   | 6,029   |   |  |   | 9,649   |  
|                                                                                                            |  |                                  |        |  
|INCOME TAXES AND DIVIDENDS ON UTILITY PREFERRED STOCK                                                       |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Income taxes                                                                                                |  |                                  | 594    |   |                                 |   | 714    |      |  |   | 1,496   |   |  |   | 2,763   |  
|Dividends on utility preferred stock                                                                        |  |                                  | 16     |   |                                 |   | 16     |      |  |   | 49      |   |  |   | 49      |  
|                                                                                                            |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Total income taxes and dividends on utility preferred stock on utility preferred stock                      |  |                                  | 610    |   |                                 |   | 730    |      |  |   | 1,545   |   |  |   | 2,812   |  
|                                                                                                            |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Income from continuing operations                                                                           |  |                                  | 1,652  |   |                                 |   | 2,403  |      |  |   | 4,484   |   |  |   | 6,837   |  
|                                                                                                            |  |                                  |        |  
|DISCONTINUED OPERATIONS:                                                                                    |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Loss from operations of Voice Systems Business, net of income tax benefits of ($32), ($6), ($271) and ($98) |  |                                  | (51    | ) |                                 |   | (11    | )    |  |   | (355    | ) |  |   | (190    | )
|Loss on sale of Voice Systems Business, net of income taxes of $85 and $85                                  |  |                                  | (870   | ) |                                 |   |       |      |  |   | (870    | ) |  |   |        |  
|                                                                                                            |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Loss from discontinued operations                                                                           |  |                                  | (921   | ) |                                 |   | (11    | )    |  |   | (1,225  | ) |  |   | (190    | )
|                                                                                                            |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|NET INCOME                                                                                                  |  | $                                | 731    |   |                                 | $ | 2,392  |      |  | $ | 3,259   |   |  | $ | 6,647   |  
|                                                                                                            |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Weighted average common shares outstanding (basic)                                                          |  |                                  | 14,377 |   |                                 |   | 14,316 |      |  |   | 14,362  |   |  |   | 14,295  |  
|Weighted average common shares outstanding (diluted)                                                        |  |                                  | 14,444 |   |                                 |   | 14,342 |      |  |   | 14,425  |   |  |   | 14,316  |  
|                                                                                                            |  |                                  |        |  
|BASIC AND DILUTED EARNINGS PER COMMON SHARE                                                                 |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|                                                                                                            |  |                                  |        |  
|Basic earnings per common share-continuing operations                                                       |  | $                                | 0.11   |   |                                 | $ | 0.17   |      |  | $ | 0.31    |   |  | $ | 0.48    |  
|Basic earnings per common share-discontinued operations                                                     |  |                                  | (0.06  | ) |                                 |   | 0.00   |      |  |   | (0.08   | ) |  |   | (0.02   | )
|                                                                                                            |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|                                                                                                            |  | $                                | 0.05   |   |                                 | $ | 0.17   |      |  | $ | 0.23    |   |  | $ | 0.46    |  
|                                                                                                            |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Diluted earnings per common share-continuing operations                                                     |  | $                                | 0.11   |   |                                 | $ | 0.17   |      |  | $ | 0.31    |   |  | $ | 0.48    |  
|Diluted earnings per common share-discontinued operations                                                   |  |                                  | (0.06  | ) |                                 |   | 0.00   |      |  |   | (0.08   | ) |  |   | (0.02   | )
|                                                                                                            |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|                                                                                                            |  | $                                | 0.05   |   |                                 | $ | 0.17   |      |  | $ | 0.23    |   |  | $ | 0.46    |  
|                                                                                                            |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Dividends per common share                                                                                  |  | $                                | 0.13   |   |                                 | $ | 0.13   |      |  | $ | 0.38    |   |  | $ | 0.38    |  
|                                                                                                            |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  

See notes to condensed consolidated financial statements.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands)

(Unaudited)



|                                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                             |  | September 30,2006 |         |   | December 31,2005 |  
|ASSETS                                                                                                                                                                       |  |                   |         |   |                  |   |         |  
|CURRENT ASSETS                                                                                                                                                               |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                    |  | $                 | 4,964   |   |                  | $ | 10,325  |  
|Accounts and notes receivable, net of reserves of $617 and $748                                                                                                              |  |                   | 16,343  |   |                  |   | 16,864  |  
|Accounts receivableaffiliated company                                                                                                                                       |  |                   |        |   |                  |   | 351     |  
|Inventories, lower of cost or market, at average cost                                                                                                                        |  |                   | 2,845   |   |                  |   | 3,645   |  
|Prepaid expenses                                                                                                                                                             |  |                   | 6,795   |   |                  |   | 8,194   |  
|Other                                                                                                                                                                        |  |                   | 1,311   |   |                  |   | 1,243   |  
|                                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|TOTAL CURRENT ASSETS                                                                                                                                                         |  |                   | 32,258  |   |                  |   | 40,622  |  
|                                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|PROPERTY, PLANT AND EQUIPMENT                                                                                                                                                |  |                   |         |   |                  |   |         |  
|In service                                                                                                                                                                   |  |                   | 373,703 |   |                  |   | 364,638 |  
|Under construction                                                                                                                                                           |  |                   | 11,979  |   |                  |   | 7,334   |  
|                                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                             |  |                   | 385,682 |   |                  |   | 371,972 |  
|Less accumulated depreciation                                                                                                                                                |  |                   | 209,379 |   |                  |   | 192,259 |  
|                                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                             |  |                   | 176,303 |   |                  |   | 179,713 |  
|                                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|OTHER ASSETS                                                                                                                                                                 |  |                   |         |   |                  |   |         |  
|Goodwill                                                                                                                                                                     |  |                   | 143,727 |   |                  |   | 145,448 |  
|Intangible assets, net of accumulated amortization                                                                                                                           |  |                   | 154,379 |   |                  |   | 161,572 |  
|Other                                                                                                                                                                        |  |                   | 8,802   |   |                  |   | 8,317   |  
|                                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                             |  |                   | 306,908 |   |                  |   | 315,337 |  
|                                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|TOTAL ASSETS                                                                                                                                                                 |  | $                 | 515,469 |   |                  | $ | 535,672 |  
|                                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                         |  |                   |         |   |                  |   |         |  
|CURRENT LIABILITIES                                                                                                                                                          |  |                   |         |   |                  |   |         |  
|Long-term debt maturing within one year                                                                                                                                      |  | $                 | 7,065   |   |                  | $ | 10,000  |  
|Accounts payable and accrued liabilities                                                                                                                                     |  |                   | 19,096  |   |                  |   | 18,962  |  
|Accrued taxes                                                                                                                                                                |  |                   | 2,867   |   |                  |   | 2,890   |  
|Accrued interest and dividends                                                                                                                                               |  |                   | 971     |   |                  |   | 1,791   |  
|Advance billings, customer deposits and other                                                                                                                                |  |                   | 6,050   |   |                  |   | 11,087  |  
|                                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|TOTAL CURRENT LIABILITIES                                                                                                                                                    |  |                   | 36,049  |   |                  |   | 44,730  |  
|                                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|LONG-TERM DEBT                                                                                                                                                               |  |                   | 202,467 |   |                  |   | 205,500 |  
|                                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|OTHER LIABILITIES                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Equity in net losses of affiliates in excess of investments and advances                                                                                                     |  |                   | 44      |   |                  |   | 196     |  
|Deferred income taxes                                                                                                                                                        |  |                   | 74,814  |   |                  |   | 79,063  |  
|Other                                                                                                                                                                        |  |                   | 15,703  |   |                  |   | 20,391  |  
|                                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                             |  |                   | 90,561  |   |                  |   | 99,650  |  
|                                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|PREFERRED STOCK OF UTILITY SUBSIDIARY, Series A 41/2%, 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: 14,385 at September 30, 2006 and 14,345 at December 31,
2005                                    |  |                   | 2,560   |   |                  |   | 2,554   |  
|Additional paid-in capital                                                                                                                                                   |  |                   | 161,748 |   |                  |   | 160,924 |  
|Accumulated other comprehensive income (loss)                                                                                                                                |  |                   | (3,710  | ) |                  |   | (5,598  | )
|Retained earnings                                                                                                                                                            |  |                   | 42,965  |   |                  |   | 45,083  |  
|Treasury stock at cost, 1,640 shares at September 30, 2006 and December 31, 2005                                                                                             |  |                   | (18,617 | ) |                  |   | (18,617 | )
|                                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                             |  |                   | 184,946 |   |                  |   | 184,346 |  
|                                                                                                                                                                             |  |                   |         |   |                  |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                   |  | $                 | 515,469 |   |                  | $ | 535,672 |  
|                                                                                                                                                                             |  |                   |         |   |                  |   |         |  

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)



|                                                                                                             |  |                                 |          |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | ------------------------------- | -------- | - | ---- | - | ------- | -
|                                                                                                             |  | Nine Months Ended September 30, |         
|                                                                                                             |  | 2006                            |          |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                         |  |                                 |          |   |      |   |         |  
|Net income                                                                                                   |  | $                               | 3,259    |   |      | $ | 6,647   |  
|Loss from discontinued operations                                                                            |  |                                 | 1,225    |   |      |   | 190     |  
|                                                                                                             |  |                                 |          |   |      |   |         |  
|Income from continuing operations                                                                            |  |                                 | 4,484    |   |      |   | 6,837   |  
|                                                                                                             |  |                                
|Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: |  |                                 |          |   |      |   |         |  
|Depreciation and amortization                                                                                |  |                                 | 28,489   |   |      |   | 28,723  |  
|Bad debt expense                                                                                             |  |                                 | 434      |   |      |   | 231     |  
|Deferred income taxes                                                                                        |  |                                 | (4,886   | ) |      |   | (1,771  | )
|Equity in net losses of affiliates                                                                           |  |                                 | 238      |   |      |   | 142     |  
|Gain on investments                                                                                          |  |                                 |         |   |      |   | (2,043  | )
|Gain from cash recovery of note receivable                                                                   |  |                                 | (2,125   | ) |      |   | (1,000  | )
|Intangible asset impairment                                                                                  |  |                                 | 1,892    |   |      |   |        |  
|Stock-based compensation expense                                                                             |  |                                 | 230      |   |      |   | 145     |  
|Loss on retirement of property, plant and equipment                                                          |  |                                 | 166      |   |      |   | 30      |  
|Loss on early extinguishment of debt                                                                         |  |                                 | 1,094    |   |      |   |        |  
|Changes in operating assets and liabilities:                                                                 |  |                                 |          |   |      |   |         |  
|Accounts receivable                                                                                          |  |                                 | 1,002    |   |      |   | 151     |  
|Inventories                                                                                                  |  |                                 | (32      | ) |      |   | (244    | )
|Prepaid expenses                                                                                             |  |                                 | 1,465    |   |      |   | 3,608   |  
|Accounts payable and accrued liabilities                                                                     |  |                                 | (741     | ) |      |   | 512     |  
|Accrued taxes and accrued interest                                                                           |  |                                 | (1,383   | ) |      |   | (978    | )
|Advance billings, customer deposits and other                                                                |  |                                 | (4,369   | ) |      |   | (4,483  | )
|Other, net                                                                                                   |  |                                 | (1,399   | ) |      |   | (818    | )
|                                                                                                             |  |                                 |          |   |      |   |         |  
|Net Cash Provided by Operating Activities from Continuing Operations                                         |  |                                 | 24,559   |   |      |   | 29,042  |  
|                                                                                                             |  |                                 |          |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                         |  |                                 |          |   |      |   |         |  
|Capital expenditures, net of proceeds from sales                                                             |  |                                 | (19,783  | ) |      |   | (22,425 | )
|Collection of note receivable                                                                                |  |                                 | 2,125    |   |      |   | 1,000   |  
|Proceeds from sale of investment                                                                             |  |                                 |         |   |      |   | 2,900   |  
|Increase in investments and advances to affiliates                                                           |  |                                 | (390     | ) |      |   | (115    | )
|                                                                                                             |  |                                 |          |   |      |   |         |  
|Net Cash Used In Investing Activities of Continuing Operations                                               |  |                                 | (18,048  | ) |      |   | (18,640 | )
|                                                                                                             |  |                                 |          |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                         |  |                                 |          |   |      |   |         |  
|Dividends on common stock                                                                                    |  |                                 | (5,129   | ) |      |   | (5,116  | )
|Payments on long-term debt                                                                                   |  |                                 | (188,291 | ) |      |   | (10,500 | )
|Proceeds from long-term debt financing                                                                       |  |                                 | 180,750  |   |      |   |        |  
|Payment of debt issuance costs                                                                               |  |                                 | (384     | ) |      |   |        |  
|Proceeds from interest rate swap terminations                                                                |  |                                 | 1,064    |   |      |   |        |  
|Proceeds from issuance of common stock                                                                       |  |                                 | 135      |   |      |   | 300     |  
|                                                                                                             |  |                                 |          |   |      |   |         |  
|Net Cash Used In Financing Activities of Continuing Operations                                               |  |                                 | (11,855  | ) |      |   | (15,316 | )
|                                                                                                             |  |                                 |          |   |      |   |         |  
|CASH USED IN CONTINUING OPERATIONS                                                                           |  |                                 | (5,344   | ) |      |   | (4,914  | )
|                                                                                                             |  |                                
|CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS                                                           |  |                                 |          |   |      |   |         |  
|Cash provided by operating activities of discontinued operations                                             |  |                                 | 195      |   |      |   | 281     |  
|Cash used in investing activities of discontinued operations                                                 |  |                                 | (212     | ) |      |   | (194    | )
|                                                                                                             |  |                                 |          |   |      |   |         |  
|Net Cash Provided by (Used In) Discontinued Operations                                                       |  |                                 | (17      | ) |      |   | 87      |  
|                                                                                                             |  |                                 |          |   |      |   |         |  
|DECREASE IN CASH AND CASH EQUIVALENTS                                                                        |  |                                 | (5,361   | ) |      |   | (4,827  | )
|                                                                                                             |  |                                
|CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD                                                                |  |                                 | 10,325   |   |      |   | 8,517   |  
|                                                                                                             |  |                                 |          |   |      |   |         |  
|END OF PERIOD                                                                                                |  | $                               | 4,964    |   |      | $ | 3,690   |  
|                                                                                                             |  |                                 |          |   |      |   |         |  

Noncash Investing and Financing Activities

In January 2006, D&E entered into a capital lease obligation for equipment in the amount of $1,573. In September 2006, D&E sold assets of the Systems Integration Voice business in exchange for a note
receivable with a fair value of $2,400 (face value $2,500) and a 10% equity investment valued at $350 (see Note 7.)

See notes to condensed
consolidated financial statements.



3



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

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

For the nine months ended September 30, 2006 and 2005

(in thousands)

(Unaudited)



|                                                                                                                                                                                  |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------- | ------ |  | - | ------ | - |  | - | ------- | -
|                                                                                                                                                                                  |  | 2006                             |        |   | 2005                            |  
|                                                                                                                                                                                  |  | Shares                           |        |   | Amount                          |   |         | Shares |  |   | Amount |  
|COMMON STOCK                                                                                                                                                                      |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  
|Balance at beginning of year                                                                                                                                                      |  |                                  | 15,985 |   |                                 | $ | 2,554   |        |  |   | 15,908 |   |  | $ | 2,542   |  
|Common stock issued for Employee Stock Purchase, Long-Term Incentive, Dividend Reinvestment, Stock Compensation Plan and Policy for
Non-Employee Directors and Stock Option Plans |  |                                  | 40     |   |                                 |   | 6       |        |  |   | 59     |   |  |   | 9       |  
|                                                                                                                                                                                  |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  
|Balance at September 30                                                                                                                                                           |  |                                  | 16,025 |   |                                 |   | 2,560   |        |  |   | 15,967 |   |  |   | 2,551   |  
|                                                                                                                                                                                  |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  
|ADDITIONAL PAID-IN CAPITAL                                                                                                                                                        |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  
|Balance at beginning of year                                                                                                                                                      |  |                                  |        |   |                                 |   | 160,924 |        |  |   |        |   |  |   | 160,255 |  
|Common stock issued for Employee Stock Purchase, Long-Term Incentive, Dividend Reinvestment, Stock Compensation Plan and Policy for
Non-Employee Directors and Stock Option Plans |  |                                  |        |   |                                 |   | 824     |        |  |   |        |   |  |   | 527     |  
|                                                                                                                                                                                  |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  
|Balance at September 30                                                                                                                                                           |  |                                  |        |   |                                 |   | 161,748 |        |  |   |        |   |  |   | 160,782 |  
|                                                                                                                                                                                  |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  
|ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)                                                                                                                                     |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  
|Balance at beginning of year                                                                                                                                                      |  |                                  |        |   |                                 |   | (5,598  | )      |  |   |        |   |  |   | (6,574  | )
|Equity adjustment for minimum pension liability, net of tax                                                                                                                       |  |                                  |        |   |                                 |   | 1,802   |        |  |   |        |   |  |   |        |  
|Reclassification adjustment for realized gain on derivative financial instruments, net of tax                                                                                     |  |                                  |        |   |                                 |   | (9      | )      |  |   |        |   |  |   |        |  
|Unrealized gain on derivative financial instruments, net of tax                                                                                                                   |  |                                  |        |   |                                 |   | 95      |        |  |   |        |   |  |   | 757     |  
|                                                                                                                                                                                  |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  
|Balance at September 30                                                                                                                                                           |  |                                  |        |   |                                 |   | (3,710  | )      |  |   |        |   |  |   | (5,817  | )
|                                                                                                                                                                                  |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  
|RETAINED EARNINGS                                                                                                                                                                 |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  
|Balance at beginning of year                                                                                                                                                      |  |                                  |        |   |                                 |   | 45,083  |        |  |   |        |   |  |   | 38,513  |  
|Net income                                                                                                                                                                        |  |                                  |        |   |                                 |   | 3,259   |        |  |   |        |   |  |   | 6,647   |  
|Dividends on common stock: $0.38 per share for each period                                                                                                                        |  |                                  |        |   |                                 |   | (5,377  | )      |  |   |        |   |  |   | (5,352  | )
|                                                                                                                                                                                  |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  
|Balance at September 30                                                                                                                                                           |  |                                  |        |   |                                 |   | 42,965  |        |  |   |        |   |  |   | 39,808  |  
|                                                                                                                                                                                  |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  
|TREASURY STOCK                                                                                                                                                                    |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  
|Balance at beginning of year                                                                                                                                                      |  |                                  | (1,640 | ) |                                 |   | (18,617 | )      |  |   | (1,640 | ) |  |   | (18,617 | )
|Treasury stock acquired                                                                                                                                                           |  |                                  |       |   |                                 |   |        |        |  |   |       |   |  |   |        |  
|                                                                                                                                                                                  |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  
|Balance at September 30                                                                                                                                                           |  |                                  | (1,640 | ) |                                 |   | (18,617 | )      |  |   | (1,640 | ) |  |   | (18,617 | )
|                                                                                                                                                                                  |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                                        |  |                                  | 14,385 |   |                                 | $ | 184,946 |        |  |   | 14,327 |   |  | $ | 178,707 |  
|                                                                                                                                                                                  |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  
|                                                                                                                                                                                  |  |                                 
|                                                                                                                                                                                  |  | Three months ended September 30, |        |   | Nine months ended September 30, |  
|                                                                                                                                                                                  |  | 2006                             |        |   | 2005                            |   |         | 2006   |  |   | 2005   |  
|COMPREHENSIVE INCOME (LOSS)                                                                                                                                                       |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  
|Net income                                                                                                                                                                        |  | $                                | 731    |   |                                 | $ | 2,392   |        |  | $ | 3,259  |   |  | $ | 6,647   |  
|Equity adjustment for minimum pension liability, net of income taxes of $1,279                                                                                                    |  |                                  | 1,802  |   |                                 |   |        |        |  |   | 1,802  |   |  |   |        |  
|Reclassification adjustment for realized gain on derivative financial instruments, net of income tax of ($8)                                                                      |  |                                  | (9     | ) |                                 |   |        |        |  |   | (9     | ) |  |   |        |  
|Unrealized gain (loss) on derivative financial instruments, net of income taxes of ($536), $311, $67 and $517                                                                     |  |                                  | (754   | ) |                                 |   | 457     |        |  |   | 95     |   |  |   | 757     |  
|                                                                                                                                                                                  |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                                                                                        |  | $                                | 1,770  |   |                                 | $ | 2,849   |        |  | $ | 5,147  |   |  | $ | 7,404   |  
|                                                                                                                                                                                  |  |                                  |        |   |                                 |   |         |        |  |   |        |   |  |   |         |  

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

(Dollars 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.

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 7.) 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 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, 2005. Operating results for the three and nine month periods ended September 30, 2006 are not necessarily indicative of the results for the year ended December 31,
2006.

Reclassifications

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

2. Recent Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections (SFAS 154), which the Company adopted in January 2006. SFAS 154 requires
retrospective application to reflect the period-specific effects of applying a new accounting principle, unless it is impracticable to do so. When it



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

(Dollars in thousands, except per-share amounts)

(Unaudited)



is impracticable to calculate the effects on all prior periods, SFAS 154 requires that the new principle be applied
to the earliest period practicable. However, when a new accounting pronouncement is issued, the specific transition provisions of that guidance are applied. The adoption of SFAS 154 has not had a significant effect on the Companys financial
position, results of operations or cash flows.

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS 123R). See Note 3 for additional information on this recently adopted accounting pronouncement.

In July 2006, the FASB issued 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. FIN 48 is effective for fiscal years beginning after December 15, 2006, and accordingly, the Company will adopt FIN 48 in January 2007. The Company is currently
evaluating the impact, if any, this accounting interpretation will have on its financial position, results of operations and cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, creates a framework within generally accepted accounting principles (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 fiscal years beginning after November 15,
2007, and accordingly, the Company will adopt SFAS 157 in January 2008. The Company is currently evaluating the impact, if any, this Statement will have on its financial position, results of operations and cash flows.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan
amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). SFAS 158 requires the overfunded or underfunded status of a defined benefit postretirement plan to be recognized as an asset or liability in a companys
statement of financial position and the changes in that funded status to be recognized through other comprehensive income in the year in which the changes occur. The Statement also requires the funded status of a plan to be measured as of the date
of a companys year-end statement of financial position. SFAS 158 is effective for fiscal years ending after December 15, 2006, and accordingly, the Company will adopt SFAS 158 in December 2006. The Company is currently evaluating the
impact SFAS 158 will have on its financial position, results of operations and cash flows. Had the new standard been in effect as of December 31, 2005, the Company estimates its shareholders equity would have been reduced by approximately
$4,142, net of income taxes. The impact of adoption on December 31, 2006 could differ materially from $4,142, as it will reflect asset performance through the end of the year as well as interest rates and other factors that will be applicable
as of December 31, 2006.



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

(Dollars in thousands, except per-share amounts)

(Unaudited)



In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify the effects of misstatements using both a balance sheet iron curtain and income statement
rollover approach, and consider the results of both, along with all other relevant quantitative and qualitative factors, in evaluating the materiality of unadjusted misstatements to the related financial statements. SAB 108 is effective
for fiscal years ending after November 15, 2006, and accordingly, the Company will adopt SAB 108 in December 2006. The Company does not anticipate the adoption of SAB 108 will have a material impact on its financial position, results of
operations and cash flows.

3. Stock-Based Compensation

In January 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R revises SFAS
No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This standard generally requires share-based
payments to be measured at grant-date fair value, with the related expense recognized over the requisite service period. In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107). SAB
107 provides further guidance based on the SEC staff views regarding the implementation of SFAS 123R.

The Company adopted the provisions
of SFAS 123R using the modified prospective transition method. Under this method, a company records compensation expense for all new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally,
compensation expense is recorded for the unvested portion of previously granted awards that remain outstanding at the date of adoption. The cost of the unvested portion of the award is recognized as the requisite service is rendered on or after the
required effective date. Under this method, results for prior periods have not been restated. The adoption of SFAS 123R did not have a material impact on our consolidated financial position, results of operations or cash flows.

Prior to the adoption of SFAS 123R, the Company accounted for stock-based compensation under the intrinsic value method of APB Opinion 25. The Company
applied the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation as if the fair value method had been applied in measuring compensation expense. In accordance with the provisions of SFAS 123R, the Company
recorded total stock-based compensation expense of $69 and $230 in general and administrative services expense for the three and nine months ended September 30, 2006, respectively. The related tax benefits for the three and nine months ended
September 30, 2006 were $29 and $95, 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

(Dollars in thousands, except per-share amounts)

(Unaudited)



The following table illustrates the effect on net income and earnings per share as if the Company had
applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation to its stock-based employee compensation plans for the three and nine months ended September 30, 2005:



|                                                                                                                     |  |                                       |       |   |                                      |   |       |  
|-------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ----- | - | ------------------------------------ | - | ----- | -
|                                                                                                                     |  | Three months ended September 30, 2005 |       |   | Nine months ended September 30, 2005 |  
|Net income, as reported                                                                                              |  | $                                     | 2,392 |   |                                      | $ | 6,647 |  
|Add: stock-based employee compensation included in reported net income, net of related tax                           |  |                                       | 33    |   |                                      |   | 87    |  
|Deduct: total stock-based employee compensation expense determined under fair value-based method, net of related tax |  |                                       | (42   | ) |                                      |   | (135  | )
|                                                                                                                     |  |                                       |       |   |                                      |   |       |  
|Pro forma net income                                                                                                 |  | $                                     | 2,383 |   |                                      | $ | 6,599 |  
|                                                                                                                     |  |                                       |       |   |                                      |   |       |  
|Basic earnings per share:                                                                                            |  |                                       |       |   |                                      |   |       |  
|As reported                                                                                                          |  | $                                     | 0.17  |   |                                      | $ | 0.46  |  
|Pro forma                                                                                                            |  | $                                     | 0.17  |   |                                      | $ | 0.46  |  
|                                                                                                                     |  |                                      
|Diluted earnings per share:                                                                                          |  |                                       |       |   |                                      |   |       |  
|As reported                                                                                                          |  | $                                     | 0.17  |   |                                      | $ | 0.46  |  
|Pro forma                                                                                                            |  | $                                     | 0.17  |   |                                      | $ | 0.46  |  

The Company has D&E common stock reserved for issuance under the 1999 Long-Term Incentive Plan
of D&E Communications, Inc. and the Conestoga Enterprises, Inc. 1999 Stock Option Plan. The per-share exercise price of a stock option shall be not less than the fair market value of the underlying common stock on the date the option is granted.
The fair value of share awards is based on the market price of the Companys common stock on the grant date. There were a combined total of 1,247,981 shares of common stock reserved for issuance under the plans at September 30, 2006.

Stock Options

On December 21,
2005, the Executive Committee of the D&E Board of Directors approved the accelerated vesting of certain employee stock options that were granted under the 1999 Long-Term Incentive Plan of D&E Communications, Inc. or the Conestoga
Enterprises, Inc. 1999 Stock Option Plan, which would have been unvested as of December 31, 2005 and had exercise prices greater than the closing price at December 20, 2005 of $8.41 per share. As a result of this acceleration of the
vesting, options to purchase 22,041 shares of D&Es common stock became exercisable immediately. The number of shares, exercise prices and other terms of the options subject to the acceleration remain unchanged. The decision to accelerate
the vesting of these options was made to reduce non-cash compensation expense that would have been recorded in D&Es income statement in periods subsequent to the adoption of SFAS No. 123R. As a result of this action, the Company will
not be required to recognize compensation expense relating to these stock options, net of taxes, of approximately $38 in 2006 and $19 in 2007.



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

(Dollars in thousands, except per-share amounts)

(Unaudited)



There were no stock option grants awarded in the nine months ended September 30, 2006. The
grant-date fair value of 10,000 stock options awarded in the nine months ended September 30, 2005 was $3.13, which was estimated using the Black-Scholes option pricing model with the following assumptions:



|                        |  |         |  
|----------------------- |  | ------- | -
|Dividend yield          |  | 5.05    | %
|Expected life           |  | 5 Years |  
|Expected volatility     |  | 50.06   | %
|Risk-free interest rate |  | 4.18    | %

There were a total of 221,405 stock options outstanding and exercisable with a weighted-average
exercise price of $10.06 at September 30, 2006 and December 31, 2005. The weighted average remaining contractual term was approximately 4.4 years for stock options outstanding as of September 30, 2006. The total intrinsic value was
approximately $653 for stock options outstanding and exercisable as of September 30, 2006.

Performance Restricted Shares

During the nine months ended September 30, 2006 and 2005, 36,700 and 37,400 common shares, respectively, were granted as performance restricted
shares with performance conditions. The service period for the grants is three years. A performance restricted share of common stock entitles a participant to receive a target number of shares of common stock after a minimum vesting period based
upon the Companys attainment of a predetermined goal during a specified performance period. If the minimum goal or service period is not met, no performance restricted shares will be earned by the participant. If the performance goal and
service period are fully achieved, 100% of the performance restricted shares will be earned by the participant. During the performance period, each performance restricted share is considered 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. D&E accrues compensation cost related to these performance restricted shares on a straight-line basis over the requisite service period based upon the probability that the conditions to
receive these shares will be met.

The performance condition related to the 2005 restricted share awards was met as of December 31,
2005. The performance condition related to the 2006 share awards is deemed probable of being met within the designated performance period.

During the nine months ended September 30, 2005, 10,000 shares of common stock were granted with market conditions. For share awards with market conditions, the effect of the condition on fair value was considered in the estimate of
grant-date fair value using a binomial lattice model with the following assumptions:



|                        |  |         |  
|----------------------- |  | ------- | -
|Dividend yield          |  | 4.70    | %
|Expected life           |  | 3 Years |  
|Expected volatility     |  | 37.55   | %
|Risk-free interest rate |  | 4.75    | %



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

(Dollars in thousands, except per-share amounts)

(Unaudited)



The fair value of performance restricted shares is determined based on the market value of the
Companys shares on the grant date. A summary of the performance restricted share award activity and related information for the nine months ended September 30, 2006 is summarized as follows:



|                                 |  |        |   |  |                                      |     
|-------------------------------- |  | ------ | - |  | ------------------------------------ | ----
|                                 |  | Shares |   |  | Weighted-AverageGrant-Date FairValue
|Non-vested at December 31, 2005  |  | 43,400 |   |  | $                                    | 8.89
|Granted                          |  | 36,700 |   |  |                                      | 8.52
|Forfeited                        |  | (200   | ) |  |                                      | 9.32
|                                 |  |        |   |  |                                      |     
|Non-vested at September 30, 2006 |  | 79,900 |   |  | $                                    | 8.72
|                                 |  |        |   |  |                                      |     

As of September 30, 2006, there was $400 of total unrecognized compensation expense related
to performance restricted shares. The unrecognized compensation expense is expected to be recognized over the period ended December 31, 2008. The total fair value of non-vested shares granted that was recognized as compensation during the three
and nine months ended September 30, 2006 was $69 and $202, respectively. The related tax benefits were $29 and $84 for the three and nine months ended September 30, 2006, respectively.

Fully Vested Shares

During the nine months ended
September 30, 2006 and 2005, there were 3,100 and 2,297 fully vested shares of common stock, respectively, issued to employees and a non-employee director of the Company. The total fair value of fully vested shares issued during the nine months
ended September 30, 2006 and 2005 was $28 and $23, respectively, and the related tax benefits were $11 and $9, respectively. There were no fully vested shares issued during the three months ended September 30, 2006 and 2005.

4. 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. Options to purchase 55,104, 76,312, 55,104 and 86,312
shares for the three and nine months ended September 30, 2006 and 2005, respectively, were not included in the computation of earnings per share assuming dilution because their effect on earnings per share would have been antidilutive.



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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

(Dollars in thousands, except per-share amounts)

(Unaudited)



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



|                                                                                                    |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                    |  | Three months ended September 30, |        |   | Nine months ended September 30, |  
|                                                                                                    |  | 2006                             |        |   | 2005                            |   |        | 2006 |  |   | 2005   |  
|Income from continuing operations                                                                   |  | $                                | 1,652  |   |                                 | $ | 2,403  |      |  | $ | 4,484  |   |  | $ | 6,837  |  
|Loss from discontinued operations                                                                   |  |                                  | (921   | ) |                                 |   | (11    | )    |  |   | (1,225 | ) |  |   | (190   | )
|                                                                                                    |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Net income                                                                                          |  | $                                | 731    |   |                                 | $ | 2,392  |      |  | $ | 3,259  |   |  | $ | 6,647  |  
|                                                                                                    |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Basic earnings per share:                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Weighted average shares outstanding (thousands)                                                     |  |                                  | 14,377 |   |                                 |   | 14,316 |      |  |   | 14,362 |   |  |   | 14,295 |  
|                                                                                                    |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Income from continuing operations                                                                   |  | $                                | 0.11   |   |                                 | $ | 0.17   |      |  | $ | 0.31   |   |  | $ | 0.48   |  
|Loss from discontinued operations                                                                   |  |                                  | (0.06  | ) |                                 |   | 0.00   |      |  |   | (0.08  | ) |  |   | (0.02  | )
|                                                                                                    |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Net income per common share                                                                         |  | $                                | 0.05   |   |                                 | $ | 0.17   |      |  | $ | 0.23   |   |  | $ | 0.46   |  
|                                                                                                    |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Diluted earnings per share:                                                                         |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Weighted average shares outstanding (thousands)                                                     |  |                                  | 14,377 |   |                                 |   | 14,316 |      |  |   | 14,362 |   |  |   | 14,295 |  
|Incremental shares from assumed stock option exercises and contingently issuable shares (thousands) |  |                                  | 67     |   |                                 |   | 26     |      |  |   | 63     |   |  |   | 21     |  
|                                                                                                    |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Adjusted weighted average shares outstanding (thousands)                                            |  |                                  | 14,444 |   |                                 |   | 14,342 |      |  |   | 14,425 |   |  |   | 14,316 |  
|                                                                                                    |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Income from continuing operations                                                                   |  | $                                | 0.11   |   |                                 | $ | 0.17   |      |  | $ | 0.31   |   |  | $ | 0.48   |  
|Loss from discontinued operations                                                                   |  |                                  | (0.06  | ) |                                 |   | 0.00   |      |  |   | (0.08  | ) |  |   | (0.02  | )
|                                                                                                    |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Net income per common share                                                                         |  | $                                | 0.05   |   |                                 | $ | 0.17   |      |  | $ | 0.23   |   |  | $ | 0.46   |  
|                                                                                                    |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  

5. Investments in Affiliated Companies

D&E owns a one-third investment in EuroTel, a domestic corporate joint venture. EuroTel holds a 100% investment in PenneCom, B.V. (PenneCom), an
international telecommunications holding company, and held a 27.85% investment in Pilicka, a telecommunications company located in Poland, until its sale on December 19, 2005. D&E also owned a 28.88% direct investment in Pilicka until the
sale on December 19, 2005. D&E accounts for its investment in EuroTel, and did account for its investment in Pilicka, using the equity method of accounting.

D&E has committed to fund certain of the operating cash needs of EuroTel, on an equal basis with the other investors, and, accordingly, will continue to recognize its equity share of EuroTels ongoing losses.
Thus, a liability of $44 was recognized at September 30, 2006, which is reported in equity in net losses of affiliates in excess of investments and advances in the consolidated balance sheets.

In July 2002, EuroTels subsidiary, PenneCom, commenced an action in the United States District Court for the Southern District of New York against
an investment bank and an individual alleging that the defendants tortiously induced a third party to breach a contract pursuant to which the third party would have purchased all of the shares of Pilicka in August of 1999. During the second
quarter of 2006, PenneCom and the defendants agreed to terminate the lawsuit and release all claims against each other.



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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

(Dollars in thousands, except per-share amounts)

(Unaudited)



Accordingly, the parties submitted a stipulation to the Court seeking a voluntary discontinuance of all claims,
with prejudice, and without costs to either side. The Court has approved the stipulation and the lawsuit is now concluded.

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



|                    |  |                                  |     |   |                                 |   |     |      |  |   |      |   |  |   |      |  
|------------------- |  | -------------------------------- | --- | - | ------------------------------- | - | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                    |  | Three months ended September 30, |     |   | Nine months ended September 30, |  
|                    |  | 2006                             |     |   | 2005                            |   |     | 2006 |  |   | 2005 |  
|Net sales           |  | $                                |    |   |                                 | $ |    |      |  | $ |     |   |  | $ |     |  
|Net loss            |  |                                  | (62 | ) |                                 |   | (80 | )    |  |   | (714 | ) |  |   | (420 | )
|D&Es share of loss |  |                                  | (21 | ) |                                 |   | (29 | )    |  |   | (238 | ) |  |   | (142 | )

The summarized results of operations of Pilicka were as follows:



|                      |  |                                      |       |                                     |   |      
|--------------------- |  | ------------------------------------ | ----- | ----------------------------------- | - | -----
|                      |  | Three months ended September 30,2005 |       | Nine months ended September 30,2005
|Net sales             |  | $                                    | 3,037 |                                     | $ | 9,301
|Net income            |  |                                      | 75    |                                     |   | 376  
|D&Es share of income |  |                                      |      |                                     |   |     

6. Intangible Assets and Impairment Charge

In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the long-lived assets of the Systems Integration
segment, including the property, plant and equipment and the finite-lived intangible asset for customer relationships, were evaluated to determine if the carrying value of the asset exceeds the estimated fair value and may not be recoverable.
Recoverability is assessed based on future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the undiscounted cash flows is less than the carrying value of the asset, an impairment loss is
recognized. 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 second quarter of 2006, of which $1,892 and $483 is reported in continuing and discontinued operations, respectively.

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, (SFAS 142) goodwill is not amortized. Goodwill is
tested for impairment annually as of April 30 and between annual tests when there is a change in circumstances that may have the effect of reducing fair value below the carrying value. Goodwill is tested for impairment based on the two-step
test prescribed in SFAS 142. The first step is to identify a potential impairment by comparing the fair value of the reporting units to their carrying value. If the results of the first step of the impairment test indicate a potential impairment,
the second step would be completed to measure the amount of any impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. In evaluating impairment, the fair value estimates are based on the present
value of the expected future cash flows, including the recognition of the best information available, such as prices for similar assets and liabilities. The assessment did not result in an impairment charge for goodwill as of April 30, 2006.



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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

(Dollars in thousands, except per-share amounts)

(Unaudited)



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



|                                               |  |                    |         |   |                   |   |         |  
|---------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                               |  | September 30, 2006 |         |   | December 31, 2005 |  
|Indefinite-lived intangibles:                  |  |                    |         |   |                   |   |         |  
|Franchises                                     |  | $                  | 104,800 |   |                   | $ | 104,800 |  
|FCC licenses                                   |  |                    | 828     |   |                   |   | 828     |  
|Finite-lived intangibles:                      |  |                    |         |   |                   |   |         |  
|Customer relationships:                        |  |                    |         |   |                   |   |         |  
|Gross carrying amount                          |  |                    | 74,000  |   |                   |   | 75,700  |  
|Accumulated amortization and impairment charge |  |                    | (25,249 | ) |                   |   | (19,756 | )
|                                               |  |                    |         |   |                   |   |         |  
|Net intangible assets                          |  | $                  | 154,379 |   |                   | $ | 161,572 |  
|                                               |  |                    |         |   |                   |   |         |  

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 incumbent rural local exchange carrier (RLEC) segment, and the cash flows
are expected to continue. Aggregate amortization expense related to the finite-lived intangible assets recorded for the three and nine months ended September 30, 2006 and 2005 was $1,321, $1,395, $4,078 and $4,446 respectively. A customer
relationship impairment charge of $2,375 was recorded in the nine months ended September 30, 2006. A customer relationship intangible asset with a net book value of $740 was included in the sale of assets described in Note 7.

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



|     |  |        |      
|---- |  | ------ | -----
|Year |  | Amount
|2006 |  | $      | 5,384
|2007 |  | $      | 5,227
|2008 |  | $      | 5,227
|2009 |  | $      | 5,227
|2010 |  | $      | 5,227

7. 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 does 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 $2,400 (face value $2,500) issued by eComm and a 10% equity interest in eComm of $350, with a related



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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

(Dollars in thousands, except per-share amounts)

(Unaudited)



put right. The promissory note is subordinated to other debt of eComm and is collateralized by the assets of eComm
and the joint and several personal guarantees of the other individual shareholders of eComm. The note receivable requires interest only payments through December 31, 2006 and equal monthly principal payments plus interest beginning
February 1, 2007 and continuing through October 2009. The note bears interest at the U.S. prime rate plus 1.75%, with a minimum interest rate of 7.5%. The 10% equity ownership interest in eComm is accounted for under the cost method in
accordance with Accounting Principles Board Opinion No 18, The Equity Method of Accounting for Investments in Common Stock. The Company expects to have no significant continuing involvement in the Voice Systems Business after the sale.

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 endedSeptember 30, |       |   | Nine months endedSeptember 30, |  
|                                                |  | 2006                            |       |   | 2005                           |   |       | 2006 |  |   | 2005  |  
|Revenue                                         |  | $                               | 2,491 |   |                                | $ | 3,211 |      |  | $ | 7,005 |   |  | $ | 8,489 |  
|                                                |  |                                 |       |  
|Depreciation and amortization                   |  |                                 | 112   |   |                                |   | 151   |      |  |   | 397   |   |  |   | 471   |  
|Intangible asset impairment                     |  |                                 |      |   |                                |   |      |      |  |   | 483   |   |  |   |      |  
|Other operating expenses                        |  |                                 | 2,462 |   |                                |   | 3,077 |      |  |   | 6,751 |   |  |   | 8,306 |  
|                                                |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Total operating expenses                        |  |                                 | 2,574 |   |                                |   | 3,228 |      |  |   | 7,631 |   |  |   | 8,777 |  
|                                                |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Operating loss                                  |  |                                 | (83   | ) |                                |   | (17   | )    |  |   | (626  | ) |  |   | (288  | )
|Income tax (benefit)                            |  |                                 | (32   | ) |                                |   | (6    | )    |  |   | (271  | ) |  |   | (98   | )
|                                                |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Loss from discontinued operations, net of taxes |  | $                               | (51   | ) |                                | $ | (11   | )    |  | $ | (355  | ) |  | $ | (190  | )
|                                                |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  

The carrying amounts of the major classes of assets and liabilities included as part of the Voice
Systems Business sold were as follows:



|                                       |  |   |       |  
|-------------------------------------- |  | - | ----- | -
|Inventory                              |  | $ | 833   |  
|Work in process                        |  |   | 164   |  
|Property and equipment                 |  |   | 1,080 |  
|Customer relationship intangible asset |  |   | 740   |  
|Goodwill                               |  |   | 1,587 |  
|Accrued warranty liabilities           |  |   | (74   | )
|Advance billings and customer deposits |  |   | (669  | )
|                                       |  |   |       |  
|Net assets sold                        |  | $ | 3,661 |  
|                                       |  |   |       |  



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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

(Dollars in thousands, except per-share amounts)

(Unaudited)



The loss on the sale is calculated as follows:



|                                                            |  |   |        |  
|----------------------------------------------------------- |  | - | ------ | -
|Fair value of sale consideration                            |  | $ | 3,000  |  
|Net assets sold                                             |  |   | (3,661 | )
|Sale costs                                                  |  |   | (124   | )
|                                                            |  |   |        |  
|Loss on sale before income taxes                            |  |   | (785   | )
|Income taxes                                                |  |   | 85     |  
|                                                            |  |   |        |  
|Loss on sale of Voice Systems Business, net of income taxes |  | $ | (870   | )
|                                                            |  |   |        |  

The effective tax rate of (10.8)% on the loss on sale of the Voice Systems Business is primarily
due to a permanent tax difference of $1,231 from the goodwill included in the net assets sold.

The note receivable of $2,400 (face value
$2,500) is reported in the consolidated balance sheets at September 30, 2006 as follows:



|                              |  |   |      
|----------------------------- |  | - | -----
|Accounts and notes receivable |  | $ | 564  
|Other long-term assets        |  | $ | 1,836

8. Sale of Investment

On February 28, 2005, D&E sold its interest in PenTeleData Limited Partnership I for $2,900 resulting in a gain of $2,043 before taxes ($1,348 net of taxes).

9. Long-Term Debt

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



|                                         |  |                                          |   |  |          |  |                    |         |                  |   |        
|---------------------------------------- |  | ---------------------------------------- | - |  | -------- |  | ------------------ | ------- | ---------------- | - | -------
|                                         |  | September 30, 2006 Average Interest Rate |   |  | Maturity |  | September 30, 2006 |         | December 31,2005
|Senior Secured Revolving Credit Facility |  | 7.07                                     | % |  | 2011     |  | $                  |        |                  | $ | 7,000  
|Senior Secured Term Loan A               |  | 7.11                                     | % |  | 2011     |  |                    | 34,884  |                  |   | 31,561 
|Senior Secured Term Loan B               |  | 6.67                                     | % |  | 2011     |  |                    | 144,241 |                  |   | 145,439
|Secured Term Loan                        |  | 9.00                                     | % |  | 2014     |  |                    | 16,500  |                  |   | 18,000 
|Secured Term Loan                        |  | 9.00                                     | % |  | 2014     |  |                    | 12,375  |                  |   | 13,500 
|Capital lease obligation                 |  |                                          |   |  |          |  |                    | 1,532   |                  |   |       
|                                         |  |                                          |   |  |          |  |                    |         |                  |   |        
|                                         |  |                                          |   |  |          |  |                    | 209,532 |                  |   | 215,500
|Less current maturities                  |  |                                          |   |  |          |  |                    | 7,065   |                  |   | 10,000 
|                                         |  |                                          |   |  |          |  |                    |         |                  |   |        
|Total long-term debt                     |  |                                          |   |  |          |  | $                  | 202,467 |                  | $ | 205,500
|                                         |  |                                          |   |  |          |  |                    |         |                  |   |        

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



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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

(Dollars in thousands, except per-share amounts)

(Unaudited)



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. On September 29, 2006, D&E made a voluntary principal prepayment of $750 of which $677 and $73 was applied to Term Loan A and Term Loan B,
respectively.

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%. D&E incurred a loss on early extinguishment of debt of $1,094, consisting of a non-cash write-off of
$1,047 of unamortized debt issuance costs of the previous credit facility and the expensing of $47 of debt issuance costs related to the amended credit facility. D&E capitalized approximately $337 of debt issuance costs related to the amended
credit facility, which will be amortized into interest expense over the life of the amended credit facility.

Maturities of senior secured
debt at September 30, 2006 are as follows:



|           |  |        |        
|---------- |  | ------ | -------
|Year       |  | Amount
|2006       |  | $      | 1,750  
|2007       |  |        | 7,000  
|2008       |  |        | 7,000  
|2009       |  |        | 7,000  
|2010       |  |        | 7,000  
|Thereafter |  |        | 178,250
|           |  |        |        
|           |  | $      | 208,000
|           |  |        |        

In January 2006, D&E entered into a long-term capital lease obligation for the use of outside
plant equipment in the amount of $1,573. Future minimum capital lease payments are as follows:



|                                          |  |        |      
|----------------------------------------- |  | ------ | -----
|Year                                      |  | Amount
|2006                                      |  | $      | 42   
|2007                                      |  |        | 168  
|2008                                      |  |        | 168  
|2009                                      |  |        | 168  
|2010                                      |  |        | 168  
|Thereafter                                |  |        | 1,699
|                                          |  |        |      
|Total minimum lease commitment            |  |        | 2,413
|Less interest                             |  |        | 881  
|                                          |  |        |      
|Present value of minimum lease commitment |  |        | 1,532
|Less current maturities                   |  |        | 65   
|                                          |  |        |      
|Long-term obligation                      |  | $      | 1,467
|                                          |  |        |      

10. 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.



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

(Dollars in thousands, except per-share amounts)

(Unaudited)



In connection with the amendment to the senior secured debt financing described in Note 9, interest
rate swap agreements with a notional amount of $75,000 were terminated. D&E received cash termination payments of $1,064, which will be 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. These agreements were due to mature between November 2008 and December 2009. During the quarter ending September 30, 2006, the Company amortized $17 ($9 net of
tax) of the termination payments as a reduction of interest expense.

As of September 30, 2006 and December 31, 2005, the Company
had interest rate swap agreements with total notional amounts of $35,000 and $110,000, respectively, with maturity dates ranging from November 2006 to December 2009. The Company recognizes all derivatives on the balance sheet at fair value. Changes
in the fair value for the effective portion of the gain or loss on a derivative that is designated as, and meets all the required criteria for, a cash flow hedge are recorded in Accumulated Other Comprehensive Income (Loss) and reclassified into
earnings as the underlying hedged items affect earnings. Amounts reclassified into earnings related to interest rate swap agreements are included in interest expense. The ineffective portion of the gain or loss on a derivative is recognized in
earnings within other income or expense. As of September 30, 2006 and December 31, 2005 the fair value of the derivatives was recorded as a long-term asset of $177 and $1,079, respectively. Unrealized net gains of $177 ($104 net of tax)
and $1,079 ($631 net of tax) at September 30, 2006 and December 31, 2005, respectively, related to these interest rate swaps were included in Accumulated Other Comprehensive Income (Loss). No hedge ineffectiveness has been recorded for
existing derivative instruments based on calculations in accordance with SFAS No. 133, as amended. At September 30, 2006, Accumulated Other Comprehensive Income (Loss) included unrealized net gains on the terminated agreements of $1,047
($613 net of tax).

11. Commitments and Contingencies

D&E has obligations under a Build-to-Suit agreement (BTS) with Crown Castle International, Inc. (Crown) who acquired Mountain Union Telecom LLC on July 1, 2006. The obligations related
to the construction of 20 wireless tower sites for Conestogas wireless subsidiary, Conestoga Wireless Company (CWC). In November 2002, D&E entered into an asset purchase agreement (the Asset Purchase Agreement) with
Keystone Wireless LLC (Keystone Wireless) for the sale of the assets of CWC. Although D&E sold the assets of this business, its obligations under the BTS were not assumed by Keystone Wireless. Under the BTS, D&E was obligated to
work with Crown to find and develop 20 wireless tower sites and, in the event its obligations under the BTS were not timely fulfilled, D&E was obligated to pay a penalty to Crown for nonperformance. Under the Asset Purchase Agreement, Keystone
is obligated to enter into long-term operating leases for antenna space on up to 15 of the towers erected under the BTS, including the nine transferred to Keystone Wireless at the closing of the sale transaction. Prior to August 2004, D&E paid
Crown $900 for its BTS obligation due for nine wireless tower sites that were not constructed. Under the terms of the Asset Purchase Agreement, Keystone is obligated to reimburse D&E for one-half of the penalties paid under the BTS, not to
exceed $125. Because the underlying assets of CWC were sold under the Asset Purchase Agreement, D&E has considered any remaining obligations under the BTS a contingent liability. As of September 30, 2006, D&E has recorded $200 for its
remaining commitment under the BTS.



17



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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

(Dollars in thousands, except per-share amounts)

(Unaudited)



D&E has a guarantee agreement with Crown for lease obligations on wireless tower sites. When
D&E entered into the Asset Purchase Agreement with Keystone Wireless, whereby Keystone Wireless was assigned the responsibility for the 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
September 30, 2006 is $10,060. The majority of these tower site leases and the Companys guarantee will expire between 2011 and 2013. As of September 30, 2006, 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 of CWC. Upon such default, the entire remaining balance of the note, which was $6,250 as of September 30, 2006 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.

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 September 30, |     
|                                         |  | 2006                             |      |   | 2005                    |   |       | 2006 |  |   | 2005 |  
|Components of Net Periodic Benefit Cost: |  |                                  |      |   |                         |   |       |      |  |   |      |   |  |   |     |  
|Service cost                             |  | $                                | 551  |   |                         | $ | 640   |      |  | $ | 2    |   |  | $ | (5  | )
|Interest cost                            |  |                                  | 921  |   |                         |   | 901   |      |  |   | 40   |   |  |   | 35  |  
|Expected return on plan assets           |  |                                  | (799 | ) |                         |   | (834  | )    |  |   | (7   | ) |  |   | (6  | )
|Amortization of initial net obligation   |  |                                  |     |   |                         |   |      |      |  |   |     |   |  |   | 1   |  
|Amortization of prior service cost       |  |                                  | (29  | ) |                         |   | (17   | )    |  |   | (41  | ) |  |   | (40 | )
|Amortization of net (gain) loss          |  |                                  | 307  |   |                         |   | 361   |      |  |   | 21   |   |  |   | 17  |  
|Curtailment gain                         |  |                                  | (116 | ) |                         |   |      |      |  |   |     |   |  |   |    |  
|                                         |  |                                  |      |   |                         |   |       |      |  |   |      |   |  |   |     |  
|Net periodic benefit cost                |  | $                                | 835  |   |                         | $ | 1,051 |      |  | $ | 15   |   |  | $ | 2   |  
|                                         |  |                                  |      |   |                         |   |       |      |  |   |      |   |  |   |     |  



18



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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

(Dollars in thousands, except per-share amounts)

(Unaudited)



|                                         |  |                                 |        |   |                         |   |        |      |  |   |      |   |  |   |     |  
|---------------------------------------- |  | ------------------------------- | ------ | - | ----------------------- | - | ------ | ---- |  | - | ---- | - |  | - | --- | -
|                                         |  | Pension Benefits                |        |   | Postretirement Benefits |  
|                                         |  | Nine months ended September 30, |       
|                                         |  | 2006                            |        |   | 2005                    |   |        | 2006 |  |   | 2005 |  
|Components of Net Periodic Benefit Cost: |  |                                 |        |   |                         |   |        |      |  |   |      |   |  |   |     |  
|Service cost                             |  | $                               | 1,719  |   |                         | $ | 1,921  |      |  | $ | 6    |   |  | $ | 15  |  
|Interest cost                            |  |                                 | 2,779  |   |                         |   | 2,702  |      |  |   | 120  |   |  |   | 133 |  
|Expected return on plan assets           |  |                                 | (2,503 | ) |                         |   | (2,502 | )    |  |   | (21  | ) |  |   | (25 | )
|Amortization of initial net obligation   |  |                                 |       |   |                         |   |       |      |  |   |     |   |  |   | 12  |  
|Amortization of prior service cost       |  |                                 | (63    | ) |                         |   | (51    | )    |  |   | (123 | ) |  |   | (90 | )
|Amortization of net (gain) loss          |  |                                 | 1,023  |   |                         |   | 1,082  |      |  |   | 61   |   |  |   | 58  |  
|Curtailment gain                         |  |                                 | (116   | ) |                         |   |       |      |  |   |     |   |  |   |    |  
|Special termination benefits             |  |                                 |       |   |                         |   |       |      |  |   | 112  |   |  |   |    |  
|                                         |  |                                 |        |   |                         |   |        |      |  |   |      |   |  |   |     |  
|Net periodic benefit cost                |  | $                               | 2,839  |   |                         | $ | 3,152  |      |  | $ | 155  |   |  | $ | 103 |  
|                                         |  |                                 |        |   |                         |   |        |      |  |   |      |   |  |   |     |  

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



|                          |  |                                  |       |                         |      |   |       |  |      |     |  |   |    
|------------------------- |  | -------------------------------- | ----- | ----------------------- | ---- | - | ----- |  | ---- | --- |  | - | ---
|                          |  | Pension Benefits                 |       | Postretirement Benefits
|                          |  | Three months ended September 30,
|                          |  | 2006                             |       |                         | 2005 |   | 2006  |  | 2005
|Continuing operations     |  | $                                | 877   |                         |      | $ | 923   |  | $    | 13  |  | $ | 2  
|Discontinued operations   |  |                                  | (42   | )                       |      |   | 128   |  |      | 2   |  |   |   
|                          |  |                                  |       |                         |      |   |       |  |      |     |  |   |    
|Net periodic benefit cost |  | $                                | 835   |                         |      | $ | 1,051 |  | $    | 15  |  | $ | 2  
|                          |  |                                  |       |                         |      |   |       |  |      |     |  |   |    
|                          |  |                                 
|                          |  | Pension Benefits                 |       | Postretirement Benefits
|                          |  | Nine months ended September 30, 
|                          |  | 2006                             |       |                         | 2005 |   | 2006  |  | 2005
|Continuing operations     |  | $                                | 2,658 |                         |      | $ | 2,774 |  | $    | 138 |  | $ | 91 
|Discontinued operations   |  |                                  | 181   |                         |      |   | 378   |  |      | 17  |  |   | 12 
|                          |  |                                  |       |                         |      |   |       |  |      |     |  |   |    
|Net periodic benefit cost |  | $                                | 2,839 |                         |      | $ | 3,152 |  | $    | 155 |  | $ | 103
|                          |  |                                  |       |                         |      |   |       |  |      |     |  |   |    

During the first quarter of 2006, the Company expensed $112 related to its commitment to provide
long-term care policy reimbursement agreements included in the retirement packages for two senior executives. This amount has been incorporated into the accumulated post retirement obligation, and the ongoing annual postretirement benefits expense
will increase by approximately $5.

On August 3, 2006, the Company approved a reduction in the future benefit accruals for certain
employees under the D&E Communications, Inc. Employees Retirement Plan (Retirement Plan).Following a comprehensive evaluation of the plan, the Company decided to maintain a single formula for service after
October 1, 2006. Under this formula, alleligible participants of the Retirement Plan will receive 1.1% of their final average compensation for each year of service rendered beginning on October 1, 2006. In
addition, as of April 1, 2007, there will be a change to the definition of pensionable compensation under the Retirement Plan to include only base pay and a limited amount of commissions for a select group of participants so that
their pensionable compensation is comparable to their peers. As a result of these changes, the expense for 2006 will be reduced by approximately $200 ($40 in the quarter ending September 30 and $160 for the quarter ending
December 31).



19



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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

(Dollars in thousands, except per-share amounts)

(Unaudited)



On September 29, 2006, the Company sold its Voice Systems Business more fully described in Note
7. As a result of this sale and related workforce reduction of 53 employees, the D&E Communications, Inc. Employees Retirement Plan experienced a curtailment in accordance with SFAS No. 88, Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits. Based on a discount rate of 6% and the September 30, 2006 asset values, the Company recorded two adjustments as of September 30, 2006. These
adjustments were a curtailment credit in the amount of $116, which reduced the Companys pension liability, and a reduction to the Companys Accumulated Other Comprehensive Income (Loss) in the amount of $1,802. As a result of the sale and
based on the September 30, 2006 assets and discount rate, the expense for the remainder of 2006 is expected to be reduced by $157.

During the nine months ended September 30, 2006, D&E contributed $3,500 to its defined benefit pension plans and made no contribution to its other postretirement benefit plan. The Company presently anticipates no additional
contributions to its defined benefit plans during the remainder of 2006.



20



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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

(Dollars in thousands, except per-share amounts)

(Unaudited)



13. Business Segment Data

D&Es business segments are: incumbent rural local exchange carrier (RLEC), competitive local exchange carrier (CLEC), Internet Services and Systems Integration. The measure of
profitability that management uses to evaluate performance of our business segments is operating income.

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



|                    |  |                                  |         |                                  |   |         |                                  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|------------------- |  | -------------------------------- | ------- | -------------------------------- | - | ------- | -------------------------------- | - | ------ | - |  | ---- | ------ | - | ---- | - | ------ | - |  | - | ------ | -
|                    |  | External Revenues                |         | Intersegment Revenues            |   |         | Operating Income (Loss)          |  
|                    |  | Three months ended September 30, |         | Three months ended September 30, |   |         | Three months ended September 30, |  
|Segment             |  | 2006                             |         | 2005                             |   | 2006    |                                  |   | 2005   |   |  | 2006 |        |   | 2005 |  
|RLEC                |  | $                                | 24,291  |                                  | $ | 24,936  |                                  | $ | 2,725  |   |  | $    | 2,391  |   |      | $ | 7,646  |   |  | $ | 7,894  |  
|CLEC                |  |                                  | 9,812   |                                  |   | 9,806   |                                  |   | 709    |   |  |      | 633    |   |      |   | 187    |   |  |   | 6      |  
|Internet Services   |  |                                  | 3,895   |                                  |   | 3,256   |                                  |   | 22     |   |  |      | 8      |   |      |   | (120   | ) |  |   | (86    | )
|Systems Integration |  |                                  | 1,773   |                                  |   | 2,235   |                                  |   | 5      |   |  |      | 6      |   |      |   | (1,055 | ) |  |   | (1,301 | )
|Corporate and Other |  |                                  | 854     |                                  |   | 844     |                                  |   |       |   |  |      |       |   |      |   | (487   | ) |  |   | (498   | )
|Eliminations        |  |                                  |        |                                  |   |        |                                  |   | (3,461 | ) |  |      | (3,038 | ) |      |   |       |   |  |   |       |  
|                    |  |                                  |         |                                  |   |         |                                  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Total               |  | $                                | 40,625  |                                  | $ | 41,077  |                                  | $ |       |   |  | $    |       |   |      | $ | 6,171  |   |  | $ | 6,015  |  
|                    |  |                                  |         |                                  |   |         |                                  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|                    |  |                                  |        
|                    |  | External Revenues                |         | Intersegment Revenues            |   |         | Operating Income (Loss)          |  
|                    |  | Nine months ended September 30,  |         | Nine months ended September 30,  |   |         | Nine months ended September 30,  |  
|Segment             |  | 2006                             |         | 2005                             |   | 2006    |                                  |   | 2005   |   |  | 2006 |        |   | 2005 |  
|RLEC                |  | $                                | 73,932  |                                  | $ | 74,994  |                                  | $ | 7,619  |   |  | $    | 7,014  |   |      | $ | 22,611 |   |  | $ | 23,116 |  
|CLEC                |  |                                  | 29,614  |                                  |   | 28,425  |                                  |   | 2,108  |   |  |      | 1,833  |   |      |   | (55    | ) |  |   | (1,193 | )
|Internet Services   |  |                                  | 11,362  |                                  |   | 9,543   |                                  |   | 63     |   |  |      | 21     |   |      |   | (124   | ) |  |   | (686   | )
|Systems Integration |  |                                  | 4,793   |                                  |   | 7,143   |                                  |   | 24     |   |  |      | 21     |   |      |   | (5,616 | ) |  |   | (4,028 | )
|Corporate and Other |  |                                  | 2,570   |                                  |   | 2,575   |                                  |   |       |   |  |      |       |   |      |   | (1,473 | ) |  |   | (1,483 | )
|Eliminations        |  |                                  |        |                                  |   |        |                                  |   | (9,814 | ) |  |      | (8,889 | ) |      |   |       |   |  |   |       |  
|                    |  |                                  |         |                                  |   |         |                                  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Total               |  | $                                | 122,271 |                                  | $ | 122,680 |                                  | $ |       |   |  | $    |       |   |      | $ | 15,343 |   |  | $ | 15,726 |  
|                    |  |                                  |         |                                  |   |         |                                  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |  



|                    |  |                    |          |   |                   |   |          |  
|------------------- |  | ------------------ | -------- | - | ----------------- | - | -------- | -
|                    |  | Segment Assets     |         
|Segment             |  | September 30, 2006 |          |   | December 31, 2005 |  
|RLEC                |  | $                  | 427,281  |   |                   | $ | 435,193  |  
|CLEC                |  |                    | 69,536   |   |                   |   | 67,472   |  
|Internet Services   |  |                    | 4,015    |   |                   |   | 3,724    |  
|Systems Integration |  |                    | 12,005   |   |                   |   | 16,792   |  
|Corporate and Other |  |                    | 461,569  |   |                   |   | 461,931  |  
|Eliminations        |  |                    | (458,937 | ) |                   |   | (449,440 | )
|                    |  |                    |          |   |                   |   |          |  
|Total               |  | $                  | 515,469  |   |                   | $ | 535,672  |  
|                    |  |                    |          |   |                   |   |          |  



21



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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

(Dollars 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 ended September 30, |        |   | Nine months ended September 30, |  
|                                                                                               |  | 2006                             |        |   | 2005                            |   |        | 2006 |  |   | 2005    |  
|Operating income from reportable segments                                                      |  | $                                | 6,658  |   |                                 | $ | 6,513  |      |  | $ | 16,816  |   |  | $ | 17,209  |  
|Corporate and other operating loss                                                             |  |                                  | (487   | ) |                                 |   | (498   | )    |  |   | (1,473  | ) |  |   | (1,483  | )
|Equity in net losses of affiliates                                                             |  |                                  | (21    | ) |                                 |   | (29    | )    |  |   | (238    | ) |  |   | (142    | )
|Interest expense                                                                               |  |                                  | (3,832 | ) |                                 |   | (3,615 | )    |  |   | (11,537 | ) |  |   | (10,436 | )
|Loss on early extinguishment of debt                                                           |  |                                  | (1,094 | ) |                                 |   |       |      |  |   | (1,094  | ) |  |   |        |  
|Gain on investment                                                                             |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   | 2,043   |  
|Other, net                                                                                     |  |                                  | 1,038  |   |                                 |   | 762    |      |  |   | 3,555   |   |  |   | 2,458   |  
|                                                                                               |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Income from continuing operations before income taxes and dividends on utility preferred stock |  | $                                | 2,262  |   |                                 | $ | 3,133  |      |  | $ | 6,029   |   |  | $ | 9,649   |  
|                                                                                               |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements 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



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



condensed consolidated financial statements, including the notes thereto, included in this quarterly report on Form
10-Q, as well as our audited consolidated financial statements for the year ended December 31, 2005, 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. For
comparative purposes, certain amounts have been reclassified to conform to the current-year presentation. The reclassifications had no impact on net income.

Business Segments

We operate as a rural local telephone company providing broadband integrated communications services to
residential and business customers in markets throughout the eastern half of Pennsylvania. We operate an incumbent rural local exchange carrier, or RLEC, in parts of Berks, Lancaster, Union and smaller portions of five other adjacent counties in
Pennsylvania, and a competitive local exchange carrier, or CLEC, in the Lancaster, Harrisburg, Reading, Altoona, Pottstown, State College and Williamsport, Pennsylvania metropolitan areas, which we refer to as our edge-out markets. We
offer our customers a comprehensive package of communications services including local and long distance telephone services, broadband services, Internet access and, in certain of our markets, video services. We also provide business customers with
systems integration services including professional data and information technology services, security, design and network monitoring.

Our
segments are RLEC, CLEC, Internet Services, and Systems Integration. 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.

As of
September 30, 2006, we served 130,727 RLEC access lines, 42,012 CLEC access lines, 26,749 digital subscriber lines (DSL)/high-speed Internet subscribers, 5,905 dial-up Internet access subscribers, 7,307 video subscribers and 944
web-hosting customers. For the quarter ended September 30, 2006, we generated total revenues of $40,625, operating income of $6,171 and net income of $731.

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 in the RLEC and CLEC areas 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



| |  |  | 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 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, VoIP and, in certain of our RLEC and CLEC 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 CLEC market and ADSL2+ over the RLEC copper system in Union County, Pennsylvania. The deployment of video in our other RLECs 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 and information technology needs. We are creating a more direct link between our RLEC, CLEC and Internet
customer base and the Systems Integration business through joint sales proposals, sales incentive plans, and needs-based proposals that combine Systems Integration and RLEC, CLEC or Internet services for a custom 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 our relationships with our customers and enhances our competitive position. In an effort to speed up and enhance the customers experience when they call in service issues, we
implemented 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, several automated tests
were developed and implemented that allow us to analyze every issue that is called in, and within 2
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



minutes, 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 visible outside the customers enterprise) and comprehensive security assessments
and management. Our complement of Managed Services fills the needs of our customers by allowing them to improve reliability, provide higher levels of service and save money through efficient device management and planning.



| |  |  | 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 threats 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, 2005 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 some of 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 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 RLEC and CLEC territories 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 territories reflect such increased
competition, in addition to the elimination of lines by our customers as they shift to DSL for high-speed Internet access.

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



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##### Table of Contents

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Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



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 preferred provider of 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 system by December 31, 2008. In keeping with the foregoing, our 2006 capital budget is approximately $28,000. However, our ability to invest in infrastructure to remain competitive may be limited by
our indebtedness of $209,532 as of September 30, 2006.

Pro-competitive regulatory environment

It is basic policy of the Federal Communications Commission (FCC) and the Pennsylvania Public Utility Commission
(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 incumbent local exchange carrier (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 operating results yet at the same time present operating
benefits to our CLEC business.

The limited suspension that we held until January 2003 from certain interconnection
requirements of the Telecommunications Act of 1996 has been discontinued, although legislation enacted in Pennsylvania in the fourth quarter of 2004 provided a continued limited suspension to our Buffalo Valley RLEC through December 31, 2008.
These developments mean that two of our RLECs could be required to allow competitors to have access to our customers by our competitors seeking the removal of our rural exemption, entering our territory and using our facilities through
interconnection agreements to provide local services.

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



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D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



| |  | 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 RLECs 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 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 significant revenue loss. Changes in the average schedule formula amounts developed by NECA and implemented annually in July will have a
negative effect on the RLECs future revenues. The FCC has approved NECAs changes in average schedule settlement formulas effective July 1, 2006 and a two-year transition period for implementing the new calculations. We estimate that
the impact of the new formulas and the transition plan on network access revenues will be approximately a $380 reduction for the six-month period beginning July 1, 2006, a reduction of $1,470 during fiscal year 2007, a reduction of $2,310
during fiscal year 2008 and an annual reduction of $2,474 thereafter.

On February 10, 2005, the FCC initiated a proceeding 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. Until the FCC adopts a specific proposal, it is impossible to predict how much the proposed changes will affect our company and whether
they will be favorable or unfavorable.

The PUC is currently considering changes in intrastate switched access rates and USF reform for
rural local exchange carriers in Pennsylvania. The proceeding, which began in December 2004, addresses the rates that RLECs charge to long distance carriers for intrastate toll calls that originate or terminate on local telephone lines. Our RLECs
also receive funding from the Pennsylvania USF, which could be affected by the PUCs investigation. We are currently supporting state industry efforts to have the PUC continue its stay of its access charge and PA USF investigation pending
resolution of the FCCs intercarrier compensation proceeding. We are also supporting state industry efforts to have the PUC file comments with the FCC to support, in general, the terms of the Missoula Plan. At this time, we cannot predict what
the PUCs response will be with regard to supporting the Missoula Plan or our requested stay of its access charge investigation.

There is limited regulation of Voice over Internet Protocol (VoIP) offerings at this time, placing VoIP at a possible regulatory advantage over traditional telephone services. Although VoIP is not regulated as a voice public
utility service, the FCC has recently made several rulings that imposed certain regulatory



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



requirements on VoIP providers. VoIP providers are now required to enable their customers to access 911 services,
comply with the Communications Assistance for Law Enforcement Act and contribute to the support of universal service. We have introduced VoIP offerings into our marketplace in anticipation of the demand for this voice communications product.



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

We had indebtedness of $209,532,
including current maturities and a capital lease obligation of $1,532, at September 30, 2006. 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.
| | - |  | -------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 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.

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. We incurred a loss on early extinguishment of debt of
$1,094, consisting of a non-cash write-off of $1,047 of unamortized debt issuance costs of the previous credit facility and the expensing of $47 of debt issuance costs related to the amended credit facility. We capitalized approximately $337 of debt
issuance costs related to the amended credit facility, which will be amortized into interest expense over the life of the amended credit facility.

The foregoing opportunities and risks require management to attempt to balance several aspects of our business. Our RLEC business segment provides 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



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



pursue every possible avenue of development, and critical decisions will need to be made among various alternatives.
These decisions can be made more difficult by our desire to balance our short-term goals of maintaining our RLEC business segment and dividend return and our long-term goal of providing voice, data and video services on the next generation, IP-based
network. Maintaining our dividend payout may be challenging due to the capital requirements of our business strategy, payments of principal and interest on our long-term debt and restrictions under our financing facilities, the latter including an
annual limitation of $10,000 in dividends and the requirement to remain in compliance with financial covenants.

Results of Operations

The following table is a summary of our operating results by segment for the three months ended September 30, 2006 and 2005. Monetary amounts
presented in the following discussion are in thousands, except per share amounts.



|                              |  |      |        |      |   |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|----------------------------- |  | ---- | ------ | ---- | - | ----------------- |  | - | ------------------- | - |  | ------------------ | ------ | - | ------------ | - | ----- | ------------ |  | - | ------ | - |  | - | ------
|Three months ended            |  | RLEC |        | CLEC |   | Internet Services |  |   | Systems Integration |   |  | Corporateand Other |        |   | Eliminations |   |       | TotalCompany
|September 30, 2006            |  |      |        |      |   |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|Revenues  External           |  | $    | 24,291 |      | $ | 9,812             |  | $ | 3,895               |   |  | $                  | 1,773  |   |              | $ | 854   |              |  | $ |       |   |  | $ | 40,625
|Revenues  Intercompany       |  |      | 2,725  |      |   | 709               |  |   | 22                  |   |  |                    | 5      |   |              |   |      |              |  |   | (3,461 | ) |  |   |      
|                              |  |      |        |      |   |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|Total Revenues                |  |      | 27,016 |      |   | 10,521            |  |   | 3,917               |   |  |                    | 1,778  |   |              |   | 854   |              |  |   | (3,461 | ) |  |   | 40,625
|                              |  |      |        |      |   |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|Depreciation and Amortization |  |      | 7,230  |      |   | 1,480             |  |   | 370                 |   |  |                    | 136    |   |              |   | 320   |              |  |   |       |   |  |   | 9,536 
|Other Operating Expenses      |  |      | 12,140 |      |   | 8,854             |  |   | 3,667               |   |  |                    | 2,697  |   |              |   | 1,021 |              |  |   | (3,461 | ) |  |   | 24,918
|                              |  |      |        |      |   |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|Total Operating Expenses      |  |      | 19,370 |      |   | 10,334            |  |   | 4,037               |   |  |                    | 2,833  |   |              |   | 1,341 |              |  |   | (3,461 | ) |  |   | 34,454
|                              |  |      |        |      |   |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|Operating Income (Loss)       |  | $    | 7,646  |      | $ | 187               |  | $ | (120                | ) |  | $                  | (1,055 | ) |              | $ | (487  | )            |  | $ |       |   |  | $ | 6,171 
|                              |  |      |        |      |   |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|September 30, 2005            |  |      |        |      |   |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|Revenues  External           |  | $    | 24,936 |      | $ | 9,806             |  | $ | 3,256               |   |  | $                  | 2,235  |   |              | $ | 844   |              |  | $ |       |   |  | $ | 41,077
|Revenues  Intercompany       |  |      | 2,391  |      |   | 633               |  |   | 8                   |   |  |                    | 6      |   |              |   |      |              |  |   | (3,038 | ) |  |   |      
|                              |  |      |        |      |   |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|Total Revenues                |  |      | 27,327 |      |   | 10,439            |  |   | 3,264               |   |  |                    | 2,241  |   |              |   | 844   |              |  |   | (3,038 | ) |  |   | 41,077
|                              |  |      |        |      |   |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|Depreciation and Amortization |  |      | 7,470  |      |   | 1,324             |  |   | 347                 |   |  |                    | 228    |   |              |   | 294   |              |  |   |       |   |  |   | 9,663 
|Other Operating Expenses      |  |      | 11,963 |      |   | 9,109             |  |   | 3,003               |   |  |                    | 3,314  |   |              |   | 1,048 |              |  |   | (3,038 | ) |  |   | 25,399
|                              |  |      |        |      |   |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|Total Operating Expenses      |  |      | 19,433 |      |   | 10,433            |  |   | 3,350               |   |  |                    | 3,542  |   |              |   | 1,342 |              |  |   | (3,038 | ) |  |   | 35,062
|                              |  |      |        |      |   |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       
|Operating Income (Loss)       |  | $    | 7,894  |      | $ | 6                 |  | $ | (86                 | ) |  | $                  | (1,301 | ) |              | $ | (498  | )            |  | $ |       |   |  | $ | 6,015 
|                              |  |      |        |      |   |                   |  |   |                     |   |  |                    |        |   |              |   |       |              |  |   |        |   |  |   |       



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



The following table is a summary of our operating results by segment for the nine months ended
September 30, 2006 and 2005. Monetary amounts presented in the following discussion are in thousands, except per share amounts.



|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |        |              |  |   |        |   |  |   |        
|----------------------------- |  | ---- | ------ | ---- | - | ------ | ----------------- |  | - | ------------------- | - |  | ------------------ | ------ | - | ------------ | - | ------ | ------------ |  | - | ------ | - |  | - | -------
|Nine months ended             |  | RLEC |        | CLEC |   |        | Internet Services |  |   | Systems Integration |   |  | Corporateand Other |        |   | Eliminations |   |        | TotalCompany
|September 30, 2006            |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |        |              |  |   |        |   |  |   |        
|Revenues  External           |  | $    | 73,932 |      | $ | 29,614 |                   |  | $ | 11,362              |   |  | $                  | 4,793  |   |              | $ | 2,570  |              |  | $ |       |   |  | $ | 122,271
|Revenues  Intercompany       |  |      | 7,619  |      |   | 2,108  |                   |  |   | 63                  |   |  |                    | 24     |   |              |   |       |              |  |   | (9,814 | ) |  |   |       
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |        |              |  |   |        |   |  |   |        
|Total Revenues                |  |      | 81,551 |      |   | 31,722 |                   |  |   | 11,425              |   |  |                    | 4,817  |   |              |   | 2,570  |              |  |   | (9,814 | ) |  |   | 122,271
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |        |              |  |   |        |   |  |   |        
|Depreciation and Amortization |  |      | 21,545 |      |   | 4,365  |                   |  |   | 1,092               |   |  |                    | 539    |   |              |   | 948    |              |  |   |       |   |  |   | 28,489 
|Other Operating Expenses      |  |      | 37,395 |      |   | 27,412 |                   |  |   | 10,457              |   |  |                    | 9,894  |   |              |   | 3,095  |              |  |   | (9,814 | ) |  |   | 78,439 
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |        |              |  |   |        |   |  |   |        
|Total Operating Expenses      |  |      | 58,940 |      |   | 31,777 |                   |  |   | 11,549              |   |  |                    | 10,433 |   |              |   | 4,043  |              |  |   | (9,814 | ) |  |   | 106,928
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |        |              |  |   |        |   |  |   |        
|Operating Income (Loss)       |  | $    | 22,611 |      | $ | (55    | )                 |  | $ | (124                | ) |  | $                  | (5,616 | ) |              | $ | (1,473 | )            |  | $ |       |   |  | $ | 15,343 
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |        |              |  |   |        |   |  |   |        
|September 30, 2005            |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |        |              |  |   |        |   |  |   |        
|Revenues  External           |  | $    | 74,994 |      | $ | 28,425 |                   |  | $ | 9,543               |   |  | $                  | 7,143  |   |              | $ | 2,575  |              |  | $ |       |   |  | $ | 122,680
|Revenues  Intercompany       |  |      | 7,014  |      |   | 1,833  |                   |  |   | 21                  |   |  |                    | 21     |   |              |   |       |              |  |   | (8,889 | ) |  |   |       
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |        |              |  |   |        |   |  |   |        
|Total Revenues                |  |      | 82,008 |      |   | 30,258 |                   |  |   | 9,564               |   |  |                    | 7,164  |   |              |   | 2,575  |              |  |   | (8,889 | ) |  |   | 122,680
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |        |              |  |   |        |   |  |   |        
|Depreciation and Amortization |  |      | 22,421 |      |   | 3,635  |                   |  |   | 1,021               |   |  |                    | 789    |   |              |   | 857    |              |  |   |       |   |  |   | 28,723 
|Other Operating Expenses      |  |      | 36,471 |      |   | 27,816 |                   |  |   | 9,229               |   |  |                    | 10,403 |   |              |   | 3,201  |              |  |   | (8,889 | ) |  |   | 78,231 
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |        |              |  |   |        |   |  |   |        
|Total Operating Expenses      |  |      | 58,892 |      |   | 31,451 |                   |  |   | 10,250              |   |  |                    | 11,192 |   |              |   | 4,058  |              |  |   | (8,889 | ) |  |   | 106,954
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |        |              |  |   |        |   |  |   |        
|Operating Income (Loss)       |  | $    | 23,116 |      | $ | (1,193 | )                 |  | $ | (686                | ) |  | $                  | (4,028 | ) |              | $ | (1,483 | )            |  | $ |       |   |  | $ | 15,726 
|                              |  |      |        |      |   |        |                   |  |   |                     |   |  |                    |        |   |              |   |        |              |  |   |        |   |  |   |        

Historically, we have derived a majority of our revenues and substantially all of our operating
income from the RLEC segment. Our RLEC revenue is derived primarily from local telephone service, network access charges, enhanced telephone services, directory and regional toll service. Our CLEC focuses primarily on businesses, and revenue is
derived primarily from local telephone service, network access charges, enhanced telephone services and long distance service revenue. Our Internet Services revenue is derived from broadband and dial-up Internet access services, web-hosting services
and VoIP service. Our Systems Integration revenue is derived from the sale of professional data and information technology services and equipment that support the design, implementation and maintenance of client-focused technology solutions
including local and wide area networks.

Our operating costs and expenses primarily include wages and related employee benefit costs,
depreciation and amortization, selling and advertising, software and information system services and general and administrative expenses. Our RLEC segment incurs costs related to network access charges, directory expense, and other operations
expenses such as digital electronic switch expense, engineering and outside plant costs. Our CLEC incurs costs related to leased network facilities associated with providing local telephone service to customers, engineering costs, and network access
costs for local calls and long distance expense. Our Internet Services segment incurs leased network facilities costs for our broadband and dial-up Internet access services. Our Systems Integration business incurs expenses primarily related to wages
and employee benefit costs, and, to a lesser degree, equipment and materials used in the provision of our services and sales of computer equipment.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



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 RLEC and CLEC territories. 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.

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 $2,400 ($2,500 face value) promissory note issued by eComm and a 10% equity interest in
eComm of $350 with a related put right. The promissory note is subordinated to other debt of eComm and is collateralized by 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 September 30, 2006 compared to three months ended September 30, 2005

Consolidated revenues
decreased $452, or 1.1%, to $40,625 for the quarter ended September 30, 2006, from $41,077 for the same period in 2005. The decrease included a $631 decline in network access revenues primarily due to lower NECA settlements and lower minutes of
use and rates, a decrease of $166 in dial-up revenue due to fewer subscribers, and a $424 decline in long distance toll revenues due to a reduction in the average rate per minute of use and lower minutes of use. Computer equipment sales decreased
$347 and professional services revenue decreased $143 primarily due to several large sales in the prior year, which were not repeated in the current year. These decreases were partially offset by increases of $784 of DSL revenue attributable to
additional customers, directory revenue of $334 as a result of the higher published value of the directories and long distance circuit revenue of $131 from additional circuits in service.

Consolidated operating income increased $156, to $6,171, for the third quarter of 2006, from $6,015 in the same period of 2005. Operating income as a
percentage of revenue increased to 15.2% in the third quarter of 2006, compared to 14.6% in the same period of 2005. The increase was primarily due to lower operating expenses. Subcontractor costs decreased $210 primarily as a result of lower
professional services revenue. Network access expense decreased $257 primarily from lower long distance minutes of use. Cost of goods sold decreased $210 due to lower computer equipment sales. Depreciation expense decreased $127 primarily from the
changes in estimated lives of RLEC fixed assets in 2005 and other operating taxes decreased $187. Employee benefits increased $275 due to increased short-term incentive plan expenses.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Cost of services increased $163 primarily as a result of the increase in long distance circuit revenue and CLEC
customer growth. Directory expense increased $389 due to higher publishing costs of the directories and settlement adjustments for prior year directories.

Other income and expense was a net expense of $3,909 in the third quarter of 2006, compared to a net expense of $2,882 for the same period in 2005.



| |  |  | Interest expense increased to $3,832 in the third quarter of 2006, compared to $3,615 in the same period of 2005, as a result of higher short-term interest rates.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We incurred a loss in 2006 on early extinguishment of debt of $1,094 as a result of amendments to our long-term debt on September 19, 2006. The loss consisted of a non-cash
write-off of $1,047 of unamortized debt issuance costs of the previous credit facility and the expensing of $47 of debt issuance costs related to the amended credit facility.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other income was $1,038 in 2006 compared to $762 in 2005. Other income included $931 of interest income and principal repayments collected in the third quarter of 2006 on the note
received from the sale of assets of Conestoga Wireless and $442 of principal and interest received in the third quarter of 2005. 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 $594 in the third quarter of 2006, compared to $714 for the same period in 2005. The effective income tax rate was 26.3% for the third
quarter of 2006, compared to 22.8% for the same period of the prior year. The effective income tax rates for both periods are 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 for the third quarter of 2005 was also impacted by a reduction of income tax expense of $353 due to adjusting federal and state provisions
for 2004 to the actual tax returns filed in 2005.

Loss from operations of the discontinued Voice Systems Business was $51, net of tax, for
the quarter ended September 30, 2006 compared to a loss of $11, net of tax, in the same period of 2005. We recognized a loss of $870, net of tax, on the sale of the Voice Systems Business in the third quarter of 2006.

Net income was $731, or $0.05 per share, in the third quarter of 2006 compared to a net income of $2,392, or $0.17 per share, in the third quarter of
2005. The primary reasons for the decrease in net income were the loss on the early extinguishment of debt of $1,094 ($640, or $0.04 per share, after tax) and the loss on the sale of the Voice Systems Business of $870, net of tax, or $0.06 per
share. Included in the third quarter 2005 results was a reduction of income tax expense of $353, or $0.02 per share, due to adjusting federal and state tax provisions for 2004 to the actual tax returns filed in 2005. Net income before these items
was $2,241, or $0.15 per share, for the quarter ended September 30, 2006, compared to $2,039, or $0.15 per share for the quarter ended September 30, 2005.

Nine months ended September 30, 2006 compared to nine months ended September 30, 2005

Consolidated revenues decreased $409, or 0.3 %, to $122,271 for the nine months ended September 30, 2006, from $122,680 for the same period in 2005. The decrease included $1,979 of lower professional



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



services revenue primarily attributable to the expiration of a major computer services contract as of June 30,
2005 and a decrease of approximately $1,938 in network access revenues primarily due to lower minutes of use and rates, partially offset by increased NECA settlements. Long distance toll revenues declined $1,285 due to a reduction in the average
rate per minute of use and lower minutes of use. Computer equipment sales decreased $387 primarily due to several large sales in the prior year, which were not repeated in the current year, and dial-up Internet access revenue declined $511 as a
result of fewer subscribers. These decreases were partially offset by increases of $919 in local telephone service primarily from additional CLEC business customers, $2,263 of DSL revenue attributable to additional customers, long distance circuit
revenue of $1,462 from additional circuits in service and directory revenue of $1,195 as a result of the higher published value of the directories.

Consolidated operating income decreased $383, to $15,343, for the first nine months of 2006, from $15,726 in the same period of 2005. Operating income as a percentage of revenue decreased to 12.5% in the first nine months of 2006, compared
to 12.8% in the same period of 2005. The decrease in operating income was primarily due to an intangible asset impairment loss of $2,375 for the customer relationships of the Systems Integration segment in the second quarter of 2006 of which $1,892
and $483 is reported in continuing and discontinued operations, respectively. Wages decreased $1,334 due to fewer employees. Network access expense decreased $871 due to lower long distance minutes of use and the savings achieved from an agreement
to provide a least-cost routing service for completion of long distance toll calls. Subcontractor costs decreased $829 as a result of lower professional services revenue. Cost of goods sold decreased $413 primarily due to lower computer equipment
sales. Depreciation expense decreased $234 primarily from the changes in estimated lives of RLEC fixed assets in 2005 and other operating taxes decreased $184. Employee benefits increased $183 due to increased short-term incentive plan expenses.
Cost of services increased $608 primarily as a result of the increase in long distance circuit revenue and CLEC customer growth. Consulting fees increased $250 related to new software to provide enhanced customer service and communication facility
maintenance support. Leased communications facilities expense increased $315 primarily due to a one-time vendor billing adjustment of $248 for fiber circuits. Directory expense increased $855 due to higher publishing costs.

Other income and expense was a net expense of $9,314 in the first nine months of 2006, compared to a net expense of $6,077 for the same period in 2005.



| |  |  | Interest expense increased to $11,537 in the first nine months of 2006, compared to $10,436 in the same period of 2005, as a result of higher short-term interest rates.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A gain on investment from the sale of our interest in PenTeleData added $2,043 of income in 2005 with no similar transaction in 2006.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We incurred a loss in 2006 on early extinguishment of debt of $1,094 as a result of amendments to our long-term debt on September 19, 2006. The loss consisted of a non-cash
write-off of $1,047 of unamortized debt issuance costs of the previous credit facility and the expensing of $47 of debt issuance costs related to the amended credit facility.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other income was $3,555 in 2006 compared to $2,458 in 2005. Other income included $2,692 of interest income and principal repayments collected in 2006 on the note received
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



from the sale of assets of Conestoga Wireless and $1,381 of principal and interest received in 2005.
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 $1,496 in the first nine months of 2006, compared to $2,763 for the same period in
2005. The effective income tax rate of approximately 24.8% for the first nine months of 2006 is lower than the federal statutory rate primarily due to the reversal of temporary book to tax differences providing deferred state income tax benefits
with no corresponding current state income tax expense and a deferred tax benefit on the intangible asset impairment loss. The effective income tax rate of approximately 28.6% for the first nine months of 2005 is lower than the federal statutory
rate primarily from a reduction of income tax expense of $353 due to adjusting federal and state tax provisions for 2004 to the actual tax returns filed in 2005 and due to the gain on the sale of investment not being fully subject to state income
tax.

Loss from operations of the discontinued Voice Systems Business was $355, net of tax, for the nine months ended September 30,
2006 compared to a loss of $190, net of tax, for same period of 2005. We recognized a loss of $870, net of tax, on the sale of the Voice Systems Business in the third quarter of 2006.

Net income was $3,259, or $0.23 per share, in the first nine months of 2006 compared to $6,647, or $0.46 per share, in the first nine months of 2005.
Included in the 2006 results were the loss on early extinguishment of debt of $1,094 ($640, or $0.04, per share, after tax), the customer relationship intangible asset impairment loss from continuing operations of $1,892 ($1,107, or $0.08 per share,
after tax) and the loss on the sale of the Voice Systems Business of $870, net of tax, or $0.06 per share. Included in the 2005 results was a gain on investment of $2,043 ($1,348, or $0.09 per share, after tax) from the sale of our ownership
interest in PenTeleData and the reduction of income tax expense of $353, or $0.02 per share, due to adjusting federal and state tax provisions for 2004 to the actual tax returns filed in 2005. Net income before these items was $5,876, or $0.41 per
share, for the nine months ended September 30, 2006, compared to $4,946, or $0.35 per share, for the nine months ended September 30, 2005.

On August 3, 2006, the Company approved a reduction in the future benefit accruals for certain employees under the D&E Communications, Inc. Employees Retirement Plan.As a result of the
reduction in future benefit accruals, pension expense for 2006 will be reduced approximately $200 ($40 in the quarter ending September 30 and $160 for the quarter ending December 31). Ongoing annual expense thereafter is estimated to
be $693 lower due to these modifications to the plan. On September 29, 2006, the Company sold its Voice Systems Business. As a result of this sale and related workforce reduction of 53 employees, the D&E Communications, Inc. Employees
Retirement Plan experienced a plan curtailment in accordance with SFAS No. 88, Employers Accounting for Settlements Curtailments of Defined Benefit Pension Plans and for Termination Benefits. Ongoing annual expense in the
future is estimated to be $226 lower due to the reduction in future benefit accruals for the 53 employees who left the Company.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



RLEC Segment Results



|                              |  |                                  |         |      |   |         |  |   |          |   |  |       |  
|----------------------------- |  | -------------------------------- | ------- | ---- | - | ------- |  | - | -------- | - |  | ----- | -
|                              |  | Three months ended September 30, |        
|                              |  | 2006                             |         | 2005 |   | Change  |  |   | % Change |  
|Revenues:                     |  |                                  |         |      |   |         |  |   |          |   |  |       |  
|Local Telephone Service       |  | $                                | 8,256   |      | $ | 8,398   |  | $ | (142     | ) |  | (1.7  | )
|Network Access                |  |                                  | 12,944  |      |   | 13,251  |  |   | (307     | ) |  | (2.3  | )
|Directory                     |  |                                  | 4,418   |      |   | 4,097   |  |   | 321      |   |  | 7.8   |  
|Other                         |  |                                  | 1,398   |      |   | 1,581   |  |   | (183     | ) |  | (11.6 | )
|                              |  |                                  |         |      |   |         |  |   |          |   |  |       |  
|Total Revenues                |  |                                  | 27,016  |      |   | 27,327  |  |   | (311     | ) |  | (1.1  | )
|                              |  |                                  |         |      |   |         |  |   |          |   |  |       |  
|Depreciation and Amortization |  |                                  | 7,230   |      |   | 7,470   |  |   | (240     | ) |  | (3.2  | )
|Other Operating Expenses      |  |                                  | 12,140  |      |   | 11,963  |  |   | 177      |   |  | 1.5   |  
|                              |  |                                  |         |      |   |         |  |   |          |   |  |       |  
|Total Operating Expenses      |  |                                  | 19,370  |      |   | 19,433  |  |   | (63      | ) |  | (0.3  | )
|                              |  |                                  |         |      |   |         |  |   |          |   |  |       |  
|Operating Income              |  | $                                | 7,646   |      | $ | 7,894   |  | $ | (248     | ) |  | (3.1  | )
|                              |  |                                  |         |      |   |         |  |   |          |   |  |       |  
|Access Lines at September 30  |  |                                  | 130,727 |      |   | 135,457 |  |   | (4,730   | ) |  | (3.5  | )
|                              |  |                                  |         |      |   |         |  |   |          |   |  |       |  

RLEC segment revenues decreased $311, or 1.1%, to $27,016 in the three months ended
September 30, 2006, from $27,327 in the three months ended September 30, 2005. Local telephone service revenue decreased $142 as a result of the decline in access lines, offset by an increase in basic service rates effective August 1,
2005. Network access revenue decreased $307, primarily due to a reduction in interstate access revenues of $663 as a result of lower rates, minutes of use and lower NECA settlements, partially offset by increased intersegment DSL revenue of $343
from increased subscribers. Intrastate access rates increased July 1, 2006; however, fewer minutes of use almost entirely offset the effect of the rate increase. Directory revenue increased $321 as a result of the higher published values of the
directories.

RLEC operating expenses decreased $63, or 0.3%, to $19,370 in the third quarter of 2006, from $19,433 in the same period of
the prior year. Depreciation decreased $240 due to changes in the estimated lives of various fixed asset categories in 2005. Corporate overhead expenses decreased $139 as a result of our other business segments receiving a larger share of the
allocation of corporate overhead expenses, which are allocated to each segment based on the average of segment revenues, expenses and certain balance sheet amounts. Network access expense decreased $230 primarily from lower long distance minutes of
use. Employee benefits increased $156 primarily from short-term incentive plan expenses. Directory expense increased $389 due to higher publishing costs of the directories and settlement adjustments for prior year directories.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



|                              |  |                                 |         |      |   |         |  |   |          |   |  |      |  
|----------------------------- |  | ------------------------------- | ------- | ---- | - | ------- |  | - | -------- | - |  | ---- | -
|                              |  | Nine months ended September 30, |        
|                              |  | 2006                            |         | 2005 |   | Change  |  |   | % Change |  
|Revenues:                     |  |                                 |         |      |   |         |  |   |          |   |  |      |  
|Local Telephone Service       |  | $                               | 24,892  |      | $ | 24,801  |  | $ | 91       |   |  | 0.4  |  
|Network Access                |  |                                 | 39,450  |      |   | 40,801  |  |   | (1,351   | ) |  | (3.3 | )
|Directory                     |  |                                 | 12,998  |      |   | 11,851  |  |   | 1,147    |   |  | 9.6  |  
|Other                         |  |                                 | 4,211   |      |   | 4,555   |  |   | (344     | ) |  | (7.6 | )
|                              |  |                                 |         |      |   |         |  |   |          |   |  |      |  
|Total Revenues                |  |                                 | 81,551  |      |   | 82,008  |  |   | (457     | ) |  | (0.6 | )
|                              |  |                                 |         |      |   |         |  |   |          |   |  |      |  
|Depreciation and Amortization |  |                                 | 21,545  |      |   | 22,421  |  |   | (876     | ) |  | (3.9 | )
|Other Operating Expenses      |  |                                 | 37,395  |      |   | 36,471  |  |   | 924      |   |  | 2.5  |  
|                              |  |                                 |         |      |   |         |  |   |          |   |  |      |  
|Total Operating Expenses      |  |                                 | 58,940  |      |   | 58,892  |  |   | 48       |   |  | 0.1  |  
|                              |  |                                 |         |      |   |         |  |   |          |   |  |      |  
|Operating Income              |  | $                               | 22,611  |      | $ | 23,116  |  | $ | (505     | ) |  | (2.2 | )
|                              |  |                                 |         |      |   |         |  |   |          |   |  |      |  
|Access Lines at September 30  |  |                                 | 130,727 |      |   | 135,457 |  |   | (4,730   | ) |  | (3.5 | )
|                              |  |                                 |         |      |   |         |  |   |          |   |  |      |  

RLEC segment revenues decreased $457, or 0.6%, to $81,551 in the nine months ended
September 30, 2006, from $82,008 in the nine months ended September 30, 2005. Local telephone service revenue increased $91 as a result of the increase in basic service rates effective August 1, 2005 partially offset by a decrease in
access lines. Network access revenue decreased $1,351, due to decreases of approximately $1,008 of special access revenue primarily from lower rates and fewer circuits, a reduction in interstate access revenues of $1,022 primarily due to lower rates
and minutes of use, a reduction in intrastate access revenue of $497 primarily from decreased minutes of use offset by the effect of a rate increase on July 1, 2006, a $294 reduction in intrastate access revenue as a result of a billing error
correction in the second quarter of 2006 and a $337 reduction in subscriber line charges due to the decline in access lines. The decreases were partially offset by an increase of $905 due to NECA settlement pool adjustments and changes in NECA
average schedule settlement formulas effective July 2005 and additional inter-segment DSL revenue of $802 due to an increase in subscribers. Directory revenue increased $1,147 as a result of the higher published values of the directories. Other
revenue decreased $344 primarily from lower long distance toll revenue of $231 due to decreased minutes of use.

RLEC operating expenses
increased $48, or 0.1%, to $58,940 in the first nine months of 2006, from $58,892 in the same period of the prior year. Depreciation decreased $876 due to changes in the estimated lives of various fixed asset categories in 2005. Corporate overhead
expenses decreased $684 as a result of our other business segments receiving a larger share of the allocation of corporate overhead expenses, which are allocated to each segment based on the average of segment revenues, expenses and certain balance
sheet amounts. Consulting fees increased $324 primarily relating to new software to provide enhanced customer service and communication facility maintenance support. Directory expense increased $855 due to higher publishing costs. Employee benefits
increased $384 primarily from short-term incentive plan expenses.

The FCC has approved NECAs changes in average schedule settlement
formulas effective July 1, 2006 and a two-year transition period for implementing the new calculations. We estimate that the impact of the new formulas and the transition plan on network access revenues will be approximately a $380 reduction
for the six-month period beginning July 1, 2006, a reduction of $1,470 during fiscal year 2007, a reduction of $2,310 during fiscal year 2008 and an annual reduction of $2,474 thereafter.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



On June 22, 2006, the PUC approved RLEC rate increases to be effective on July 1, 2006. The
rate increases were requested in accordance with our PUC approved Chapter 30 Plans, as amended pursuant to Act 183. The majority of the rate increases were in network access revenues and are based on the application of an industry price cap formula,
which measures the current rate of inflation. The new monthly rates were calculated using historical data for our access lines and minutes of use and were designed to generate an increase in annual revenue of $2,268. The actual annual revenue
increase will be different from this amount to the extent that actual access lines and minutes of use differ from the historical data that we used in developing the new rates. We estimate that RLEC access lines will continue to decline due to
increasing competition.

We have entered into a new three-year agreement for the publication of certain directories whereby the
responsibility for publication and distribution of the directory and the related financial risks will become the responsibility of the publisher beginning in the fourth quarter of 2006. As a result, our directory revenue as new directories are
published will only be the annual fee paid to the Company for access to our customers. This arrangement will decrease directory revenue, based upon 2005 levels, approximately $1,900 in the fourth quarter of 2006, $11,800 in 2007, $12,500 in 2008 and
$12,800 in 2009. Our directory expense will also decrease approximately $1,800 in the fourth quarter of 2006, $11,000 in 2007 and $11,200 in 2008 and 2009. The net effect of the decrease in directory revenue and expense will result in a reduction in
operating income of approximately $100 in the fourth quarter of 2006, $800 in 2007, $1,300 in 2008 and $1,600 in 2009.

CLEC Segment Results



|                              |  |                                  |        |      |   |        |  |   |          |   |  |         |  
|----------------------------- |  | -------------------------------- | ------ | ---- | - | ------ |  | - | -------- | - |  | ------- | -
|                              |  | Three months ended September 30, |       
|                              |  | 2006                             |        | 2005 |   | Change |  |   | % Change |  
|Revenues:                     |  |                                  |        |      |   |        |  |   |          |   |  |         |  
|Local Telephone Service       |  | $                                | 3,828  |      | $ | 3,658  |  | $ | 170      |   |  | 4.6     |  
|Network Access                |  |                                  | 1,554  |      |   | 1,400  |  |   | 154      |   |  | 11.0    |  
|Long Distance                 |  |                                  | 4,985  |      |   | 5,231  |  |   | (246     | ) |  | (4.7    | )
|Other                         |  |                                  | 154    |      |   | 150    |  |   | 4        |   |  | 2.7     |  
|                              |  |                                  |        |      |   |        |  |   |          |   |  |         |  
|Total Revenues                |  |                                  | 10,521 |      |   | 10,439 |  |   | 82       |   |  | 0.8     |  
|                              |  |                                  |        |      |   |        |  |   |          |   |  |         |  
|Depreciation and Amortization |  |                                  | 1,480  |      |   | 1,324  |  |   | 156      |   |  | 11.8    |  
|Other Operating Expenses      |  |                                  | 8,854  |      |   | 9,109  |  |   | (255     | ) |  | (2.8    | )
|                              |  |                                  |        |      |   |        |  |   |          |   |  |         |  
|Total Operating Expenses      |  |                                  | 10,334 |      |   | 10,433 |  |   | (99      | ) |  | (0.9    | )
|                              |  |                                  |        |      |   |        |  |   |          |   |  |         |  
|Operating Income              |  | $                                | 187    |      | $ | 6      |  | $ | 181      |   |  | 3,016.7 |  
|                              |  |                                  |        |      |   |        |  |   |          |   |  |         |  
|Access Lines at September 30  |  |                                  | 42,012 |      |   | 40,703 |  |   | 1,309    |   |  | 3.2     |  
|                              |  |                                  |        |      |   |        |  |   |          |   |  |         |  

CLEC segment revenues increased $82, or 0.8%, to $10,521 in the three months ended
September 30, 2006, from $10,439 in the three months ended September 30, 2005. Local telephone service revenue increased $170 as a result of increased access lines for new business customers, August 2005 rate increases and growth in
private network circuits. Network access revenue increased $154 primarily from additional interstate access revenue due to higher rates and minutes of use offset by a reduction in intrastate access



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



revenue primarily due to lower minutes of use. Long distance circuit revenue increased $121 from additional circuits
while long distance toll revenue decreased $367 due to a decline in the average rate per minute of use and lower minutes of use. We anticipate the long distance average rate per minute will continue to decrease as competitors such as wireless
carriers and VoIP providers continue to offer unlimited minute pricing.

Operating expenses for the CLEC segment decreased $99, or 0.9%, to
$10,334 in the third quarter of 2006, from $10,433 in the same period of 2005. Cost of services expense for T-1 circuits increased $229 due to increased long distance circuit revenue and access line growth while all other CLEC cost of services
decreased $322 primarily due to lower intersegment circuit trunking expenses. Depreciation expense increased $156 from asset additions and decreases in estimated lives of certain assets. Network access expense increased $203 due to long distance
expense credit received in the prior year not repeated in the current year. Wages decreased $108 and uncollectible expense decreased $123.



|                              |  |                                 |        |   |      |   |        |        |  |   |          |   |  |       |  
|----------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | ------ |  | - | -------- | - |  | ----- | -
|                              |  | Nine months ended September 30, |       
|                              |  | 2006                            |        |   | 2005 |   |        | Change |  |   | % Change |  
|Revenues:                     |  |                                 |        |   |      |   |        |        |  |   |          |   |  |       |  
|Local Telephone Service       |  | $                               | 11,369 |   |      | $ | 10,731 |        |  | $ | 638      |   |  | 5.9   |  
|Network Access                |  |                                 | 4,730  |   |      |   | 4,202  |        |  |   | 528      |   |  | 12.6  |  
|Long Distance                 |  |                                 | 15,183 |   |      |   | 14,847 |        |  |   | 336      |   |  | 2.3   |  
|Other                         |  |                                 | 440    |   |      |   | 478    |        |  |   | (38      | ) |  | (7.9  | )
|                              |  |                                 |        |   |      |   |        |        |  |   |          |   |  |       |  
|Total Revenues                |  |                                 | 31,722 |   |      |   | 30,258 |        |  |   | 1,464    |   |  | 4.8   |  
|                              |  |                                 |        |   |      |   |        |        |  |   |          |   |  |       |  
|Depreciation and Amortization |  |                                 | 4,365  |   |      |   | 3,635  |        |  |   | 730      |   |  | 20.1  |  
|Other Operating Expenses      |  |                                 | 27,412 |   |      |   | 27,816 |        |  |   | (404     | ) |  | (1.5  | )
|                              |  |                                 |        |   |      |   |        |        |  |   |          |   |  |       |  
|Total Operating Expenses      |  |                                 | 31,777 |   |      |   | 31,451 |        |  |   | 326      |   |  | 1.0   |  
|                              |  |                                 |        |   |      |   |        |        |  |   |          |   |  |       |  
|Operating Loss                |  | $                               | (55    | ) |      | $ | (1,193 | )      |  | $ | 1,138    |   |  | (95.4 | )
|                              |  |                                 |        |   |      |   |        |        |  |   |          |   |  |       |  
|Access Lines at September 30  |  |                                 | 42,012 |   |      |   | 40,703 |        |  |   | 1,309    |   |  | 3.2   |  
|                              |  |                                 |        |   |      |   |        |        |  |   |          |   |  |       |  

CLEC segment revenues increased $1,464, or 4.8%, to $31,722 in the nine months ended
September 30, 2006, from $30,258 in the nine months ended September 30, 2005. Local telephone service revenue increased $638 as a result of increased access lines for new business customers, August 2005 rate increases and growth in private
network circuits. Network access revenue increased $528 primarily from additional interstate access revenue due to higher rates and minutes of use, offset by a reduction in intrastate access revenue primarily due to lower minutes of use. Long
distance circuit revenue increased $1,431 from additional circuits while long distance toll revenue decreased $1,095 due to a decline in the average rate per minute of use and lower minutes of use. We anticipate the long distance average rate per
minute will continue to decrease as competitors such as wireless carriers and VoIP providers continue to offer unlimited minute pricing.

Operating expenses for the CLEC segment increased $326, or 1.0%, to $31,777 in the nine months ended 2006, from $31,451 in the same period of 2005. Cost of services increased $362 as a result of the increase in long distance circuit revenue
and customer growth. Depreciation expense increased $730 from asset additions and decreases in estimated lives of certain assets. Network access expense decreased $530



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



primarily as a result of savings achieved from an agreement to provide a least-cost routing service for completion of
long distance toll calls and lower minutes of use. Leased communications facilities expense increased $309 primarily due to a one-time vendor billing adjustment of $248 for fiber circuits. Customer service and administrative wages decreased $333.
Other expenses decreased including information technology expenses, uncollectible expense and operating taxes.

Internet Services Segment Results



|                              |  |                                  |        |   |      |   |        |        |  |   |          |   |  |       |  
|----------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | ------ |  | - | -------- | - |  | ----- | -
|                              |  | Three months ended September 30, |       
|                              |  | 2006                             |        |   | 2005 |   |        | Change |  |   | % Change |  
|Revenues                      |  | $                                | 3,917  |   |      | $ | 3,264  |        |  | $ | 653      |   |  | 20.0  |  
|Depreciation and Amortization |  |                                  | 370    |   |      |   | 347    |        |  |   | 23       |   |  | 6.6   |  
|Other Operating Expenses      |  |                                  | 3,667  |   |      |   | 3,003  |        |  |   | 664      |   |  | 22.1  |  
|                              |  |                                  |        |   |      |   |        |        |  |   |          |   |  |       |  
|Total Operating Expenses      |  |                                  | 4,037  |   |      |   | 3,350  |        |  |   | 687      |   |  | 20.5  |  
|                              |  |                                  |        |   |      |   |        |        |  |   |          |   |  |       |  
|Operating Loss                |  | $                                | (120   | ) |      | $ | (86    | )      |  | $ | (34      | ) |  | 39.5  |  
|                              |  |                                  |        |   |      |   |        |        |  |   |          |   |  |       |  
|Customers at September 30     |  |                                  |        |   |      |   |        |        |  |   |          |   |  |       |  
|DSL/High-Speed Internet       |  |                                  | 26,749 |   |      |   | 17,375 |        |  |   | 9,374    |   |  | 54.0  |  
|Dial-up Access                |  |                                  | 5,905  |   |      |   | 8,957  |        |  |   | (3,052   | ) |  | (34.1 | )
|Web-hosting Services          |  |                                  | 944    |   |      |   | 946    |        |  |   | (2       | ) |  | (0.2  | )

Internet Services segment revenues increased $653, or 20.0%, to $3,917 in the three months ended
September 30, 2006, from $3,264 in the three months ended September 30, 2005. DSL revenue increased $785 as a result of increased subscribers, offset by a reduction in the average revenue per subscriber. The decrease in the number of
dial-up subscribers resulted in a $166 decrease in dial-up revenue.

Operating expenses for the Internet Services segment increased $687,
or 20.5%, to $4,037 in the third quarter of 2006, from $3,350 in the same period of 2005. Direct cost of services increased $368 as a result of higher costs due to DSL subscriber growth. Wages and benefits increased $235, primarily for sales
personnel. The VoIP service costs were $56 for the third quarter of 2006 compared to $115 in the same period of the prior year. The decline in VoIP service costs is due to higher start-up and planning costs in 2005.



40



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



|                              |  |                                 |        |   |      |   |        |        |  |   |          |   |  |       |  
|----------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | ------ |  | - | -------- | - |  | ----- | -
|                              |  | Nine months ended September 30, |       
|                              |  | 2006                            |        |   | 2005 |   |        | Change |  |   | % Change |  
|Revenues                      |  | $                               | 11,425 |   |      | $ | 9,564  |        |  | $ | 1,861    |   |  | 19.5  |  
|Depreciation and Amortization |  |                                 | 1,092  |   |      |   | 1,021  |        |  |   | 71       |   |  | 7.0   |  
|Other Operating Expenses      |  |                                 | 10,457 |   |      |   | 9,229  |        |  |   | 1,228    |   |  | 13.3  |  
|                              |  |                                 |        |   |      |   |        |        |  |   |          |   |  |       |  
|Total Operating Expenses      |  |                                 | 11,549 |   |      |   | 10,250 |        |  |   | 1,299    |   |  | 12.7  |  
|                              |  |                                 |        |   |      |   |        |        |  |   |          |   |  |       |  
|Operating Loss                |  | $                               | (124   | ) |      | $ | (686   | )      |  | $ | 562      |   |  | (81.9 | )
|                              |  |                                 |        |   |      |   |        |        |  |   |          |   |  |       |  
|Customers at September 30     |  |                                 |        |   |      |   |        |        |  |   |          |   |  |       |  
|DSL/High-Speed Internet       |  |                                 | 26,749 |   |      |   | 17,375 |        |  |   | 9,374    |   |  | 54.0  |  
|Dial-up Access                |  |                                 | 5,905  |   |      |   | 8,957  |        |  |   | (3,052   | ) |  | (34.1 | )
|Web-hosting Services          |  |                                 | 944    |   |      |   | 946    |        |  |   | (2       | ) |  | (0.2  | )

Internet Services segment revenues increased $1,861, or 19.5%, to $11,425 in the nine months ended
September 30, 2006, from $9,564 in the nine months ended September 30, 2005. DSL revenue increased $2,264 as a result of increased subscribers, offset by a reduction in the average revenue per subscriber. The decrease in the number of
dial-up subscribers resulted in a $512 decrease in dial-up revenue.

Operating expenses for the Internet Services segment increased $1,299,
or 12.7%, to $11,549 in the nine months ended September 30, 2006 from $10,250 in the same period of 2005. Direct cost of services increased $583 as a result of higher costs due to DSL subscriber growth partially offset by reductions in
broadband transport costs. Wages and benefits increased $387. Other operating expenses, including depreciation, network operations, customer service and billing expenses, increased as a result of growth in DSL subscribers. The VoIP service costs
were $304 for the nine months ended September 30, 2006 compared to $376 in the same period of the prior year.

Systems Integration Segment Results



|                              |  |                                  |        |   |      |   |        |        |  |   |          |   |  |       |  
|----------------------------- |  | -------------------------------- | ------ | - | ---- | - | ------ | ------ |  | - | -------- | - |  | ----- | -
|                              |  | Three months ended September 30, |       
|                              |  | 2006                             |        |   | 2005 |   |        | Change |  |   | % Change |  
|Revenues                      |  | $                                | 1,778  |   |      | $ | 2,241  |        |  | $ | (463     | ) |  | (20.7 | )
|Depreciation and Amortization |  |                                  | 136    |   |      |   | 228    |        |  |   | (92      | ) |  | (40.4 | )
|Other Operating Expenses      |  |                                  | 2,697  |   |      |   | 3,314  |        |  |   | (617     | ) |  | (18.6 | )
|                              |  |                                  |        |   |      |   |        |        |  |   |          |   |  |       |  
|Total Operating Expenses      |  |                                  | 2,833  |   |      |   | 3,542  |        |  |   | (709     | ) |  | (20.0 | )
|                              |  |                                  |        |   |      |   |        |        |  |   |          |   |  |       |  
|Operating Loss                |  | $                                | (1,055 | ) |      | $ | (1,301 | )      |  | $ | 246      |   |  | (18.9 | )
|                              |  |                                  |        |   |      |   |        |        |  |   |          |   |  |       |  

Systems Integration segment revenues decreased $463, or 20.7%, to $1,778 in the three months ended
September 30, 2006, from $2,241 in the three months ended September 30, 2005. Communications products sold decreased $312 and communications services revenue decreased $156 primarily due to several large sales in the prior year, which were
not repeated in the current year.



41



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Operating expenses for the Systems Integration segment decreased $709, or 20.0%, to $2,833 in the
third quarter 2006, from $3,542 in the same period of 2005. The major expense variances were a decrease of approximately $265 in wages and subcontractor services, a decrease in employee benefits of $110 and a decrease of $92 in depreciation and
amortization. Cost of goods sold decreased $167 primarily due to lower computer equipment sales. Rent expense decreased $68 due to a move to smaller and less expensive office space.



|                              |  |                                 |        |   |      |   |        |        |  |   |          |   |  |       |  
|----------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | ------ |  | - | -------- | - |  | ----- | -
|                              |  | Nine months ended September 30, |       
|                              |  | 2006                            |        |   | 2005 |   |        | Change |  |   | % Change |  
|Revenues                      |  | $                               | 4,817  |   |      | $ | 7,164  |        |  | $ | (2,347   | ) |  | (32.8 | )
|Depreciation and Amortization |  |                                 | 539    |   |      |   | 789    |        |  |   | (250     | ) |  | (31.7 | )
|Intangible Asset Impairment   |  |                                 | 1,892  |   |      |   |       |        |  |   | 1,892    |   |  | 100.0 |  
|Other Operating Expenses      |  |                                 | 8,002  |   |      |   | 10,403 |        |  |   | (2,401   | ) |  | (23.1 | )
|                              |  |                                 |        |   |      |   |        |        |  |   |          |   |  |       |  
|Total Operating Expenses      |  |                                 | 10,433 |   |      |   | 11,192 |        |  |   | (759     | ) |  | (6.8  | )
|                              |  |                                 |        |   |      |   |        |        |  |   |          |   |  |       |  
|Operating Loss                |  | $                               | (5,616 | ) |      | $ | (4,028 | )      |  | $ | (1,588   | ) |  | 39.4  |  
|                              |  |                                 |        |   |      |   |        |        |  |   |          |   |  |       |  

Systems Integration segment revenues decreased $2,347, or 32.8%, to $4,817 in the nine months
ended September 30, 2006, from $7,164 in the nine months ended September 30, 2005. Communications services revenue decreased $2,172 primarily as a result of the expiration, on June 30, 2005, of a large government services contract.
Communications products sold decreased $325 primarily due to several large computer equipment sales in the prior year, which were not repeated in the current year.

Operating expenses for the Systems Integration segment decreased $759, or 6.8%, to $10,433 in the nine months ended September 30, 2006, from $11,192 in the same period of 2005. The major expense variances were an
intangible asset impairment loss of $1,892 for customer relationships, which was partially offset by a decrease of approximately $1,510 in wages and subcontractor services, a decrease in employee benefits of $360 and a decrease of $250 in
depreciation and amortization. Cost of goods sold decreased $193 primarily due to lower computer equipment sales. Rent expense decreased $106 due to a move to smaller and less expensive office space and the corporate overhead expense allocation
decreased $169.

On September 29, 2006, we completed the sale of the Voice Systems Business of the Systems Integration segment for
$3,000 to eComm. We received $250 in cash, a $2,400 (face value $2,500) promissory note issued by eComm and a 10% equity interest in eComm with a fair value of $350 and a related put right. The Systems Integration segment will now focus on the
professional data and information technology services, security, design and network monitoring operations, which were not included in the sale.

Recently Adopted Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections (SFAS 154), which the Company adopted in January 2006. SFAS 154 requires retrospective application to
reflect the



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



period-specific effects of applying a new accounting principle, unless it is impracticable to do so. When it is
impracticable to calculate the effects on all prior periods, SFAS 154 requires that the new principle be applied to the earliest period practicable. However, when a new accounting pronouncement is issued, the specific transition provisions of that
guidance are applied. The adoption of SFAS 154 has not had a significant effect on the Companys financial position, results of operations or cash flows.

Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R) using the modified prospective transition method. Under
this method, a company records compensation expense for all new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation expense is recorded for the unvested portion of previously granted
awards that remain outstanding at the date of adoption. The cost of the unvested portion of the award is recognized as the requisite service is rendered on or after the required effective date. Under this method, results for prior periods have not
been restated. The adoption of SFAS 123R did not have a material impact on our consolidated financial position, results of operations or cash flows.

Prior to the adoption of SFAS 123R, the Company accounted for stock-based compensation under the intrinsic value method of APB Opinion 25. The Company applied the disclosure provisions of SFAS No. 123,
Accounting for Stock-Based Compensation as if the fair value method had been applied in measuring compensation expense. In accordance with the provisions of SFAS 123R, the Company recorded total stock-based compensation expense of $230
for the nine months ended September 30, 2006.

Financial Condition

Liquidity and Capital Resources

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



|                                                      |  |                                 |         |   |      |   |         |  
|----------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                      |  | Nine months ended September 30, |        
|                                                      |  | 2006                            |         |   | 2005 |  
|Net cash provided by (used in) continuing operations: |  |                                 |         |   |      |   |         |  
|Operating activities                                  |  | $                               | 24,559  |   |      | $ | 29,042  |  
|Investing activities                                  |  |                                 | (18,048 | ) |      |   | (18,640 | )
|Financing activities                                  |  |                                 | (11,855 | ) |      |   | (15,316 | )
|                                                      |  |                                 |         |   |      |   |         |  
|                                                      |  | $                               | (5,344  | ) |      | $ | (4,914  | )
|                                                      |  |                                 |         |   |      |   |         |  

Net cash provided by operating activities was $24,559 in the nine months ended September 30,
2006, compared with $29,042 in the same period of 2005. Net cash provided by operating activities in the nine months ended September 30, 2006 was primarily attributable to net income plus non-cash expenses for depreciation and amortization,
offset by reductions in accounts payable, accrued taxes and interest and advance billings. The primary reason for the decrease from 2005 to 2006 was an increase in income tax payments of $3,438 in 2006 over 2005 and increased accounts payable
payments in the nine months ended September 30, 2006 compared to the same period of 2005.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Net cash used in investing activities was $18,048 in the nine months ended September 30, 2006,
compared with net cash used of $18,640 in the same period of 2005. Capital additions in the first nine months of 2006 were primarily for information technology upgrades of approximately $5,400, communications network enhancements of approximately
$8,500 and outside plant additions totaling approximately $4,900. Investing activities included a cash receipt of $2,900 from the sale of our interest in PenTeleData in February 2005 with no similar receipt in 2006. In the first nine months of 2006,
principal payments of $2,125 were received on the note that was part of the sale price for the Conestoga Wireless assets compared to $1,000 received in the same period of 2005. We are scheduled to receive additional principal payments of $750 on
this note during the remainder of 2006.

Net cash used in financing activities was $11,855 in the nine months ended September 30,
2006, compared with $15,316 of net cash used in the same period of 2005. In the first nine months of 2006, payment of dividends of $5,129 was a slight increase in use of funds from dividends paid in the same period of 2005 as a result of an increase
in shares outstanding. Long-term debt payments were $7,541 in the nine months ended September 30, 2006, including a $750 voluntary prepayment made on September 29, 2006. The long-term debt refinancing on September 19, 2006 was the
significant financing activity in 2006 with proceeds of $180,750, which were used to repay the original loan. Scheduled and voluntary repayments of long-term bank debt totaled $10,500 for the first nine months of 2005.

External Sources of Capital at September 30, 2006

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 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.

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. We incurred a loss on early extinguishment of debt of $1,094, consisting of a non-cash write-off of $1,047 of unamortized debt issuance costs of the previous credit facility and the expensing of $47 of
debt issuance costs related to the amended credit facility. We capitalized approximately $337 of debt issuance costs related to the amended credit facility, which will be amortized into interest expense over the life of the amended credit facility.

As of September 30, 2006, our credit facility consists of Term Loan A (a single draw senior term loan with a remaining balance of
$34,884), Term Loan B (a single draw senior term loan with a remaining



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



balance of $144,241), Secured Term Loans (single draw loans with a remaining balance of $28,875) 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 an applicable margin or at LIBOR rates plus an applicable margin 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 one, two, three or six month 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 interest rates on the amended credit facility depending on the leverage ratio are as follows:



|               |  |                                                            
|-------------- |  | -----------------------------------------------------------
|Term Loan A    |  | U.S. Prime plus 0.50% to 1.00% or LIBOR plus 1.50% to 2.00%
|               | 
|Term Loan B    |  | U.S. Prime plus 0.75 or LIBOR plus 1.75%                   
|               | 
|Revolving Loan |  | U.S. Prime plus 0.50% to 1.00% or LIBOR plus 1.50% to 2.00%

Maturities of senior secured debt at September 30, 2006, under the September 19, 2006
and March 5, 2004 credit facilities are as follows:



|           |  |                                    |         |                               |   |        
|---------- |  | ---------------------------------- | ------- | ----------------------------- | - | -------
|Year       |  | September 19, 2006 Credit Facility |         | March 5, 2004 Credit Facility
|2006       |  | $                                  | 1,750   |                               | $ | 2,500  
|2007       |  |                                    | 7,000   |                               |   | 12,500 
|2008       |  |                                    | 7,000   |                               |   | 12,500 
|2009       |  |                                    | 7,000   |                               |   | 12,500 
|2010       |  |                                    | 7,000   |                               |   | 9,061  
|Thereafter |  |                                    | 178,250 |                               |   | 158,939
|           |  |                                    |         |                               |   |        
|           |  | $                                  | 208,000 |                               | $ | 208,000
|           |  |                                    |         |                               |   |        

The credit facility includes a number of significant covenants that impose restrictions on our
business. These covenants include, among others, restrictions on additional indebtedness, mergers, acquisitions and the disposition of assets, sale and leaseback transactions and capital lease payments. In addition, we are required to comply with
financial covenants with respect to the maximum leverage ratio, maximum indebtedness to total capitalization ratio, debt service coverage and fixed charge coverage. As of September 30, 2006, we had no other unsecured lines of credit. As of
September 30, 2006, $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 52.9% at September 30, 2006 from 53.7% at
December 31, 2005 due to our long-term debt principal repayments.



45



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



The financial covenant ratios at September 30, 2006, under the September 19, 2006 and
March 5, 2004 credit facilities are as follows:



|                                                                                     |  |                                    |  |                              
|------------------------------------------------------------------------------------ |  | ---------------------------------- |  | -----------------------------
|                                                                                     |  | September 19, 2006 Credit Facility |  | March 5, 2004 Credit Facility
|Total Leverage Ratio = Indebtedness divided by Cash Flow                             |  | <3.75                              |  | <3.50                        
|Total Indebtedness to Total Capitalization Ratio                                     |  | <60%                               |  | <60%                         
|Proforma Debt Service Coverage Ratio = Cash Flow divided by next years Debt Service |  | >1.75                              |  | >1.75                        
|Fixed Charge Coverage Ratio = Cash Flow divided by Fixed Charges                     |  | >1.05                              |  | >1.05                        

The maximum Total Leverage Ratio covenant requirement in the September 19, 2006 credit
facility declines to less than 3.25 after January 1, 2010. The maximum Total Leverage Ratio covenant requirement in the March 5, 2004 credit facility declined to less than 2.75 after January 1, 2008.

Cash Flow as used for covenant calculations is defined as Operating Cash Flow which means the sum of (i) net income or deficit, as the
case may be (excluding gains or losses from sales of assets, extraordinary gains or losses, interest income, the write up or off of any asset, patronage refunds or similar distributions and investment income or loss (equity earnings or loss) from
affiliates or other persons not consolidated with the Borrowers under GAAP), (ii) total interest expense (including non-cash interest), (iii) depreciation and amortization expense and other similar non-cash expenses, (iv) taxes,
federal or state, imposed upon income and (v) non-cash employee and director compensation. For any period of calculation, Operating Cash Flow will be adjusted to give effect to any acquisition, sale or other disposition of any operation of
business (or any portion thereof) during the period of calculation as if such acquisition, sale or other disposition occurred on the first day of such period of calculation.

Commitments, Contingencies and Projected Uses of Capital

We believe that our most significant
commitments, contingencies and projected uses of funds in 2006, other than for operations, include capital expenditures, scheduled principal payments on our long-term debt, the payment of quarterly common stock dividends, as and when declared by the
board of directors, and other contractual obligations. On October 26, 2006, we declared a quarterly common stock dividend of $0.125 per share payable on December 15, 2006, to holders of record on December 1, 2006. We expect that this
dividend will result in an aggregate payment of approximately $1,798. We believe that we have adequate internal and external resources available to meet ongoing operating requirements.

D&E has obligations under a Build-to-Suit agreement (BTS) with Crown Castle International, Inc. (Crown) who acquired Mountain
Union Telecom LLC on July 1, 2006. The obligations related to the construction of 20 wireless tower sites for Conestogas wireless subsidiary, Conestoga Wireless Company (CWC). In November 2002, D&E entered into an asset
purchase agreement (the Asset Purchase Agreement) with Keystone Wireless LLC (Keystone Wireless) for the sale of the assets of CWC. Although D&E sold the assets of this business, its obligations under the BTS were not
assumed by Keystone Wireless. Under the BTS, D&E was obligated to work with Crown to find and develop 20 wireless tower sites and, in the event its obligations under the BTS were not timely fulfilled, D&E was



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



obligated to pay a penalty to Crown for nonperformance. Under the Asset Purchase Agreement, Keystone Wireless is
obligated to enter into long-term operating leases for antenna space on up to 15 of the towers erected under the BTS, including the nine transferred to Keystone Wireless at the closing of the sale transaction. Prior to August 2004, D&E paid
Crown $900 for its BTS obligation due for nine wireless tower sites that were not constructed. Under the terms of the Asset Purchase Agreement, Keystone is obligated to reimburse D&E for one-half of the penalties paid under the BTS, not to
exceed $125. Because the underlying assets of CWC were sold under the Asset Purchase Agreement, D&E has considered any remaining obligations under the BTS a contingent liability. As of September 30, 2006, D&E has recorded $200 for its
remaining commitment under the BTS.

D&E has a guarantee agreement with Crown for lease obligations on wireless tower sites. When
D&E entered into the Asset Purchase Agreement with Keystone Wireless, whereby Keystone Wireless was assigned the responsibility for the 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
September 30, 2006 is $10,060. The majority of these tower site leases and our guarantee will expire between 2011 and 2013. As of September 30, 2006, 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 of CWC. Upon such default, the entire remaining balance of the note, which was $6,250 as of September 30, 2006 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.

In January 2006, we entered into a capital lease obligation for equipment in the amount of $1,573. The obligation requires monthly payments of $14
beginning in the first quarter of 2006 and continuing through the first quarter of 2021.

We hold a 33% interest in EuroTel, which we
account for under the equity method of accounting. Neither the assets nor the liabilities of EuroTel are presented on a consolidated basis on our balance sheets. We have committed to loan EuroTel, on an equal basis with the other investors in
EuroTel, funds for its operating cash needs. D&E and the other owners of EuroTel are in the process of dissolving PenneCom and EuroTel. In the nine months ended September 30, 2006, we advanced $390 to EuroTel and expect that our total 2006
advances will be less than $500.

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



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D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



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. Our RLEC and CLEC pricing is subject to oversight by
both state and federal regulatory commissions.

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

We receive a portion of our interstate access revenues in our RLEC segments from settlement pools in which we participate with other telephone companies
through 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 are required to record the amount of such a reduction or increase as an adjustment to our earnings. During the first nine months of 2006 and 2005, we have increased revenue by $597 and $222, 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 RLEC and CLEC
segments. 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



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D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



be required to adjust depreciation and amortization expense, which could impact our earnings. During 2005, we revised
the estimated useful lives of certain fixed assets to update composite rates for our regulated telephone property.

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. In the second quarter of 2006, we recorded an impairment charge for our Systems Integration intangible asset of
$2,375 ($1,390 net of tax) for customer relationships (see Note 6) of which $1,892 and $483 are reported in continuing and discontinued operations, respectively. Additionally, future events or changes in circumstances could also 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 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, 2006. 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.



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D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



Retirement Benefits

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

Income Taxes

We file a consolidated federal income tax return. We have two categories of income taxes: current and deferred. Current taxes are those amounts we expect
to pay when we file our tax returns. Since we must report some of our revenues and expenses 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.

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.

Recently Issued Accounting Pronouncements

In July 2006, the FASB issued 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. FIN 48 is effective for fiscal years beginning after December 15, 2006, and accordingly, the Company will adopt FIN 48 in January 2007. The
Company is currently evaluating the impact, if any, of this accounting interpretation on its financial position, results of operations and cash flows.



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##### Table of Contents

D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

Item 2. Managements Discussion and Analysis of

Financial Condition and Results of Operations

(Dollar amounts are in thousands)



In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
157). SFAS 157 defines fair value, creates a framework within generally accepted accounting principles (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 fiscal years beginning after November 15, 2007, and accordingly, the Company will adopt SFAS 157 in January 2008. The Company is currently evaluating the
impact, if any, this Statement will have on its financial position, results of operations and cash flows.

In September 2006, the FASB
issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). SFAS 158 requires the
overfunded or underfunded status of a defined benefit postretirement plan to be recognized as an asset or liability in a companys statement of financial position and the changes in that funded status to be recognized through other
comprehensive income in the year in which the changes occur. The Statement also requires the funded status of a plan to be measured as of the date of a companys year-end statement of financial positions. SFAS 158 is effective for fiscal years
ending after December 15, 2006, and accordingly, the Company will adopt SFAS 158 in December 2006. The Company is currently evaluating the impact SFAS 158 will have on its financial position, results of operations and cash flows. Had the new
standard been in effect as of December 31, 2005, the Company estimates its shareholders equity would have been reduced by approximately $4,142, net of income taxes. The impact of adoption on December 31, 2006 could differ materially
from $4,142, as it will reflect asset performance through the end of the year as well as interest rates and other factors that will be applicable as of December 31, 2006.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current
year misstatement. The SEC staff believes that registrants should quantify the effects of misstatements using both a balance sheet iron curtain and income statement rollover approach, and consider the results of both,
along with all other relevant quantitative and qualitative factors, in evaluating the materiality of unadjusted misstatements to the related financial statements. SAB 108 is effective for fiscal years ending after November 15, 2006, and
accordingly, the Company will adopt SAB 108 in December 2006. The Company does not anticipate the adoption of SAB 108 will have a material impact 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)

We
are highly leveraged and, as a result, our cash flows and earnings are exposed to fluctuations in interest rates. Our debt obligations are U.S. dollar denominated. Our market risk, therefore, is the potential loss arising from adverse changes in
interest rates and changes in our leverage ratio which may increase the margin added to the interest rate as provided in our loan agreement. As of September 30, 2006 and December 31, 2005, our debt, excluding capital lease obligations, can
be categorized as follows:



|                                         |  |                    |         |                   |   |        
|---------------------------------------- |  | ------------------ | ------- | ----------------- | - | -------
|                                         |  | September 30, 2006 |         | December 31, 2005
|Fixed interest rates:                    |  |                    |         |                   |   |        
|Secured Term Loans                       |  | $                  | 28,875  |                   | $ | 31,500 
|Subject to interest rate fluctuations:   |  |                    |         |                   |   |        
|Senior Secured Revolving Credit Facility |  |                    |        |                   |   | 7,000  
|Senior Secured Term Loans                |  |                    | 179,125 |                   |   | 177,000
|                                         |  |                    |         |                   |   |        
|                                         |  | $                  | 208,000 |                   | $ | 215,500
|                                         |  |                    |         |                   |   |        

Prior to the amendment to our credit facilities on September 19, 2006, we were required to
maintain interest rate protection on more than one-half of the total amount of senior indebtedness outstanding, with a weighted average life of at least two years. In connection with the amendment to the credit, interest rate swap agreements with a
notional amount of $75,000 were terminated. We received cash facility termination payments of $1,064, which will be amortized as a reduction of interest expense over the remainder of the respective terms of the interest rate swap agreements. These
agreements were due to mature between November 2008 and December 2009. As of September 30, 2006, our debt, excluding capital lease obligations, is as follows:



|                                                       |  |           |         |              |      |   |            |   |        
|------------------------------------------------------ |  | --------- | ------- | ------------ | ---- | - | ---------- | - | -------
|                                                       |  | Principal |         | Average Rate |      |   | Fair Value
|Rates fixed for four years through interest rate swaps |  | $         | 35,000  |              | 5.24 | % |            | $ | 35,000 
|Fixed rate debt, rates fixed for twelve years          |  |           | 28,875  |              | 9.00 | % |            |   | 31,166 
|                                                       |  |           |         |              |      |   |            |   |        
|Total fixed rate debt, 31%                             |  |           | 63,875  |              | 6.94 | % |            |   | 66,166 
|Variable rate debt, 69%                                |  |           | 144,125 |              | 7.12 | % |            |   | 144,125
|                                                       |  |           |         |              |      |   |            |   |        
|                                                       |  | $         | 208,000 |              |      |   |            | $ | 210,291
|                                                       |  |           |         |              |      |   |            |   |        

If interest rates rise above the rates of the variable debt, we could incur extra interest expense
of $721 for each 50 basis points above the variable rates. If rates were to decline, we would realize reductions in interest expense of approximately $721 for each 50 basis point decrease in rates.

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



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D&E Communications, Inc. and Subsidiaries

Part I - Financial Information (continued)

As of September 30, 2006, we have one interest rate swap agreement as follows:



|                     |  |                 |        |         |      |   |                       |      |   |                     |   |    
|-------------------- |  | --------------- | ------ | ------- | ---- | - | --------------------- | ---- | - | ------------------- | - | ---
|Term of Swap         |  | Notional Amount |        | PayRate |      |   | Average Received Rate |      |   | Fair Value of Asset
|11/25/02 to 11/25/06 |  | $               | 35,000 |         | 5.24 | % |                       | 7.11 | % |                     | $ | 177

If interest rates rise above the rates fixed by these swaps, we could realize other comprehensive
income of $175 for each 50 basis points above the fixed rates. If rates were to decline, we could realize other comprehensive expense of approximately $175 for each 50 basis point decrease in rates.

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

Item 4. Controls and Procedures

As of September 30, 2006, the Company carried out an
evaluation, under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to the Securities Exchange Act of 1934 (Exchange Act), Rule 13a-15(e). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed
in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. These controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files under the Exchange Act is accumulated and communicated to the issuers management, including its
principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, the Companys Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.

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

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, 2005.

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.



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D&E Communications, Inc. and Subsidiaries

Part II - Other Information

Item 6. Exhibits



|            |  |                                                                                                                                                                                                                               |  |                                                                                                                            
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Identification of Exhibit                                                                                                                                                                                                     |  | Reference                                                                                                                  
|3.          |  | Articles of Incorporation and By-laws:                                                                                                                                                                                        |  |                                                                                                                            
|            |  |                                                                                                                                                                                                                              
|            |  | 3.1    Amended and Restated Articles of Incorporation                                                                                                                                                                         |  | Incorporated herein by reference from Exhibit 3.1 to D&Es Annual Report on Form 10-K for the year ended December 31, 2002.
|            |  |                                                                                                                                                                                                                              
|            |  | 3.2    By-laws                                                                                                                                                                                                                |  | Incorporated herein by reference from Exhibit 3.1 to the Current Report on Form 8-K filed by D&E on December 8, 2004.      
|            |  |                                                                                                                                                                                                                              
|10.         |  | Material Contracts                                                                                                                                                                                                            |  |                                                                                                                            
|            |  |                                                                                                                                                                                                                              
|            |  | 10.1   Third Amended and Restated Credit Agreement Dated as of September 19, 2006 by and among D&E Communications, Inc. and
CoBank ACB as Administrative Agent, Lead Arranger and Lender and other Lenders described therein. |  | Incorporated herein by reference from Exhibit 10.1 to the Current Report on Form 8-K filed by D&E on September 25, 2006    
|            |  |                                                                                                                                                                                                                              
|31          |  | Certification of the Chief Executive Officer and the Chief Financial Officer Required by Section 13a-14(a) of the Exchange Act                                                                                                |  | Filed herewith.                                                                                                            
|            |  |                                                                                                                                                                                                                              
|32          |  | Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                       |  | Filed herewith.                                                                                                            



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D&E Communications, Inc. and Subsidiaries

Signatures

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



|                       |  |                          |  |                                      
|---------------------- |  | ------------------------ |  | -------------------------------------
|                       |  | D&E Communications, Inc.
|                       |  |                         
|Date: November 8, 2006 |  |                          |  |                                      
|                       |  |                         
|                       |  | By:                      |  | /s/ James W. Morozzi                 
|                       |  |                          |  | James W. Morozzi                     
|                       |  |                          |  | President & Chief Executive Officer  
|                       |  |                         
|Date: November 8, 2006 |  |                          |  |                                      
|                       |  |                         
|                       |  | By:                      |  | /s/ Thomas E. Morell                 
|                       |  |                          |  | Thomas E. Morell                     
|                       |  |                          |  | Senior Vice President,               
|                       |  |                          |  | Chief Financial Officer and Treasurer



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